Tax Policy – Will Nebraska Find a Path Forward in its Property Tax Standstill?
The Nebraska Unicameral has passed the halfway point in this year’s abbreviated 60-day legislative session, but no consensus has been reached in the ongoing effort to reduce property taxes.
For years, property taxes have been a source of frustration in the Cornhusker State. In a state in which corporate income, individual income, and sales tax collections per capita are all somewhat higher than average, Nebraska’s property tax collections per capita are $340 higher than the national average. When real property taxes are taken as a percentage of total home value, Nebraska has an effective property tax rate of 1.65 percent, the 8th highest effective rate in the nation.
Nebraska’s property taxes are high by any measure, but property taxes feel especially burdensome to many property owners because, as an agriculture-intensive state, farmland comprises nearly 92 percent of the state’s total land area, a larger share of total land acreage than in any other state. As such, Nebraska’s local governments have little choice but to rely heavily on agricultural landowners to generate revenue to fund local government services.
While real property taxes get most of the political attention, disagreement persists when it comes to the severity of the problem and what should be done in response. This lack of consensus is evidenced by the number and scope of property tax relief proposals that have been introduced this session. Two such proposals, LB974 and LB1213, are discussed below.
LB974: Increasing State Aid to Reduce Local Property Taxes
Nebraska is a state in which every bill is guaranteed a hearing, but expedited floor consideration is given to any bill that is designated a “priority bill” by a senator, a committee, or the Speaker of the Legislature. The Revenue Committee’s priority bill this year is LB974, which would reduce local property taxes by reducing school district property tax assessment ratios, with the state absorbing more of the costs of education through increased foundation aid to schools.
As amended by the Revenue Committee (AM2433), LB974 would reduce property tax assessment ratios for real property taxes levied by school districts while retaining current law assessment ratios for property taxes levied by counties, municipalities, and other local taxing entities. Under current law, for all local taxing entities, residential and commercial property is assessed at 100 percent of its actual value (or market value), while agricultural and horticultural land is assessed at 75 percent of actual value. AM2433’s proposed valuation reductions would phase in over time, such that, by 2022, school districts would tax residential and commercial property at 87 percent of actual value and agricultural and horticultural property at 55 percent of actual value.
This legislation would also tighten Nebraska’s existing property tax limitation measures. Currently, school districts can assess property taxes at a maximum rate of $1.05 per $100 in assessed value. In addition, any political subdivision seeking to raise its total property tax levy beyond the prior year’s levy must hold a public hearing before passing any such resolution or ordinance. To prevent unchecked increases in revenue growth, Nebraska’s base limitation generally requires local taxing authorities to obtain voter approval to increase funding growth beyond a certain level (currently, 2 percent).
Under AM2433 to LB974, starting with the 2023-24 school year, maximum school district levies would instead be limited to the amount of the prior year’s local formula contribution—which accounts for inflation and new construction—plus 5 cents per $100 of assessed property value. This legislation would also set Nebraska’ base limitation to match the rate of inflation, but not to exceed 2.5 percent or drop below zero.
One of the strengths of Nebraska’s current tax system is that the state’s property tax caps allow few exemptions, making them more effective. However, state-for-local tax swaps have little efficacy in reducing long-term combined state and local tax burdens over time. Research suggests state-financed property tax relief increases citizens’ willingness to accept a higher overall burden of taxation. This, and the fact that tax increases are relatively easy to detect over time due to the transparent nature of the property tax, suggests it may not be in taxpayers’ long-term best interest to shift more local funding burdens to the state.
It’s important to note that, while taxes on real property (land and structures) get most of the attention in Nebraska, they’re far from the only property tax issue worth addressing. Many states are moving away from tangible personal property (TPP) taxes by increasing their de minimis exemptions or exempting additional categories of TPP over time, but Nebraska continues to tax TPP to a significant degree. Most agricultural and business machinery and equipment is subject to property taxes each year based on the depreciated value of the property. Nebraska’s primary TPP tax reprieve (apart from the TPP tax relief certain companies can obtain through the Nebraska Advantage incentives program) is a de minimis exemption that excludes the first $10,000 in taxable TPP from taxation each year.
While AM2433 would reduce real property taxes by reducing property tax assessment ratios, it would repeal the $10,000 de minimis TPP tax exemption, effective in tax year 2020, thereby increasing, rather than reducing, reliance on TPP taxes paid by farmers and businesses. This would be a step in the wrong direction, as TPP taxes discourage in-state capital accumulation, distort economic decision-making, apply non-neutrally to some industries more than others, and impose significant compliance burdens on the farmers and business owners who owe them. By comparison, taxes on real property are far less economically distortive and administratively burdensome, and they are better aligned with the benefit principle, or the idea in public finance that taxes paid should relate to benefits received.
LB1213: Reducing Local Property Taxes in the Context of Comprehensive Tax Reform
While LB974 is the Revenue Committee’s priority bill, an alternative bill, LB1213, would offer similar property tax reductions but would do so in the context of comprehensive tax reform. Specifically, this bill would reduce property tax assessment ratios for property taxes levied by school districts to 65 percent of actual value for agricultural and horticultural real property and to 90 percent for all other real property, effective in 2021. This bill would also enhance taxpayer transparency by requiring local taxing jurisdictions to provide more substantive public notice before increasing property tax levies from one year to the next. In addition, by broadening the sales tax base to additional goods and services, this bill would reduce the general sales tax rate from 5.5 to 5 percent, reduce each of the state’s four individual income tax rates by 0.2 percentage points across-the-board starting in tax year 2021, and eliminate the inheritance tax for lineal heirs.
Of all the ways to generate new state and local tax revenue to offset reductions elsewhere, sales tax base modernization is among the most conducive to minimizing economic harm while improving adherence to the principles of sound tax policy. Essential to any sales tax base-broadening consideration, however, is the understanding that, as a consumption tax, the sales tax should apply only to final personal consumption and not to business-to-business transactions. This is not because businesses deserve special treatment but because applying the sales tax to business inputs increases the costs of production and ultimately raises consumer prices in a nontransparent manner. Such taxes also discriminate against Nebraska-based operations by making production more expensive in Nebraska than it would be in other states. To avoid tax pyramiding, it is important to exempt from the sales tax any services that are primarily business inputs.
Taken as a whole, if amended to exclude major business inputs, the reform framework outlined in LB1213 would significantly improve Nebraska’s tax structure while reducing tax rates and making the tax system more responsive to taxpayers’ needs and concerns.
Concluding Thoughts
With only 22 session days left in Nebraska’s 2020 legislative session, legislators have much work to do if they’re going to reach a property tax consensus. While some stakeholders see immediate real property tax relief as the most pressing goal, it is prudent for policymakers to consider broader changes that would not only provide desired tax relief but would also improve the competitiveness of Nebraska’s overall tax structure. Comprehensive tax reform would not only provide an opportunity to address Nebraska’s high property taxes but also to reexamine other problematic aspects of the tax code and put the state on a path to a better fiscal future.
Nebraska’s tax situation and political landscape are complex, but the path forward does not have to be. If policymakers would broaden the tax base to make it more neutral—such as by modernizing the sales tax and repealing economically inefficient business tax incentives—those reforms would allow significant rate reductions elsewhere in the code, whether property tax rates, income or sales tax rates, or a combination of all three, with the result being a tax code that works better for all Nebraskans.
Source: Tax Policy – Will Nebraska Find a Path Forward in its Property Tax Standstill?
Upstate Tax Professionals