The Nebraska Property Tax Incentive Act: What’s good about it, and what’s not?

As part of a last-minute compromise in LB1107, Nebraska state senators have given final approval to a new property tax relief program (not, as Sarah Curry notes, property tax reform). The new program expected to be signed into law is called the Nebraska Property Tax Incentive Act, which will join the list of other state programs that attempt to offset the cost of property taxes with your state tax dollars, including the Property Tax Credit Act and the homestead exemption.

The main difference between the Property Tax Incentive and the current Property Tax Credit is who receives the money and which political subdivisions are impacted. Under the current $275 million program, all property taxing political subdivisions are paid state funds and credit your real property tax bill based on how much funding they receive.

The new Property Tax Incentive is only aimed at school district real property taxes you pay, excluding local bonds or overrides. It will start at $125 million and is intended to rise to $375 million by 2024. But school districts will not receive these funds, and your school property tax bill will not change.

Instead, you will pay your property taxes like always and be rebated through a refundable state income tax credit. If you owe state income taxes, your bill will decline by the amount of credit offered for the school taxes you pay. If you don’t owe any income taxes at the end of the tax year, you’ll receive a refund for that amount after filing.

Upon the bill’s passage, the Platte Institute staff contributed their thoughts on the good and bad features to Nebraska’s newest property tax relief program.

Good: The Legislature has made a growing commitment to property taxes that will be difficult, though not impossible, to remove.

LB1107 is not the first legislative proposal to suggest phasing in a large tax change over a period of years, committing the state to give more back to taxpayers as revenues allow. Similar plans have been rejected on the floor of the Legislature and in committee numerous times in recent years, and in much less volatile economic times.

But LB1107 is the first such plan to appear on the scene at the same time as the reauthorization of the state’s largest tax incentive program and a major economic project, each of which had their supporters and opponents.

Under the current law, the state has to fund the Property Tax Incentive at $375 million by 2024 no matter what, cannot reduce the $275 million in the Property Tax Credit, and must increase that fund if new revenue sources are approved for it, such as in the likely ballot initiative on casino gambling.

This means the state could be spending around $700 million on property tax relief in the years ahead, which is equivalent to about 30% of all non-bond school property taxes levied in 2019.

Bad: The Legislature can change the plan at any time by passing a new law.

It may be politically difficult for senators to gather the 33 votes to overcome a filibuster and reverse course on property taxes, but there are many ways to change the plan if senators wanted to do so without scrapping it entirely. They could delay the implementation of the program by changing the years referenced in the bill, reduce the amount of promised spending, or choose to end one of the two property tax programs and not replace it with other reforms.

Good: At full implementation, the Property Tax Incentive would more than double the size of Nebraska’s property tax relief programs.

Supporters of the Property Tax Incentive are not wrong to say the program is significant in comparison to what the state has done on property tax previously. It took more than a decade for the current Property Tax Credit to ramp up to $275 million, and the Property Tax Incentive is slated to provide a larger amount of relief in less than half the time.

Bad: The state’s capacity to spend on property taxes is outpaced by increases in local property taxes.

Because the Legislature has so far been unable to put additional restraints on local property taxing authority, and can’t agree on a way to pay for a larger property tax reform package, increases in local property taxes are happening much faster than the state can fund a plan to replace those taxes.

Since 2007, the state has cumulatively spent more than $2 billion on the existing Property Tax Credit. Over that same period of time, though, total statewide property taxes have increased by nearly $2 billion annually. 

Good: The incentive appeals to taxpayers concerned about income taxes and property taxes.

The Property Tax Incentive is structured as a refundable income tax credit so that it can serve a purpose for taxpayers who own property but may not pay much state income tax. However, the policy also effectively cuts the state income tax bill of anyone who pays property taxes.

Bad: Doesn’t improve Nebraska’s tax climate or reduce tax rates.

Nebraska’s income tax rates and property tax rates are not changing under this plan. Nobody outside Nebraska is going to take notice of the program as an enticement to live, work, or do business here. In theory, the Legislature could even raise income taxes someday to continue to fund this program, and we already know that property tax levies and valuations will not be impacted.

Good: The Unicameral showed it can work together on property taxes under the right circumstances.

