Excise Taxes Can't Replace Property Taxes: Why Local Funding Matters

Understanding the Critical Role of Property Taxes

As states grapple with funding local services, the discussion surrounding property taxes is intensifying. From January 2020 to July 2025, U.S. home prices surged by an astonishing 55.9%, adding pressure on property tax rates. For homeowners, this uptick in property values comes with the unwelcome consequence of higher property taxes. While the ascent in home values may offer some financial comfort, it also necessitates a closer examination of the essential role that property taxes play in funding local governments and services.

Excise Taxes: A Short-Sighted Solution?

Some legislators are proposing to alleviate the burdens of rising property taxes by shifting towards excise taxes. However, this approach is fraught with challenges. Excise taxes, levied on specific goods like cigarettes and gasoline, constitute a volatile and narrow tax base. For instance, the unsuccessful attempt of Nebraska to significantly raise cigarette taxes shows that these taxes cannot sustainably replace the critical funding provided by property taxes. In 2024, Nebraska's property taxes yielded over $5.3 billion, while the entire excise tax revenue—primarily from fuel—totaled just $575 million. Attempting to replace a broad-based property tax with such insufficient funds is illogical and economically unfeasible.

The Stability of Property Taxes Amid Economic Changes

Unlike excise taxes, which fluctuate based on market cycles and consumer behaviors, property taxes provide a stable revenue source. They are tied to immovable assets, ensuring a consistent flow of funds for essential services such as education, public safety, and infrastructure. The volatility of excise taxes, alongside their declining bases—such as cigarette tax revenues that have decreased significantly since their peak in the 1970s—underscores the risks of relying on these alternatives.

Ensuring Local Governments Remain Funded

Proposals to replace property taxes with less reliable sources like excise taxes not only jeopardize local government funding but also distort the fiscal landscape. As the demand for local services increases, the need for stable funding becomes paramount. Instead of eliminating property taxes, states should explore avenues like targeted reforms that tie property tax rates to individuals' abilities to pay. Initiatives such as circuit breaker programs, which prevent property tax bills from overwhelming residents' budgets, can be effective in addressing affordability without compromising service funding.

The Bottom Line: Preserving Local Services

Ultimately, property taxes remain an indispensable method of funding critical local services. By understanding the unique challenges they face, states can implement fair reforms that maintain funding for schools, roads, and first responders without resorting to unstable taxes like excise taxes. A robust dialogue around property taxes—though often unpopular—helps secure the resources necessary for community well-being and development.