Property Taxes and Local Finance

The property tax is the main source of local tax revenue, providing about seven of every ten dollars local governments collect in taxes. Local assessors estimate the value of homes, businesses, and land, and governments apply a tax rate, often expressed in mills, or dollars per thousand of assessed value. Most states offer exemptions or credits, such as homestead exemptions for owner-occupied homes and relief for seniors. Because school districts and special districts also levy property taxes, a single property often pays several overlapping governments.

Local governments also rely on sales taxes, in many states, local income taxes, in a few, fees for utilities and services, and large transfers from state governments, especially for schools. Property tax revolts reshaped local finance after California voters approved Proposition 13 in 1978, which capped rates at 1 percent of assessed value and limited annual assessment increases, followed by Massachusetts's Proposition 2 1/2 in 1980 and similar limits elsewhere. Federal tax law also matters: the 2017 tax law capped the federal deduction for state and local taxes at $10,000, and a 2025 law raised the cap for many taxpayers.

To build schools, roads, and water systems, local governments borrow by issuing municipal bonds, a market of roughly $4 trillion whose interest is generally exempt from federal income tax. Chapter 9 of the Bankruptcy Code lets insolvent municipalities restructure their debts, as Detroit did in 2013, the largest municipal bankruptcy in American history. Supporters of property taxes say they are a stable source of revenue tied to local services, while critics say they burden homeowners on fixed incomes and produce wide inequalities between wealthy and poor communities.