Controversial legislation often requires 33 votes to overcome a filibuster in Lincoln, which is hard to do. LB1107’s passage shows that both political and rural-urban divides can sometimes be put aside. It also prevents the Legislature from sending the signal that they are unwilling, as an institution, to work with urgency on the property tax problem.

Bad: The solutions offered by LB1107 took the path of least resistance. 

The Property Tax Incentive Act is yet another spending program that will not change Nebraska’s high reliance on property taxes to fund schools. Because senators could not agree on a plan limiting school property taxing authority, which was opposed by the education lobby, Nebraskans may have to pursue a ballot initiative if there is still a desire to achieve this aspect of property tax reform.

Good: In future years, the Property Tax Incentive fund will grow as overall property values increase.

This policy might represent an improvement over the current tax relief program. If the original Property Tax Credit had been designed to grow as property taxes increased, rather than when the Legislature decided to support the program, more taxpayers might think the credit addresses their concerns.

Bad: The Property Tax Incentive’s cap doesn’t keep up with rising school property taxes, and the credit doesn’t impact other property taxes.

The credit can rise by as much as 5% a year, depending on the overall growth in statewide property tax valuations. While this requirement keeps the state’s future financial obligations in check, it is also slightly below the average rate of increase in valuations over the last decade. That means there could be years like 2014 or 2015 where statewide valuations rise by double digits, and the credit does not rise correspondingly. And, a 5% increase in the program fund does not mean a 5% increase in school property taxes is being offset.

Last year, school property taxes increased about $100 million, or 4%. But overall valuations only rose about 2%. Two percent of $375 million is $7.5 million, or only a small fraction of the property tax increase that occurred. City and county property taxes also increased by tens of millions, which could undo the impact of the credit for a taxpayer.

Good: State budget priorities besides property taxes will be funded.

Other state priorities such as education, transportation, and Health and Human Services will not be cut for property tax relief efforts under LB1107 in the years leading up to 2024. Before additional funding to the Property Tax Incentive program is committed beyond the initial $125 million, there must be a 3.5% growth in general fund revenues and more than $500 million in the state’s cash reserves.

Bad: The revenue growth needed to fund the Property Tax Incentive might not happen.

Decisions about the level of funding for the new tax relief program will be based on the state’s actual receipts, meaning if revenues come in below 3.5%, or not significantly above 3.5%, the program may stay at current levels for years, while local property taxes can still continue to rise.

Good: The plan may encourage more lawmakers to seriously consider broadening Nebraska’s sales tax base. 

Because the Property Tax Incentive depends on revenue triggers to be funded, senators may finally decide ending sales tax exemptions would help to boost annual state revenues enough to fund their desired property tax changes on schedule. Done properly, this change could also give lawmakers the flexibility to move beyond LB1107 and adopt more significant tax reforms.

Bad: The revenues used for the Property Tax Incentive or Property Tax Credit can’t be used to fix the state or local tax structure without ending the programs, and Nebraskans could face tax hikes without real limits on property taxes.

Since money spent on the Property Tax Incentive goes back to taxpayers, it can’t be used to fund government services, and therefore can’t fund other reforms to the state and local tax system without ending the program. Some taxpayers could become fearful of losing their Property Tax Incentive, even if there may be better ways to use the money in more comprehensive tax reforms.

And expanding the sales tax base only to fund tax credits will mean Nebraskans would pay new taxes but still not see their real property taxes go down. In addition, a portion of funding for the Property Tax Incentive comes from ending the state’s tax relief program for personal property taxes on business equipment, which will seem like a tax increase to some taxpayers.

In Conclusion

At a recent Platte Institute Virtual Property Tax Town Hall, 67% of respondents told us that they were dissatisfied with LB1107. Fifty percent were “somewhat dissatisfied,” which may mean that the Property Tax Incentive, while not a totally unwelcome development, is not the solution they were looking for.

At the very least, the Property Tax Incentive creates a financial framework for building upon Nebraska’s property tax policies. But without additional reforms from either the Legislature or voters, rising local property taxes could reduce the state’s new and potentially expensive property tax relief program from “better than nothing,” to good for nothing.