How do local governments use sales, income, or dedicated levies to replace property tax revenue?
Executive summary
Local governments that seek to reduce or eliminate property taxes typically try to make up lost revenue by expanding sales taxes, authorizing local income taxes, or creating dedicated levies (often on real estate transfers or specific activities), but each substitute carries distinct distributional, stability, and administrative tradeoffs that usually leave communities worse off or more exposed to volatility without additional state aid [1] [2] [3]. Policy debates and proposals — from Ohio’s local income taxes to Florida’s high-profile elimination drives and the recent interest in “mansion” or real-estate transfer levies — illustrate that replacing the property tax is fiscally complex and politically fraught [4] [5] [6].
1. How sales taxes are used and why they fall short
Local option sales taxes are the most common local alternative to property tax revenue and can be raised quickly by expanding taxable sales or state-shared collections, but they are regressive and volatile because they depend on consumption patterns and retail geography, making them an unreliable full substitute for the stable base property taxes provide [2] [7]. Analysts note that sales-tax-heavy jurisdictions benefit if retail activity is concentrated locally, but shrinking retail or cross-border shopping to low-tax counties can erode receipts and force rate increases that hit lower‑income households hardest [4] [7].
2. Local income taxes: fairness, flight risk, and uneven bases
Some localities already levy municipal or school-district income taxes and states could authorize broader local income taxation; in practice income taxes raise equity questions and migration concerns because sufficiently high local rates needed to replace property revenue would be economically distortionary and politically explosive, as Ohio’s mix of state and local income levies illustrates [2] [4]. Revenue from local income taxes is small relative to property tax collections nationwide, and converting a property-tax system to an income-tax system would require materially higher local rates in many places, creating winners and losers across regions [1] [8].
3. Dedicated levies and “mansion” or transfer taxes as targeted substitutes
Policymakers sometimes pursue dedicated levies — for example, real-estate transfer fees or “mansion” taxes on high-value property sales — to raise revenue for housing programs or to capture tax on wealth concentrated in expensive homes; when well designed these can generate millions and target higher-income owners, but they cannot realistically replace broad-based property taxation by themselves [6]. States like New Jersey, Rhode Island, and Maine have recently adjusted transfer or high-value property rates to fund housing initiatives, showing the political and fiscal appeal of targeted levies even as advocates caution they are supplemental rather than full substitutes [6].
4. Fiscal stability, administration, and the centralization dilemma
Scholars and fiscal groups warn that eliminating local property taxes tends to centralize funding at the state level or force compensating statewide taxes or revenue-sharing formulas, which undermines local accountability and can reward or punish jurisdictions unevenly depending on the replacement design [9] [4]. Property taxes’ stability and link to local land values make them administratively efficient for funding schools, police, and infrastructure; substitutes typically broaden administrative complexity and require either higher rates or state backstops to avoid service cuts [8] [3].
5. Politics, hidden agendas, and the tradeoffs voters face
High-profile campaigns to eliminate property taxes — such as proposals in Florida — often frame the change as homeowner relief while downplaying the $14+ billion funding gap and the consequential choices about sales-tax increases, one‑time newcomer fees, or state takeover of local services that would follow, revealing political incentives to promise cuts without fully accounting for distributional effects and fiscal risk [10] [5]. Critics and independent analysts urge more targeted relief tools — homestead exemptions, circuit breakers, levy limits, or mansion taxes — rather than wholesale swaps, because broad replacements tend to be regressive, destabilize local budgets, and concentrate power at higher levels of government [11] [8] [12].