Excise Taxes Cannot Replace Property Taxes

Property taxes will be front and center in several states’ taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. debates in 2026. From January 2020 to July 2025, aggregate US home prices soared 55.9 percent, outpacing both incomes and aggregate inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin, netting homeowners an inflation-adjusted value increase of more than 25 percent in just five and a half years. The increases in value may be welcome to some homeowners, but what’s less welcome are the higher property taxes that result if local governments don’t cut rates.

While property taxes are not always popular, they are the cornerstone of local government. Nationwide, property taxes generate 70 percent of all local tax revenue. In aggregate, local governments collect twice as much property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. revenue as state governments collect from income taxes.

Property tax rates and implementation vary widely. Effective average property tax rates on owner-occupied housing range from 0.32 percent in Hawaii to 1.83 percent in Illinois.

Even though property taxes serve as a relatively effective tax, they remain unpopular. Policy alternatives to property taxes carry tradeoffs, some far worse than others. Perhaps the biggest hurdle to shrinking property tax collections or eliminating them altogether, though, is that there isn’t a great replacement revenue source.

One proposal to fill the crater left by shrinking property tax collections is to increase excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. collections. The Nebraska legislature, for example, introduced multiple bills in 2024 to increase the cigarette tax rate to generate additional revenue to pursue Governor Jim Pillen’s (R) stated goal of reducing property taxes by 40 percent.

Nebraska cigarette taxes generated $52 million in 2024. Property taxes generated $5.3 billion. No cigarette tax hike could generate $3 billion to replace 40 percent of property taxes. Statewide, excise taxes, including fuel, generated only $575 million, the large majority of that being petroleum taxes that are used for road maintenance and construction. Excise taxes have far too small a tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to replace a broad-based property tax.

Because the tax base is so narrow, excise taxes are also much less stable than broad-based taxes. Where property taxes are tied to immovable assets, excise tax revenues grow and shrink through market cycles and as consumer preferences change.

Many excise taxes also have shrinking tax bases, making them terrible candidates for local expenditures that increase over time. Education, fire, and police services are important local services and have required substantial increases in funding over time. Real cigarette tax revenues in Nebraska are down two-thirds from their peak in 1972, despite four rate hikes over that same period.

Fewer Americans smoke each year. Though a celebration for public health, it becomes a problem if governments rely too heavily on cigarette tax revenue. Excise taxes are a poor tax base for supporting growing services.

Further, replacing a portion of property tax collections with a state excise tax means centralizing revenue at the state level and then distributing that revenue to localities, creating a host of other problems. Local expenditures and property tax rates vary considerably within a state. In South Dakota, effective annual property tax rates range from 0.44 percent of property value to 2.23 percent. Replacing these with a single statewide excise tax creates distribution problems and severs the connection between local taxes and the services they fund.

Next, consider a separate metric: property tax collections by household. Roughly 42 percent of property taxes are levied on businesses, including (sometimes) their land, machinery, and equipment. In areas where businesses are relatively more or less dense, property tax payments per resident will differ. Similarly, more affluent areas will experience higher property tax collections than rural or lower-income areas.

In North Dakota, due in significant part to oil and gas activity, average property tax revenues range from $1,165 per household to $10,565. This exacerbates the challenge of trying to replace local revenues with a standard statewide tax

Property taxes will remain a focal point of state and local tax debates in 2026 because they occupy a unique position in the fiscal landscape: unpopular yet indispensable. While rising property values and taxes have intensified calls for reform, the reality is that property taxes fund the lion’s share of local services and lack a viable substitute. Excise taxes are far too narrow to fill the gap, and a poor candidate for filling any meaningful portion of it. Meanwhile, shifting to income or sales taxes would introduce greater economic distortions, administrative complexity, and equity concerns.

Ultimately, any policy changes must balance taxpayer relief with the need for stable and transparent revenue streams. Property taxes remain the most practical—and least harmful—option for funding local government priorities, even if they never win a popularity contest.