How the state legislature can address Nebraska’s rising home values
Nebraska policymakers are being called upon to address a problem that afflicts nearly every state across the country. Rapidly rising property values are stressing homeowners, particularly when property taxes rise proportionate to property values. As a result, homeowners are turning to public officials for solutions.
It is fair to say that this problem exists in nearly every state in the country. The solution is to disconnect valuation increases from a tax increase by requiring an automatic rollback in the tax levy rate (or mill rate) to offset rising property values.
The crux of the problem occurs when property taxes rise automatically with property valuation increases. In short, a 25% increase in property values should not result in a 25% increase in property tax collections. A large valuation increase should be offset with a proportionate tax rate reduction so that the overall tax levy stays steady, and each homeowner’s liability is also steady.
While homeowners enjoy seeing the boost in home equity that comes with a rising valuation, these valuation changes are “paper gains” in wealth. In other words, the homeowner’s wealth rises with their home value, but they don’t have meaningful access to that new wealth in the form of cash or cash-like forms of liquidity.
On the other hand, if property taxes rise with the homeowner’s rising home value, it will cost the homeowner more in cash to pay property taxes. So, a higher home value is only a “paper gain,” but the higher property tax expenditure is a real increase in hard costs.
The connection between rising property values and rising property taxes should not be ironclad. In fact, actual property taxes paid can stay flat in the midst of rising property values so long as the tax rate adjusts lower to offset the valuation increase.
Consider a home with a $200,000 valuation and a $4,000 property tax burden, meaning the home has an effective tax rate of 2% ($4,000/$200,000 = 2%). Suppose the property valuation increases to $250,000. If the rate stays the same (2%), the property tax burden would increase from $4,000 to $5,000.
But the rate should not stay the same. The same $4,000 in property taxes would be collected upon the home if the effective rate is rolled back from 2.0% to 1.6% ($4,000/$250,000 = 1.6%). At a 1.6% rate, the $250,000 home is liable for the same $4,000 in annual taxes.
A provision can be added to state law to enforce rate rollback to offset valuation increases, with some buffer amount to allow the property tax to increase by some reasonable amount per year. This can be modeled like Nebraska’s Truth in Taxation law, but with a harder cap that requires voter approval for property tax collections to rise by more than a given percentage each year. Capping the levy increase will force the tax rate to be lowered when property values are increased.
For example, Texas’ SB 2, enacted in 2019 and since amended, requires an automatic rate rollback to a “revenue-neutral rate,” which is the rate that allows the local taxing jurisdiction to raise 103.5% of the previous year’s levy (or 102.5% for some jurisdictions). This law forces the tax rate down when valuations go up. Local governments can raise more than 103.5% of the previous year’s levy upon voter approval of the additional property tax increase.
Here’s how such a proposal would impact the home considered earlier in this blog, assuming such a home is the average home in the taxing area. The home increased from $200,000 to $250,000. It previous yielded $4,000 in property taxes, and in the new year can yield 103.5% of that previous amount, or $4,140. That means the homeowner’s tax rate must roll back from 2% to 1.656%, and the local government must seek voter approval if it wants a higher rate.
If Nebraska adopts an automatic rollback law, then homeowners need not fear property valuation increases. Any increased home assessment will be roughly offset by a rate reduction after accounting for an allowed revenue increase without voter approval.
That provides security for homeowners, steady revenues for local governments, and transparency about when tax increases are occurring. Then, local officials will not be able to hide tax increases behind property value increases.