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What revenue mechanisms do states use to replace property tax—sales tax, income tax, severance tax, or user fees?
Executive summary
States that try to cut or replace property taxes typically seek revenue from expanded sales taxes, higher or broader income taxes, severance taxes in resource states, or a variety of user fees — but analysts warn these “tax swaps” are difficult and shift burdens unpredictably [1] [2]. Research from the Tax Foundation and related studies finds wholesale replacement is complex: property taxes fund most local services and replacing them with state-level taxes (sales or income) can dramatically shift tax incidence and shrink economic output in models [2] [3].
1. Why states contemplate replacing property tax — and the scale of the problem
Rising property assessments and homeowner political pressure have pushed legislatures and ballot campaigns toward limits, relief, or outright abolition in many states (examples cited include Colorado, Florida, Texas and others) [4]. Property taxes remain the primary tool for financing local governments and schools; eliminating or sharply cutting them creates large revenue gaps that lawmakers must backfill if services are to continue [4] [2].
2. The obvious alternatives: sales tax and expanded consumption levies
A common policy route is to raise sales taxes or broaden the sales tax base to capture services and goods previously untaxed. Governing reporting shows multiple proposals to offset lost property-tax revenue with consumption taxes; Wyoming and Nebraska discussions specifically considered raising or expanding sales taxes to replace property revenue [1]. Tax Foundation analysis warns shifting local property revenue to statewide consumption taxes undermines local accountability and can dramatically change who pays [2].
3. Income tax as a replacement — possible but economically consequential
Some proposals would substitute property levies with state income taxes or increase income-tax rates. Empirical and model-based work cited by the Tax Foundation finds that replacing property taxes with an income tax could reduce gross state product in simulations (for Indiana, estimated decline ~2.8%) — showing macroeconomic tradeoffs and distributional consequences [3] [2]. The Tax Foundation stresses that wholesale replacement dramatically shifts tax burdens and is not a trivial swap [2].
4. Severance taxes and resource-state strategies
States rich in extractive industries (oil, gas, minerals) may look to severance taxes as partial offsets. Governing and other coverage note that some resource-state proposals have relied on higher severance or targeted levies, though these are viable only where production volumes and prices can sustain recurring local-service funding [1]. Available sources do not provide a cross‑state estimate of how many states would rely on severance taxes as the principal substitute.
5. User fees, special levies, and targeted exemptions — the less-visible patchwork
Many jurisdictions prefer targeted approaches: larger homestead exemptions, assessment caps, credits, voter-approved levies, or new user fees. Examples from 2025 show states expanding exemptions for seniors or creating levy/assessment limits rather than full swaps (Texas homestead exemption proposals, Florida exemptions, Georgia assessment limits, and local replacement levies are cited) [5] [6] [7] [8]. These measures reduce homeowner bills but do not replace the aggregate revenue base, often producing budget shortfalls local governments must manage [6] [8].
6. Political and fiscal constraints — why full abolition rarely succeeds
Reporting across Governing and Tax Foundation finds political appetite for cuts but practical obstacles: voters and politicians worry where school, safety, and infrastructure money will come from, and governors or analysts often oppose abolition because it would “cause more problems than it would solve” [1] [4]. The Tax Foundation highlights that backfilling lost local revenue with state taxes undermines local control and is administratively and politically fraught [2].
7. What the modeling and experts emphasize: distributional and growth effects
Academic studies cited by the Tax Foundation model the economy-wide impacts: swapping to a sales tax reduced modeled gross state product by ~2.7%, swapping to an income tax by ~2.8% in one Indiana study — evidence that the choice of replacement matters for growth and who bears the burden [3]. Analysts therefore recommend caution: reform that limits property-tax growth (levy or assessment caps) can offer relief without forcing a full revenue swap [3] [2].
8. Bottom line for policymakers and voters
There is no simple one‑for‑one replacement. States primarily consider (a) sales/consumption taxes, (b) income-tax changes, (c) severance taxes in resource states, and (d) user fees or targeted exemptions — each option produces distinct distributional, economic, and local‑control consequences [1] [2] [3]. Tax Foundation and Governing reporting together recommend that lawmakers weigh those tradeoffs explicitly, because replacing property taxes reshapes who pays for schools and local services and can have measurable effects on economic output [2] [3].
Limitations: available sources summarize proposals and modeling but do not provide a definitive, up‑to‑date list tying each state to a single replacement mechanism; many initiatives are political proposals rather than enacted, and local levies remain a common, piecemeal response [4] [7].