Beyond the Property Tax: Local Government Revenue Diversification

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ABSTRACT. Local governments in the U.S. rely less on the property tax than they have historically. This long-term trend has been accompanied by important shifts in the composition of local revenues. While the property tax still serves as one primary source of local government revenue, increasingly other sources are used to pay for local government. This paper first examines that trend, the forces behind it, and its regional impact. We then explore trends in three central states - Iowa, Nebraska, and Arkansas - that have experienced substantial revenue shifts in recent years. A concluding section discusses the options for the future.


The property tax is one of the oldest, most widely used, and most local of revenue sources in the United States. In the 19th century, it was a fairly comprehensive tax on wealth, as most wealth was either real property or tangible personal property. As the economy moved away from its agrarian basis, the tax also changed. It has become mainly a tax on real property and limited types of personal property, such as business machinery, equipment, inventories, and in some states, automobiles and boats. As a wealth tax it is flawed, as it is imposed only on certain types of wealth, and does so on the basis of the gross, rather than the net value. Further, the property tax is expensive for governments to administer, as it requires property valuation by assessors. Political pressures work against accurate and up-to-date assessment, and for some governments, assessment quality remains low (Mikesell, 1993, 1999). The property tax "is a 'lump sum' tax that is highly visible and often inconvenient to pay. It falls heavily on unrealized capital values, burdens shelter, and may be unrelated to the ability of the owner's current income." (G. Fisher, 1996, p. 209). Despite these problems, the real estate component of the property tax has the desirable features of taxing an immobile factor of production, and taxing landowners (including those who may not be residents) who benefit from certain locally provided services such as public safety, roads, and sewers and sanitation. Sokolow (1998, p. 186) in a recent review of property tax trends stated, "It's easy to pick on the property tax.... Yet as a local government revenue source, it has meritorious and unparalleled features, high revenue yield, and stability in particular." Other taxes are more difficult to levy and administer at the local level, and some jurisdictions have limited sales and income tax bases (G. Fisher, 1996). Because of these features, the general property tax has long been considered as the "best available independent source of local revenue, and made it possible for citizens to spend their own money as they collectively saw fit" (Mields, 1993, p. 16).

Many premature obituaries of the property tax have been written, often emphasizing the alleged inelasticity of the property tax. This is a fair criticism, as a review of several studies indicates that income and sales taxes are significantly more elastic relative to their tax base than is the property tax (Mikesell, 1999, p. 298). Other obituaries have stressed the limits imposed on property tax rates as a result of the general public's revolt against the tax. However, through the 1980s and into the 1990s, property tax levies typically increased, while the tax rate grew less slowly or even declined. A resurgent economy plus better assessment techniques have boosted assessed valuation in many localities, and have produced a revenue bonanza in many cities (Dearborn, 1993). Criticisms about its regressivity have been muted as more states have enacted various exemptions to the property tax (Bartle, 2000). Similarly, the popular outcry against the property tax has had to be balanced against the public's opinion that it is a relatively fair and beneficial tax (Speer, 1997). At the beginning of the twenty-first century, property taxes continue to be a significant source of funds for municipalities, counties, school districts, towns, villages, and special districts. …