Polls show that most Americans generally prefer sales taxes over property or income taxes. So it sounds like a promising plan to repeal local property taxes and just replace them with a higher sales tax rate, or an expanded sales tax base. However, new research says this big idea -- is really a bad idea.
Property Tax is Universal
Every state has property taxes. Taking away this critical funding option would be a mistake, according to a tax policy report, commissioned by Texas Tax TRUTH. While the study focuses on Texas, other versions of this same idea have surfaced in Oklahoma, Kansas, Missouri and North Dakota.
No state has ever eliminated property taxes. On the few occasions where legislators or voters have been given the option, they decided against it. The most recent example is a referendum considered by North Dakota residents in June.
Measure 2 would have eliminated property taxes for schools, cities and counties and replaced them with an undefined set of state taxes. North Dakota voters rejected it by a margin of almost 3-1, not because they like property taxes but because they were concerned about the impact on their local communities.
A Stable Tax Versus A Volatile Tax
Swapping property taxes for higher, broader sales taxes would be risky since the sales tax is such a volatile revenue source. The sales tax responds very quickly to changes in consumer and business spending. This would create added uncertainty for funding local services like schools, police, fire protection, etc.
There are also serious concerns about how consumers would react to higher sales taxes. In many cases, they could choose to just cross into a neighboring state to purchase their big ticket items.
This is already common in high-tax states like Massachusetts and New York, which have surrounding states with lower tax rates.
Winners and Losers
Having only sales tax and no property tax would favor cities and surrounding suburbs where large numbers of people make taxable purchases. Areas that have relatively small populations could see their revenues plummet.
An additional factor that would have to be addressed is the reality that should a sales tax be supplemented for a property tax, huge transfers in the tax burden would occur. Non-resident real estate owners would effectively pay no taxes to state or local governments. The taxes they formerly paid would be transferred to the state's residents.
School funding would likely represent a particular problem too. A single consumption tax would do nothing to fix an uneven distribution of revenues among schools districts. It would be lawmakers' responsibility to find ways to mandate equality for public school systems. And once the state is put in charge, the idea of local control of public schools would be over. In fact, local control and oversight of many public services would become a thing of the past.
The report concludes that replacing property taxes with sales taxes is not a real world strategy. Even though no one likes property taxes, it's not a tradeoff that taxpayers should make.