Nebraska property tax modernization

Nebraska property tax modernization

Nebraska’s property tax is older than the state itself, and old taxes benefit from being updated as the state economy evolves. Property taxation was first instituted in 1857, under a territorial legislature, and then became a statewide tax when Nebraska achieved statehood in 1867. Nebraska leaders have iteratively updated the property tax system throughout the state’s history, and it’s time for another property tax update in the Cornhusker State.

Nebraska raised revenues through a broad, state-wide property tax for its first hundred years until 1967. The early version of the property tax was levied upon real property (land and its improvements), tangible property (physical property such as equipment) and intangible property (stocks, bonds, bank accounts).

Nebraska overhauled its tax code in 1966, resulting in significant changes to property taxation. Voters abolished the statewide property tax and intangible property was exempted from taxation. Nebraska’s Revenue Act of 1967 implemented a statewide individual income tax, corporate income tax, and sales and use tax in part to replace the state property tax.

Policymakers should be emboldened by the big tax changes Nebraska has achieved in its past. It’s time to modernize the state’s property tax for the 21st century. As with any tax, the key factors to fix are the tax base and the tax rate. Property tax modernization should result in a refined property tax base, a lower property tax rate, and stronger caps on property taxation.

Modernizing Nebraska’s property tax base

Nebraska’s property tax base consists of real property and tangible personal property, along with targeted taxes that are levied upon other forms of property or net worth.

Real property is the appropriate base for a modern property tax. Land and its improvements are relatively easy to value and can’t be moved. Most economists maintain that a well-designed property tax is among the least economically damaging taxes available because it does not distort decision-making on the margin. However, even though the property tax is economically efficient, Nebraska must address the reality that its average property tax rate is too high. The overall burden is cumbersome and uncompetitive with other states.

Taxing real property also makes sense because it coordinates local revenues with where core local services are needed. This coordination approximates the benefit principle of taxation. By comparison, a local sales tax is not nearly as efficient at generating revenue based upon where people live because consumption tends to aggregate near retail centers, which are not always in the same taxing jurisdiction as the taxpayers who patronize them.

Tangible personal property (TPP) taxes should be removed from the tax base. They are relatively complex and taxpayer-active (meaning taxpayers must put in effort to comply), and they create an impediment to business investment in Nebraska. In general, it is wise to avoid levying taxes upon property that can be moved out of the taxing jurisdiction. Industries that require a lot of physical capital, such as farms and factories, are especially burdened by TPP. Nebraska’s TPP taxes distort economic decision-making and incentivize businesses to locate their machinery and equipment elsewhere.

Nebraska should phase out its taxation of TPP in order to modernize its property tax. It can begin this process by restoring the $10,000 de minimum TPP exemption that was repealed in 2020. Restoring the exemption would move in the right direction and remove a swath of smaller firms from the TPP tax rolls.

Nebraska also allows for a county inheritance tax and a statewide capital stock tax (corporate occupation tax). States across the country have been phasing out their death taxes and capital stock taxes in a move towards modernization. Nebraska’s inheritance tax was originally adopted in 1901. The revenue generated by the inheritance tax goes to counties, and is unevenly distributed across the state. Nebraska’s capital stock tax was adopted in 1913, and was originally a way to tax businesses based upon their net worth before business income was subject to taxation.

Both of these taxes are anachronistic and incentivize families and firms to allocate capital to other states. Nebraska should repeal both taxes in order to modernize its code.

Reforming Nebraska’s property tax rate

Nebraska’s property tax is the 7th-highest of any state. So not only is Nebraska’s property tax base over-broad, its tax rate is quite high. The two primary ways to achieve tax rate reform are to increase state aid to education in order to lessen local tax levies and to tighten the cap on Nebraska’s property tax levy. Funding for the former task could include existing property tax credits along with new revenues from economic growth and broadening other tax bases, such as Nebraska’s sales tax.

Nebraska policymakers created a credit against school district property taxes that is refundable on a taxpayer’s income tax return. The credit was recently expanded to apply to both K-12 school property taxes and community college property taxes. The goal is to offset the high cost of school district property taxes.

However, it would be more efficient to use the same state revenues to directly reduce school property taxes by increasing school aid. And Nebraska might be forced to consider this alternative because Nebraska taxpayers are claiming the credit at a low rate. In fact, Nebraska taxpayers left 40 cents per dollar of tax credit unclaimed in each of the first two years of the program.

Nebraska’s new property tax credit for community colleges will eventually be worth 70-80% of all community college taxes collected. Once the credit is fully implemented, the community college property tax will effectively act as an unnecessary middle-man. Nebraska policymakers should finish the job of this targeted property tax relief by eliminating community college property taxes altogether and funding the schools directly so that property owners don’t need to worry about claiming a credit.

As for tax levy caps, lawmakers should be commended for enacting the state’s new Truth in Taxation law. Nebraskans across the state recently engaged in the state’s first Truth in Taxation hearings, enjoying a new layer of transparency on local property tax decisions. Yet Nebraska can go further to tighten its property tax cap.

One step to consider would be to follow Kansas’ lead and apply the Truth in Taxation process to the first dollar of increase in the property tax levy rather than allowing local governments to capture 2 percent plus real growth before going through the transparency process. Another option is to add a harder cap to the property tax levy that requires a voter referendum for approval if the levy increases beyond a certain amount. For example, Illinois limits the growth in the property tax levy for smaller local governments to the lesser of 5% or inflation. Applying Truth in Taxation to the first dollar of property tax would improve Nebraska’s cap by adding more transparency, and adding a requirement for voter approval on levy increases above a certain threshold would harden the cap.

Nebraska generates more than one-third of all state and local tax revenue from property taxation. It is the Cornhusker State’s single largest tax source. Modernizing the property tax will impact more total tax dollars than any other tax reform. In addition, property tax reform ties into reforming Nebraska’s sales and income taxes.

Effective property tax modernization will circumscribe the property tax base to real property, and then apply a low, competitive tax rate to that base. While this presents a tall task for Nebraska policymakers, they have the tools and revenues available to make property tax modernization a success.

Property tax modernization is key component of Nebraska’s broader tax reform. While many property tax reforms can be done on their own, property tax modernization would work best as a part of modernizing the sales tax and the income tax. Each component of tax reform will make Nebraska more competitive for business and more friendly for families.

This is the first blog in a three blog series on tax modernization in Nebraska. The other posts in the series can be found here:

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