In 2025, local governments faced new costs and challenges brought on by unprecedented federal funding cuts and the continuation of deep state tax cuts. Following the passage of President Trump’s “One Big Beautiful Bill Act” signed into law in July 2025, local communities grappled with the implications of major federal rollbacks to Medicaid and food assistance. The cuts, which started phasing in at the end of last year, are rippling through local communities, threatening access to care and straining local budgets that are often responsible for public health and safety-net services. Many localities were already struggling with rising costs such as increased pension liabilities and health care costs for municipal employees, as well as reduced revenue from commercial real estate. The federal cuts combined with trade and immigration policies have pushed local budgets over the edge, leading to massive revenue shortfalls across the nation including in New Orleans, San Diego, Denver and Boulder County, and cities across Indiana.
Many local leaders on both sides of the aisle understand what’s at stake: without new, sustainable revenue, communities will be forced to make deep cuts to essential services or rely on regressive, short-term fixes. As a result, 2025 saw an intensification of state and local tax fights across the country, as well as growing experimentation with local-option taxes, levies, fees, and tourism taxes aimed at keeping budgets afloat while also navigating political constraints imposed by state legislatures.
Fights Over Fiscal Authority
One of the clearest trends last year was the escalation of states’ efforts to limit local taxing authority, despite ongoing local financial pressures.
In Wisconsin, multiple cities have been lobbying the state for permission to adopt their own local sales taxes. Currently, only counties (no cities or villages other than Milwaukee) are permitted to levy local sales taxes. A package of bills was introduced in November 2025 that would allow all municipalities to impose a local-option sales tax of up to 0.5 percent, subject to local referendum approval. At the same time, GOP state lawmakers are pushing a bill that would require local vehicle registration fees (called “wheel taxes”) to be approved by voters via referendum before they could be imposed, and would even force existing wheel taxes to go before voters to remain in effect. If passed, the bill would create even more uncertainty for local budgets and make it more difficult to pay for transit and infrastructure repairs.
There was also increasing tension between state and local governments in Tennessee, where Metro Nashville sued the state over a law restricting the council’s size and its ability to raise taxes. Tennessee lawmakers are also considering a bill that would limit how much local governments can raise property taxes without triggering a voter referendum.
In Florida, the Florida Association of Counties, the Florida League of Cities, and other local officials on both sides of the aisle forcefully pushed back against proposals in the statehouse to cut property taxes, citing concerns about fire departments and emergency management services.
In Texas and Florida, this dynamic has taken a particularly aggressive turn. In Texas, Attorney General Ken Paxton launched a probe into almost 1,000 Texas cities under a new state law that restricts local property tax increases if financial audits aren’t completed. The rationale is for greater fiscal transparency, but the enforcement mechanism effectively punishes communities, often smaller and under-resourced communities, by limiting their ability to respond to rising costs. In Florida, the state’s Department of Government Efficiency (DOGE) is actively auditing and publicly shaming cities for “wasteful” spending. Florida state officials have directly tied these overspending claims to Gov. Ron DeSantis’ property tax elimination agenda since they claim they help justify reducing local budgets. Taken together, these interventions reflect a broader trend of state-led austerity being imposed on local governments, even as cities and counties face rising costs for housing, infrastructure, climate resilience, and other necessities.
Local-option Taxes
Against this backdrop, local-option taxes are increasingly a critical tool for local governments. In California, voters in Santa Clara County approved a 0.625 percent sales tax increase to fund county hospitals and health services. The measure came in direct response to significant federal Medicaid cuts, which threatened access to care for low-income residents. Similarly, in Harris County, Texas, officials adopted a 3.25 percent property tax increase to address rising debt costs for local hospital systems. This decision underscores how federal and state disinvestment in health care has pushed costs down to the local level where leaders are forced to navigate difficult decisions, especially amid growing concerns about affordability and inflation.
