Several states (Connecticut, Florida, Minnesota, New Jersey, Rhode Island, and Texas) have recently considered imposing severe caps on property tax revenue.[1] These caps restrict the amount that property tax revenue can increase from year to year to a low fixed percentage, a formula based on the inflation rate, or some combination of the two.[2]
While such caps may hold down property taxes, they are likely to impair local governments’ ability to provide education, public safety, and other services residents demand and need. They also are likely to make the local revenue system more regressive.
Property tax caps do nothing to change the main drivers behind higher property taxes. They cannot slow the increase in the cost of health care or fuel, for example, which reflects forces outside of the control of local officials. Nor do they change the demand for local public services, such as quality K-12 education, public safety, and good roads.
There are ways to mitigate the effects of property tax caps by replacing the lost revenue, but each of them has serious drawbacks:
- Increased state aid to replace property tax revenue is sometimes promised at the time a cap is enacted. The evidence suggests, however, that state aid is not reliably sustained over time — particularly during economic downturns, when state aid to localities often declines.
- Most caps include provisions permitting citizens in a locality to vote to override the limit temporarily, or sometimes even permanently. Citizens unhappy with deteriorating services have frequently used this provision. The evidence suggests, however, that wealthier communities both attempt more overrides and are more successful in passing them. This can exacerbate disparities across the state in education and other important services, leaving lower-income communities even worse off relative to their higher-income counterparts.
- Localities may shift their revenue bases to other local sources, such as local sales taxes and fees, if permitted to do so under state law. The evidence suggests that localities under property tax caps often shift to these other revenue sources in order to maintain existing services. Such shifts, however, can place greater tax burdens on low-income residents than if the property tax were maintained.
When none of these strategies succeeds in completely alleviating the effects of the cap, serious reductions in the level and quality of public services are likely to follow. For example, K-12 spending per pupil in California fell dramatically under Proposition 13, dropping from more than $600 above the national average in 1978 (when Proposition 13 was passed) to more than $600 below the national average in 2000.[3] School districts in the state have been forced to cut programs such as music, physical education, and art; reduce class offerings; and cut positions, such as librarians and counselors.[4]
Similarly, some Massachusetts towns have had to lay off school and municipal employees (including fire and police), freeze wages, close the town library and senior center, and stop funding infrastructure projects in order to comply with that state’s severe property tax cap.[5] And in Illinois, school districts affected by the state’s cap have eliminated positions, reduced the number of teaching assistants, imposed salary freezes, and cut certain classes.[6]
Academic studies have found that in most cases, property tax limits have led not to a shrinkage in the public sector but instead to a shift to other revenue sources, such as state aid and fees. In places where the caps have had an effect, however, the outcome has been negative. For example, evidence suggests that caps disproportionately affect lower-income communities: “the implications are that [tax and expenditure limits] are most constraining on the ability of governments serving economically less prosperous and at-risk populations to meet public service needs,” according to a study by Dr. Daniel Mullins, an expert on state and local fiscal issues.[7] Some studies have found strong evidence that property tax caps lead to lower student test scores; they may also lead to higher dropout rates and a reduction in teacher preparedness.[8]
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