The great American property tax freak out

Building state capacity in the US is hard, but a good starting principle is to not do any harm. Alas, US states appear committed to doing harm.

In a nice new paper, Yale law professor David Schleicher tracks the ongoing post-Covid property tax revolt, which threatens to starve states and localities of desperately needed revenue in coming years. Last year, Texas adopted $51 billion worth of property tax cuts; Florida legislators put on the ballot a cut that would exempt most homeowners from paying any non-school property taxes. Several other states have adopted large credits and exemptions meant to exclude large shares of homeowners from paying property tax.

Property tax is the main way state and local governments pay for themselves in the US. They generate up to 30 percent of combined state-local revenue, and 70 percent of local revenue specifically. As Schleicher and Nick Bagley have argued elsewhere, the state capacity problem in the US is disproportionately state/local in nature. State and local governments employ the vast majority of government employees, are responsible for most infrastructure for services like transportation, water, sewage, and electricity, and handle permitting for most private construction projects.

The failures of capacity at the state/local level are not solely matters of insufficient funding. Indeed, on infrastructure the problem is more that most projects are too expensive on a per-unit basis. But there are key areas of underfunding, and the property tax revolt is likely to make those problems all the worse.