Property Taxes
The property tax debates we are seeing across the country truly reflect the competing pressures on many local governments. On one hand, some state policymakers are trying to score political points at the expense of local revenues by offering broad-based tax cuts to homeowners. While property taxes have legitimately increased since 2019 given rapid appreciation and low inventory – an issue that requires tax and nontax solutions alike, many of the tax cut proposals would not benefit the most vulnerable or lowest-income households. Studies repeatedly show that tight property tax restrictions create inequities and, in some cases, even make new housing construction more expensive. Even so, across the country, 2025 proved to be a volatile year for property tax policy, with significant implications for both equity and fiscal sustainability.
- Some states like Wisconsin and Minnesota saw significant levy increases as local governments attempt to keep pace with rising costs. Minnesota, in particular, experienced notable levy hikes by cities and school districts seeking to stabilize budgets in the face of inflation and uncertain state aid.
- Others like Ohio enacted major property tax legislation designed to cap future increases, expand homeowner tax credits, and alter levy formulas so that property tax growth is limited to inflation except where voters approve new levies; this raises major concerns about reducing revenue for schools and local services.
- Localities in Indiana are facing tighter budgets due to property tax cuts passed in April 2025.
- In Georgia, hundreds of local governments and school districts wisely opted out of a statewide property tax cap to preserve revenue for education, though some have reversed course after initially opting out.
- Texas Gov. Greg Abbott has made eliminating school property taxes a centerpiece of his 2026 agenda though lawmakers seem divided on the issue.
- In Boston, Mayor Michelle Wu has long been pursuing a tax shift bill that would shift more of the city’s property tax base from the residential to the commercial sector. The Senate blocked the proposal in late 2024; on January 15, 2026, the Senate again voted down an amendment that mirrored Mayor Wu’s tax shift proposal.
There are countless other stories and legislative updates around property tax bills from the past year, but the core point is that property taxes remain central for local budgets and increasingly politically fraught. However, solutions beyond deep, widespread tax cuts exist and need be considered to advance affordability for those who need it most.
Increased Fees
Many local leaders have turned to fees, particularly utility fees, to help close budget gaps. Policymakers have framed the increases as necessary “catch up” measures to reflect the true costs of water and sewage rates and trash collection. While cost-based fees such as these can be appropriate, they disproportionately harm lower-income households unless they’re paired with strong affordability measures.
For example, San Diego and Los Angeles both increased sanitation and wastewater fees, citing aging infrastructure and higher labor and compliance costs. Localities in Illinois also approved scheduled increases to water, sewer, and stormwater fees to support basic services and debt obligations tied to water infrastructure. Beyond utilities, some cities expanded solid waste, recycling, and street maintenance fees. While this trend is nationwide, it’s especially apparent throughout Texas and Florida. While these fees are legally distinct from taxes, they can add to the overall regressivity of who is paying for vital public services and how states and localities raise revenue.
Tourism Taxes and the Search for Revenue
Communities that have strong tourism industries are increasingly seeking ways to capture more revenue from visitors rather than residents.
- For example, municipalities in Alaska have been exploring higher bed taxes to help fund infrastructure strained by cruise ship traffic and seasonal population spikes.
- In Montana, resort communities approved increases to local resort and lodging taxes to fund workforce housing, transportation, and public safety in areas where tourism growth has outpaced local wages.
- Idaho communities with heavy recreational tourism moved to expand lodging tax revenue to address road maintenance and emergency response costs tied to seasonal visitors.
- In Colorado, several mountain towns passed lodging tax increases or extensions in 2025, frequently dedicating the revenue to housing affordability initiatives, wildfire mitigation, and infrastructure.
The Need for More Local Autonomy in 2026
The past year has underscored a growing divide between local governments that have the authority to adapt their tax systems and those that remain constrained by state law. Some communities, when able, are experimenting with new approaches to modernize revenue systems and address budget gaps. But recent local tax conversations also highlight the broader challenge facing local governments nationwide – without greater fiscal autonomy and decision-making power, many communities will continue to face the consequences of federal and state disinvestment with limited ability to protect their most vulnerable residents.
