Property Tax Cuts Are No Free Lunch

January 28, 2008

As many states continue debating the issue of cutting of property taxes while raising other taxes, a friendly reminder to policymakers and voters on the public finance of property taxes: there is no such thing as a free lunch. How to provide property tax relief can basically be summed up in one simple equation:

Local Property Tax Burden = Level of Local Government Services X Cost Per Unit of Local Government Services X Local Share of Financing Local Government Services X Share of Local Revenue that comes from property taxes

In other words, in order to reduce property tax burdens, you have one of four options.

First, you can cut the level of services provided by government. Second, you can improve government efficiency at the local level (possibly by eliminating rents acquired by public sector workers). Third, you can increase state level financing of local government services, thereby raising taxes at the state level, typically on sales or income. Or finally, local governments can switch to a different tax source besides property taxes.

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