States React to Federal Changes

How are the states reacting to potential federal tax reform under the new administration? After the flush years of federal COVID funding, many states reacted by lowering income, sales, and/or property tax rates and increasing tax deductions and homestead exemptions. Now, reality sets in, and many of those states are formulating next fiscal year’s budget amid the uncertainty of federal cutbacks in funding, federally leased properties, and lost government service contracts directly impacting state revenues. The uncertain status of federal tax law changes, which could also be retroactive, compounds the chaos. States must decide on the best way to protect revenue without unfairly or disproportionately burdening residents. Changes to income, sales, and property tax rates have varying effects on different socioeconomic groups.

Changes to Property Taxes

This year’s state legislative sessions have seen an unusual flurry of activity in the property tax area. At least 10 states are considering property tax reform or elimination after Florida Governor Ron DeSantis stated his support for eliminating property taxes in his state. Florida is considering a phasing out of property taxes over 8 to 10 years, potentially replaced with sales tax rate increases or base expansion. States like Colorado, Indiana, Iowa, and Kansas have made property tax reductions a high priority. Some states like North Dakota and Wyoming are considering property tax cuts without proposing any offsets to replace the lost revenue. Several states will implement property tax relief measures in 2025, including enacting a distinction between residential and nonresidential property for tax purposes. Valuation of property will continue to be a factor in setting property tax rates. Lower occupancy rates on commercial property, as well as higher costs on new construction, can wreak havoc in rate setting because of fluctuations in valuations among similar properties. Property tax increases will disproportionately fall on commercial properties, with many states extending homestead exemptions to residential owners.

Late last year, an attempt to institute an Empty Homes Tax on vacant properties in San Francisco was found by Superior Court to be unconstitutional and preempted by California law. Oakland voters, however, approved a measure in 2018 to establish the Oakland Vacant Property Tax that imposes an annual tax of $3,000 to $6,000 on vacant property. A new ballot initiative to impose a “waste tax” on vacant buildings has been filed with the Colorado Legislature. The proposed tax would apply to properties that have been vacant for more than six months, starting January 1, 2026.