Essays in Honor of Dick Netzer
Studies in Fiscal Federalism and State–local Finance series
Edited by Amy Ellen Schwartz
Chapter 2: What should local governments tax: income or property?
Wallace E. Oates and Robert M. Schwab* INTRODUCTION The property tax has long been the primary source of tax revenues for local government in the United States. As John Wallis (2001) has documented in his excellent history of the property tax in the USA, the tax has a long and rich history, dating back to the origins of our nation. In fact, in the 18th and 19th centuries, the tax was used, at various junctures, by all the various levels of government, but, over the course of the 20th century, its use became associated nearly exclusively with local government. At the same time, local property taxation has long been a contentious issue. The tax has been the source of continuing dissatisfaction from many quarters. During the latter part of the 20th century, for example, a forceful judicial attack called into question the constitutionality of local property taxation as a source of ﬁnance for public schools. The basic charge has been that the tax base is distributed unequally among local jurisdictions, giving rise to unjustiﬁable ﬁscal disparities in the funding of public education. This has led several states to restructure their systems of school ﬁnance so as to place less reliance on property taxation. The primary candidate as an alternative tax base to that of property for local governments is income.1 Indeed, some students of local ﬁnance have argued that local income taxation would oﬀer a more eﬃcient and equitable source of local tax revenues than does property...
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