Property Tax Proposal Removes Tax Hikes, But Also Shelves Reforms

It hasn’t been easy to keep track of the several property tax-related plans the Legislature is considering this session. Nearly every week, a new amendment seems to emerge that makes tweaks to a previous proposal.

But the clock is really ticking now, with news that the Legislature will adjourn a week early, completing their session by the end of May.

That means Sen. Tom Briese’s latest amendment, AM1846 to LB183, has to be considered among the last of the last-ditch efforts to bring a property tax bill across the finish line this year.

There’s a lot to admire in AM1846 relative to other proposals, since it would boost property tax-related funding while requiring no increases in state tax rates. The state sales tax, cigarette tax, and real estate documentary stamp tax would remain at their current levels.

Instead, Sen. Briese’s amendment removes a broad range of sales tax exemptions as previously proposed in the latest amendment to LB289. It also includes an increase in Nebraska’s Earned Income Tax Credit.  

But it should be noted that AM1846 is really more focused on sales tax reform than property tax reform. In terms of how it spends the money it raises, it is more aligned with the many property tax “relief” proposals the Legislature has advanced over the last two decades, which don’t require changes to local government spending or taxes.

Another downside of AM1846 is that it could actually result in higher property tax bills for Nebraska businesses that pay the personal property tax on equipment, since the plan is partially funded by eliminating the $10,000 exemption for personal property. Whether the reduction in real property taxes will make up for this increase will vary from business to business. 

As a note for future debate, while the amendment should be commended for proposing to end so many sales tax exemptions, reading the amendment’s latest text, it’s also glaring that professional services like legal, accounting, and real estate services, are receiving a free pass. It seems hard to justify excluding these purchases from sales tax considering the many other purchases that are being recommended as taxable.

But this amendment is all about the art of the possible, and those exemptions are among the hardest to challenge. Also, in an effort to help pass something this session without objections from larger school districts, the amendment removes a proposal to repurpose the property tax credit fund to create a new foundation aid program for public school districts, along with nixing additional limits on school tax levies and assessment ratios.

That means the property tax credit program would see a boost under this measure, and be fixed to at least $275 million annually (though the sales tax changes will raise the total amount beyond that). This will come without any corresponding restrictions on local property taxing subdivisions. This is too bad, since those restrictions are good policy and very popular with voters.

Local governments would all receive more state revenues as a result of the added property tax credit funds. That includes schools, cities, counties, natural resource districts and more. At least immediately, property taxpayers would likely see a larger credit and a smaller tax bill next year, as long as their latest property tax increase didn’t outpace the increase made in the fund.

But there’s not much reason to see this as a permanent solution, since this would be just the latest in a series of increases in the property tax credit since it was created in 2007. Property taxes have continued to rise faster than the credits, despite the fact that the property tax credit fund is now one of the most significant and fast-growing parts of the state budget.

AM1846 does have an escape clause if lawmakers decide to pursue more comprehensive reforms in the future, though. If the Legislature provides an education funding plan that increases state aid to schools by 20 percent from one year to another, the state would be off the hook for setting the property tax credit at the permanent level designated under the amendment, and could use the money in some other way.

AM1846 is expected to see debate along with LB183 next week.