Thinking Twice About Property Tax Reforms

Thanks to the Federal Reserve’s aggressive monetizing of $4 trillion in federal COVID spending, the U.S. economy has faced 31% inflation since December 2019.  At the same time, housing prices have outpaced inflation. Of course, details vary by market, but the national average, as measured by the Case-Shiller US National Home Price Index has increased by 55% in that same time.

In light of this, it is a small wonder that politicians are attempting to alleviate the burden on American consumers. Alas, they are stumbling into Groucho Marx’s warning that “politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.”  Instead of attacking the root causes of the problem—monetary policy in general and regulatory and zoning restrictions that impede housing supply growth—politicians are turning to measures that sound good… but may have significant unintended consequences.

Earlier this summer, Congress passed the 21st Century Renewing Opportunity in the American Dream (ROAD) to Housing Act, which has already been dubbed the most significant housing legislation since 1990. Amidst some deregulation, the Act further increases federal involvement in national housing markets. Specifically, it caps institutional ownership of single-family homes at 350 units. We have explained how the cap is likely to put upward pressure on housing prices, while hurting small investors.

Now, local-level politicians are trying their hand at lowering housing costs. In the upcoming November 2026 midterm elections, seven states are featuring a total of 13 constitutional measures aimed at lowering housing costs through property tax reductions. While property tax initiatives have appeared on the ballot in seven states, 15 states have seen some activity surrounding property taxes. This represents almost double the historical average of property tax discontent over the past 50 years in a single cycle.

What is Seen and What is Not Seen

We return to the timeless wisdom of the great economist Frédéric Bastiat, who reminded us of “what is seen and what is not seen.”  Reducing property taxes looks like a great idea, on the face of it. But it’s actually a lot more complex.

Before anything else, we should state the obvious. Prima facie, we favor tax cuts, as more money remains in the hands of consumers, households, and entrepreneurs, rather than in the hands of politicians and bureaucrats. But economic actions do not happen in a vacuum, and reductions in property taxes—within a framework of entangled political economy and the existing web of taxes, spending, and regulations—may have unintended consequences.

Lower property taxes are unlikely to reduce housing prices. If anything, they will likely put further upward pressure on prices. To be sure, lower property taxes represent immediate savings for homeowners. But tax savings will likely be capitalized into property prices. Indeed, a would-be property buyer considers the entire cost of housing—including the house price itself, as well as maintenance, mortgage debt servicing, insurance, and property taxes. Lower property taxes mean more money is available for housing; in turn, the resulting increase in demand will lead to higher home prices.

Taxing and Spending

Moving from consumer behavior to public finance, local governments, when faced with lower property tax revenues, will have to compensate accordingly. They can reduce local government services or seek other revenue sources (by increasing taxes on other activities).

Privatizing government services or shifting from taxes to user fees—introducing market forces into “public” services, as suggested by Arthur Seldon, an economist who co-founded the Institute of Economic Affairs in London—is generally a good idea. But this assumes, first, that collective action is not cheaper and more efficient than market action (as explained by James M. Buchanan and Gordon Tullock in The Calculus of Consent). And second, that there is a well-thought-out plan for the cost-benefit analysis and the transition. The property tax ballot initiatives address only one aspect of the problem.

Privatization and user fees are one option. Alternatively, states could compensate for the lost local revenues by increasing statewide sales or property taxes to pay for local services through state funds. This would centralize power in the states and reduce local autonomy and discretion over spending. It would also lead to the creation (or expansion) of two bureaucracies: the local and county government internal lobbyists seeking funding from the capital, and the state-level department tasked with income redistribution.

The shift in taxation could also have negative effects for the states.  

Two of the seven states considering a property tax reduction, Indiana and Kansas, already have some of the country’s highest sales taxes (2nd and 9th, respectively); Florida is 16th.  The other four (Louisiana, North Carolina, Oklahoma, and Wyoming) are in the third-lowest quartile of state sales taxes.  

When it comes to income taxes, two of the seven states are in the second-highest quartile (Kansas ranks 19th for the highest marginal income tax rate, and Oklahoma ranks 27th).  Three states (North Carolina, 32nd; Louisiana, 37th; and Indiana, 38th) are among the least taxed.  And two states (Florida and Wyoming) have no income tax.  

These states, and their voters, should ask themselves what it might mean to increase state-level taxes and bureaucracies.

To paint a more general picture, the seven states contemplating a reduction or elimination of property taxes are among the most well-behaved in terms of regulation in the United States. Two are in the top 10 of the Economic Freedom of North America index, which ranks North American states and provinces by their levels of regulation, business freedom, respect for property rights, and rule of law. Florida is #6 in the U.S. and North Carolina is #7, followed closely by Indiana at #10, Oklahoma at #11, Kansas at #14, and Wyoming at #16. Of the seven states with property tax ballot measures, only Louisiana (at #28) falls outside the first two quartiles of states with the highest level of economic freedom.

Again, in a vacuum, tax cuts are generally desirable, as they reduce distortions, increase economic activity, and leave more money in the hands of American families, consumers, and entrepreneurs, rather than politicians and bureaucrats. But—absent a plan for alternative provision of services or alternative sources of income, our seven states are playing with fire. Voters at the polls should ask themselves if they are ready to play with enviable economic conditions that have made their states among the most attractive within the union.

And Then There’s Debt-Financing…

Of course, there’s another way to raise revenue, without having to increase taxes: debt financing.  

This is the path the US Congress has chosen: it has cut taxes (again, a good thing, prima facie) while continuing profligate and unconstitutional spending (not so good…). The US national debt now stands at $40.1 trillion, or about 125% of GDP. While it’s nice to have lower taxes, with beneficial effects today, the debt must be serviced—and not just tomorrow. Today, interest payments on the national debt stand at about 11% of federal spending, after defense and Medicare (about 14% each) and Social Security (21.5%).  

Our seven states have been responsible in their use of debt. Florida ranks lowest among the 50 states, with a debt-to-GDP ratio of less than 1%, followed by Wyoming (48th) and Indiana (41st). The next cluster is in the third quartile (Oklahoma is 37th, North Carolina 34th, and Kansas 30th, at 3.3%). Even Louisiana (at the 19th most indebted) has a modest debt-to-state-GDP ratio of 4.8%.

Thinking Twice

To repeat, we are instinctively in favor of lower taxes. But supporters of property tax reform should ask themselves if the downside risk is worthwhile.