Legislative Testimony for LB310: Change inheritance tax rates and exemption amounts

Good morning, Chair Linehan and members of the Revenue Committee. I’m Sarah Curry, Policy Director at the Platte Institute and I am testifying in support of LB310.

All of you should have received a copy of the Platte Institute’s most recent report detailing the inheritance tax at length. This tax, which was established in 1901, is largely outdated and no longer serving its originally intended use. Most states repealed their death taxes when the federal death tax credit was phased out in the early 2000s. Nebraska repealed its estate tax because of this federal tax change. Today, there are only 6 states remaining with an inheritance tax.

From our extensive review of the tax, we have concluded that Senator Clements’ bill is a logical and appropriate reform measure to modernize our tax code and eventually eliminate this tax from our state. LB310 will reduce the top rate and increase the exemption amount over time, which will ultimately phase out this tax and allow the counties to adjust their budgets accordingly. It will also help our state drop to having the lowest top rate instead of the nation’s highest at 18%.

I know there will be many people from the counties here today to testify in opposition to this bill.  But I want to tell you that the impacts of this bill are unknown, and that is a problem in and of itself. When conducting the historical review of this tax, we realized that there has never been an accurate reporting of how much is collected by this tax, and how much by each class of beneficiary. In a 1981 study committee, and again in 2007, the question was raised of how much money is collected by each class. Every time, there has been substantial debate on this tax, everyone always asks for more details.

In 2007, the tax was reformed, and many from the counties lobbied to get the exemption rate reduced from the original bill to the rates where they are today. If you look at a time-series analysis of inheritance tax collections statewide, it is overwhelmingly evident that tax collections increased after the 2007 change, even though many said it would devastate the counties’ budgets. At that time, NACO reported to this committee that Class I was approximately 42% of the revenues, Class II was 48%, and Class III was about 9%.

Saying all that, I want to recognize that the counties do rely on this tax as a form of their cash reserve. When conducting statistical analysis of the 2020 inheritance tax collections across all 93 counties, we found this tax makes up between 1% to 6.2% of total county revenues with an average of 3.6%.

Given that information, we have put together reform options for this tax. The policy in LB310 is one of the many reform options we suggested to modernize the tax and make it less of a burden, but I wanted to share the other reform options with you in advance of opposition testimony.

1. To accommodate for the county’s loss of revenue, give them a more stable revenue source they can rely on, such as a county level sales tax as a replacement.
2. Remove the probate provisions and move the inheritance tax out from under the court system and put it under the County Treasurer.
3. Create a statewide reporting requirement so any future reforms can have a more accurate fiscal note.
4. Exempt children under the age of majority if their parent or direct guardian dies. Under current law, this is permissible, and we believe at a time when a child loses their parent, they should not have the additional burden of paying a tax.
5. Although LB310 reduces the top rate, we would also like to see a consolidation of tax brackets. After seeing the data presented from NACO in the 2007 testimony, we do not see any reason not to consolidate the Class III and Class II brackets creating a two-tiered tax.

Thank you for your time and I’m happy to answer any questions you might have about LB310 or the inheritance tax.