Property tax relief should focus on cutting school levies
Governor Jim Pillen seeks to cut Nebraska property taxes by 40% through a tax package that includes raising new state tax revenues in order to fund local property tax cuts. Gov. Pillen seeks $2 billion in new property tax relief balanced against $5.3 billion in total property taxes. In Platte Institute’s assessment of the options and tradeoffs for such a tax swap, we pointed out that any state-local tax swap should focus on school funding rather than funding for general local government services provided by municipalities and counties.
LB 1415 is the current proposal to reduce local property taxes by providing state funding directly to school districts, counties, cities and villages. As of 2023, schools accounted for roughly $3.1 billion in property taxes, while counties were another $865 million and municipalities (cities and villages) accounted for $590 million in property taxes.
LB 1415 would provide nearly $990 million in new aid to school districts, $440 million in aid to counties, and $300 million for municipalities. This means that LB 1415, as currently drafted, would use state funding to offset:
- 32% of school property taxes;
- 51% of county property taxes; and
- 51% of municipal property taxes.
Nebraska’s property tax relief package should focus on schools, and be coupled with a much tighter cap on school tax levies. Nebraska is already committed to providing aid to schools through the state’s school funding program, and implicitly through income tax credits to offset school property taxes paid. Therefore, tax relief should focus on driving down school tax levies rather than replacing local funding for local city and county services.
Education has historically been a joint state-local initiative, and the state government is increasingly picking up the tab across several states. This is made feasible through legacy school aid programs along with other programs designed specifically to reduce school property taxes.
As of 2022-2023, Nebraska’s state aid to local governments was heavily weighted towards schools and community colleges, with schools receiving over $1 billion in state aid and community colleges receiving over $100 million. LB 243, enacted in 2023, will provide roughly $300 million per year to replace community college property taxes altogether. This reform is fairly straightforward because the state was already involved in funding community colleges before the change.
On the other hand, state aid to counties and municipalities is concentrated on $400 million in dedicated transportation funding, which is distinct from general aid to offset the cost of local government services. Similar to education, transportation has historically been a joint state-local-federal funding initiative.
County and municipal property taxes abide by the benefit principle of taxation by funding local government services based upon where people live. The state should not undermine or disrupt this local funding mechanism, but it should tightly cap the growth in these local taxes. Municipal property taxes grew by 9.3% and county property taxes grew by 6.7% increase between 2022 and 2023.
School property taxes should also be subject to a tighter cap. School property taxes rose by 3.5% year-over-year despite a new education future fund that provides state revenue specifically to reduce school property taxes.
State funding to offset local school property taxes would be built upon the state’s property tax relief momentum in eliminating community college property taxes. Furthermore, state funding for schools is historically normal and would be less disruptive than the state replacing more than half of county and city property taxes, and it would allow the state to reallocate inefficient income tax credits that offset school district taxes paid.
Finally, increased state funding as a share of total K-12 funding aligns with the goal of expanding Nebraska’s new education freedom program over time. States that heavily rely of local property taxes face greater challenges in expanding school choice because school choice is funded through state resources. Lessening Nebraska’s dependence on school property taxes would broaden the horizon for making education funding more portable and individualized.
Nebraskans need property tax relief, and cutting school levies is the way to provide it.