Governor Jim Pillen’s Tax Triumphs and the Future of Tax Reform

Governor Jim Pillen inherited a historic opportunity for tax reform in Nebraska. Revenues surged during the pandemic recovery, creating unprecedented surpluses for the Cornhusker State. Nebraska leaders had maintained years of disciplined spending, setting the table for Pillen’s plan. 

Gov. Pillen was the man for the moment in 2023, and he delivered a transformational tax package. Gov. Pillen, in concert with Senator Lou Ann Linehan’s Revenue Committee, delivered the best tax reform in the nation in 2023.  

2023 tax relief in review 

Nebraska’s 2023 tax reforms slashed corporate and individual income tax rates from a scheduled rate of 5.84% to a new lower rate of 3.99%. Nebraska’s corporate income tax will be flattened to a single-rate structure instead of a 2-tier rate structure. These income tax reforms alone qualified Nebraska to claim the best state tax reform of 2023. 

And that’s not all, the community college property tax was largely repealed, reducing property taxes by 5-6% statewide. The income tax on social security retirement income was repealed. Additional tax changes were made on the margins around the income and property tax overhaul. 

If you add up the impact of Governor Pete Ricketts 2022 tax package with Gov. Pillen’s 2023 package, the average Nebraska household will receive $3,000 of annual tax relief. These reforms will have a tremendous impact on boosting Nebraska prosperity. Families will have more money, and businesses will have greater incentive to invest. Nebraska will boom as a result. 

Spending restraint 

Governor Pillen’s first budget limited spending growth to under 2% per year for his first two years. In general, state revenues grow with inflation and as state economic activity expands. Pillen’s level of restraint, which is even tighter than Governor Pete Rickett’s admirable restraint in spending growth, keeps Nebraska’s spending below inflation and below the natural growth rate of state revenues. The result will be surpluses. 

Governor Pillen has also kicked off an ambitious project to find spending efficiencies to reduce state spending by 3% in fiscal year 2024. Pillen’s plan then intends to build upon those savings by reducing state spending by 6% in fiscal year 2025. If this project succeeds, Nebraska’s fiscal position will become meaningfully stronger. Delivering the same services for lower cost means that taxpayers get more value for their hard-earned tax dollar. 

2024 Pillen property tax plans 

In 2024, Governor Pillen promises to dramatically slash property taxes as the next achievement in his tax overhaul. Pillen argues that Nebraska property taxes ought to be reduced by 40% statewide, cutting total collections from $5 billion to $3 billion. 

Funding for property tax relief comes primarily from two sources, the first of which will be considered in this blog. State income tax credits for school property taxes paid would be “front-loaded” and delivered directly to school districts to offset property tax levies. This single change would be a major property tax triumph, and different proposals for how to effectuate this change are being considered by the legislature.

Nebraska has created and expanded two property tax relief programs that are delivered via tax credits. The larger program – designed to offset the cost of school property taxes – is delivered via a refundable income tax credit that individual taxpayers claim at the end of the year. This program has been dogged by inconsistent utilization by taxpayers. In other words, taxpayers are not claiming all the property tax relief that is allocated for them in state appropriations for property tax relief. The cause of this problem is that the tax relief is “taxpayer active,” meaning taxpayers must put in work to figure out how to claim the credit instead of tax relief being delivered to them directly via lower property tax rates. Using the same money to directly reduce school property taxes, as Pillen proposes, would solve this problem.  

Pillen has also proposed a property tax cap that would only allow property tax levies (dollars collected) to grow by a limited amount each year. In other words, the total dollars collected could increase by, for example, 2%. This is important for two reasons. First, it restrains the growth in local tax levies, some of which have seen stupendous increases due to soaring valuations. Second, it guarantees that state funding to reduce property taxes would actually result in dollar-for-dollar decreases in property taxes. 

Senator Lou Ann Linehan’s LB 1414 contains one version of how to enact a property tax levy cap. It limits how much property tax collections can grow from one year to the next, which provides the key protection needed for homeowners. In addition, Senator von Gillern’s LB 1241 contains an alternative way to achieve the same goal. LB 1241 would require levy rates to fall in order to offset valuation increases. Both are commendable approaches to ensure that property taxes don’t soar when home valuations increase, and they will be further contrasted in Platte Institute’s ongoing writing on this topic. 

Conclusion 

Governor Pillen hit a home run on income tax relief in his first year. The changes to individual and corporate income taxes were years in the making and have transformed Nebraska’s competitive tax landscape. 

Property tax reform is the obvious next step, and Pillen’s outlined solutions generally drive Nebraska in the correct direction. In a follow-up blog, Platte Institute will consider the trade-offs for Pillen’s pathway to achieve a 40% property tax reduction, and offer alternative routes that result in better tax efficiency and enhanced competitiveness.