When Michigan voters recently approved a plan to substitute sales taxes and other state taxes for the local property tax, it gained national attention. The New York Times called it "the most dramatic change in the way public schools are financed in a century."(1) Many predicted that it would start a wave of similar actions in other states. Far-reaching proposals to replace the property tax for schools have been considered this year in South Carolina, Vermont and Wisconsin. Proposals to raise state taxes to cut the school property tax also have been floated in Idaho, Illinois and South Dakota.
Not so fast. Michigan's property tax was far higher than those of most other states. It was out of step. As a result of its tax cut, it has fallen into line. Michigan is not a leader. It is a follower.
Interest in property tax relief is understandable. The property tax is the main tax used by local school districts, accounting for 98 percent of their tax revenue. When schools are poorly financed or resources are unevenly distributed, it is natural for people to blame the property tax.
But that criticism is off the mark. The problem of big inequalities between rich and poor school districts is caused by reliance on local taxes, not dependence on the property tax per se. If local income or sales taxes were substituted for property taxes, inequalities in local tax bases would be even greater. The solution to disparities is to increase state aid.(2)
Agitation for property tax relief is not new. In the 1970s, many states took major strides to reduce property taxes by substituting state taxes. They were successful. After peaking in 1972 at 4.74 percent of personal income, property taxes fell to 3.24 percent of personal income in 1982, as Exhibit 1 shows. School property taxes mirrored the national trend, declining from 2.02 percent to 1.36 percent between 1972 and 1982.(3)
Then the tide reversed. By 1991 (the last year for which statistics are available), property taxes were back up to 3.61 percent of personal income, and school property taxes had risen to 1.50 percent of personal income. They have continued to creep higher since then.
So, is the trend for the property tax up or down? It depends on the time period considered. If one goes back to 1950 or even 1970, the property tax is in retreat. But in just the period since 1982, the property tax is going up, not down.(4)
School Taxes in 1991
The need for property tax relief is not the same in all states. Property tax levels vary widely across the country. As Exhibit 2 shows, the state with the highest school property tax in 1991 was Vermont, where it took 3.58 percent of personal income. The next highest were Oregon, Michigan, Nebraska, New Hampshire, Wisconsin, Wyoming, New Jersey, South Dakota and Texas. There is an important story about each of these states.
* Michigan, Oregon and Nebraska have each taken major steps to reduce reliance on the property tax. In November 1990, Oregon voters approved an initiative to slash the overall property tax from about 2.5 percent of property value to 1.5 percent. Nebraska in 1990 raised the state sales and income taxes to reduce school property taxes. Along the same lines, New Jersey in 1990 raised its sales and income taxes, with increased school aid and property tax relief being two of the main rationales. Although property tax revenue was not reduced, it did not grow at all in the next four years. (These 1990 developments did not affect property taxes until the 1991-92 school year.)
* Vermont and Wisconsin are two of the states that are most seriously considering alternatives to their high property taxes.
* Wyoming's tax is deceptive. A large share of it represents a tax on production by oil and coal companies rather than a conventional property tax.
* The other three states--New Hampshire, South Dakota and Texas--are among the nine that do not impose a personal income tax. …