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 due to 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 the 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.

Random Other Reactions

A few states are proposing retail delivery fees, following the Colorado and Minnesota models. Connecticut, Hawaii, Indiana, Maryland, Massachusetts, and Mississippi are all considering this alternative method to raise revenue. New Jersey will be increasing taxes on fuel, while New York and North Carolina drivers should see slight relief. Vermont and Wisconsin will begin taxing electric vehicle infrastructure, while Rhode Island will start taxing nicotine delivery devices. Illinois also increased the sports betting excise tax from a flat 15% to graduated rates ranging from 20 to 40%.

Future Expectations

In addition to changes to federal tax law, states may be forced to address a hole in their budgets due to a loss of federal funding for Medicaid, education, and social welfare or because of decreased investment due to federal trade policy. The changes in Washington through the Department of Government Efficiency included many cuts to federal funding to the states. Federal officials have also suggested transferring many current federal functions—such as disaster relief—to state agencies, which could similarly strain state budgets. The future state budgets must incorporate plans to replace the lost funding to continue many current programs. These federal cuts may be impacting the current fiscal years as well, compounding the problem and increasing the urgency of coming changes at the state level.

Another potential complication could arise with the pending Death Tax Repeal Act (“the Act”). The exemption from federal estate tax of approximately $14 million [increased under the Tax Cuts and Jobs Act (TCJA)] is scheduled to expire at the end of this year, reducing the value of a federally taxed estate to the former lower value of about $7 million. As many estate tax structures are based on the federal estate tax liability, changes at the federal level strongly impact state revenue. An elimination of the federal estate tax under the proposed Act would require additional changes to the state estate tax legislation to correct any lost revenue.

States will need to investigate proposals for corporate and individual income tax, sales and use tax, and property tax reform and/or implement new taxes to fill any gaps caused by federal tax law changes. Unfortunately, the federal changes are continuously occurring at an alarming rate, disrupting the certainty of state plans.