Property Tax Relief Efforts Place Pressure on Sales Tax Rates

In 1978, a noteworthy event transpired in the property tax realm – one whose implications continue to reverberate today as evidenced by current property tax relief efforts in Florida, Tennessee, Colorado, Wyoming and other states. 

California Proposition 13 passed on June 6, 1978, with support from 65% of the Golden State’s voters. The measure gave property owners an immediate property tax reduction (rolling back property assessments for 1978-1979 to 1975-1976 values) along with greater certainty regarding future tax increases. The law limited the rate of increase on assessments to 2% (or the inflation rate, whichever is lower) each year; it also limited a homeowner’s annual property tax bill to 1% of the assessed value. However, when a house changes ownership, the assessment limit resets to the market value.

Fast-forward to 2025 when housing prices in most states have hit record highs and more state legislatures and citizens are seeking ways to limit property tax rate increases. As I’ve noted, property tax reductions have impacts on sales tax rules and rates: if state and local governments receive less revenue from property taxes, sales taxes are the primary option for addressing that shortfall. That said, property tax relief efforts – ballot initiatives and draft legislation – rarely specify how the fiscal impacts of property tax relieve measures will be mitigated. 

While Prop 13 has been modified over the years, it remains an influential model for property tax relief, as the Tax Foundation’s Jared Walczak notes in a report titled Confronting the New Property Tax Revolt. The report argues that Prop 13 is a flawed role model that demonstrates “just how distortionary assessment limits can be.” By way of example, two houses with identical 2025 assessment values of $1 million could have vastly different tax bills if one house was bought in 1975 and never sold ($451) and the other was purchased in 2023 ($10,000).

The report notes that property values have soared 27% faster than inflation since 2020, triggering proposals to eliminate or dramatically reduce property taxes in North Dakota, Nebraska and other states. The report warns that shifting from property taxes to sales taxes can harm economic growth, in part because sales taxes often “exempt vast swaths of final consumption” while inappropriately taxing business inputs and other intermediate transactions. This can lead to tax pyramiding.

Sales tax rate changes also contribute to a larger compliance burden. Home prices and property tax bills appear likely to remain near historic highs in most, though not all, states for some time. This means that property tax reform will continue to rank as a high priority within county and state governments – and on ballot initiatives.

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