Nebraska’s Property Tax Relief Needs to Deliver for all Taxpayers

Nebraska’s Property Tax Relief Needs to Deliver for all Taxpayers

Governor Pete Ricketts held a press conference on September 15th to encourage Nebraskans to claim their property tax credits.  The Department of Revenue’s website has the relevant documents, here, for Nebraskans who have not yet claimed their credits. Taxpayers can claim a credit worth up to 30% for their school property taxes paid, depending on the tax year. The credit is refundable, too, so Nebraskans can get a check from the state even if they don’t have income tax liability.

There’s one obvious shortcoming to this approach: it is taxpayer-active rather than taxpayer-passive. In Nebraska’s case, this means that taxpayers have to put in work in order to claim their tax relief after they have already paid their property taxes. In contrast, taxpayer-passive tax relief comes from simply lowering the tax burden on the front end, such as when a tax rate is cut and collections go down.

Gov. Ricketts’ press conference revealed why the taxpayer-active approach is problematic. Nebraska’s property tax credit for tax year 2021 (for returns filed in 2022) is worth approximately $500 million. But $200 million worth of property tax credits remain unclaimed with the state. So only 60 cents per tax relief dollar are actually getting to Nebraska taxpayers. Similarly, Nebraskans claimed only 60 cents on the dollar in property tax credits for tax year 2020, leaving $50 million with the state out of $125 million appropriated for property tax credits. Tax relief should deliver more than 60 cents per dollar appropriated.

Performance might improve over time as Nebraskans become more aware of the tax credit program. Furthermore, Nebraskans who took an extended tax filing deadline for 2022 have until October 15th to file their returns, meaning that some of the $200 million in unclaimed credits might be claimed over the next month. And Nebraskans can retroactively claim their property tax credits (filing documents here).

On the other hand, taxpayer-active tax relief requires taxpayers to do paperwork to claim the relief, and Nebraska’s problem of unclaimed tax relief is likely to continue over time. The total value of the K-12 school property tax credit is scheduled to rise to $560 million by tax year 2023, and grow each year going forward. And LB 873 created a new $195 million property tax credit for community college property taxes paid, totaling $755 million in property tax credits between these two programs. Even if program performance improves from delivering 60 cents of tax relief for each dollar appropriated to delivering 80 cents, that would mean that $150 million in tax relief would be left with the state each year.

In the near-term, Gov. Ricketts proposed raising the value of the school property tax credit from 25% to 30% of school taxes paid. Ricketts explained that unclaimed tax relief would be used to finance the more generous credit percentage. While this is a good way to get rid of unclaimed credit dollars, it actually exacerbates the underlying problem of the taxpayer-active program. Now, taxpayers who claim the credit will get more valuable tax relief, and that tax relief is essentially paid for by the Nebraskans who aren’t claiming the credit. The 60% of the Nebraskans who file for the credits will get more, and the 40% of Nebraskans who don’t file for the credits will continue to get nothing.

In addition, LB 873 eliminates state income taxes on social security.  This generous provision will remove some Nebraska retirees from the income tax rolls entirely. As a result, some retirees might stop filing state income tax returns because they don’t have any state liability. Or they might continue to file tax returns with no liability, but they might not pay much attention in the process because they don’t owe any taxes. As a result, these retirees might be less likely to claim their property tax credits.

The alternative to the taxpayer-active property tax credit is to enact tax relief directly through the K-12 school funding formula. Other states have taken this approach. For example, Texas Governor Greg Abbott plans to provide additional property tax relief through the state’s school funding formula in 2023. And Indiana cut and capped its property taxes by reforming its school funding formula under Governor Mitch Daniels.

Enacting direct tax relief would create significantly more work for policymakers in Lincoln. They would have to change the school funding formula and unwind and reallocate the property tax credit program dollars. Such changes would require political tradeoffs between different regions of the state, different sectors of the economy, and between the state and local governments.

The merit of the direct approach is that it would directly reduce school property taxes, creating taxpayer-passive relief. If designed carefully, this would result in Nebraskans sharing in tax relief more equally, and it would remove the risk that hundreds of millions in property tax relief dollars would go unclaimed each year.

In the meantime, policymakers should consider direct property tax relief by eliminating community college property taxes altogether. Nebraska’s community college property tax credit will be worth $195 million by tax year 2026, whereas total property taxes paid for community colleges are approximately $250 million today. Instead of implementing a credit that is worth 75% of the total tax burden for community colleges, the state should directly fund community colleges and eliminate the community college property tax.

Nebraska policymakers should be commended for their great willingness to dedicate state revenues to tax relief. Many Nebraska reforms have improved the state’s tax code and reduced the tax burden. But when it comes to Nebraska’s property tax credit program, if it doesn’t effectively deliver tax relief dollars, it doesn’t make sense.

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