Unicameral approves inheritance tax cut
The Nebraska Legislature has given final approval to Sen. Robert Clements’ Legislative Bill 310, which reduces Nebraska’s county-levied inheritance tax. The bill passed by a vote of 37-1. It now awaits the governor’s signature.
With an amendment provided by the Legislature’s Revenue Committee and provisions from another inheritance tax-related bill by state Sen. Wendy DeBoer, the enacted version of LB310 makes these changes to the tax, effective in 2023:
- People under age 22 will be fully exempt from inheritance tax.
- Nebraska’s top two inheritance tax rates for more distant relatives and unrelated heirs will be reduced by approximately fifteen percent, declining from 18% to 15% on the top rate, and from 13% to 11% on the middle rate. The amount of inherited property exempt from these two classes of the tax increases to $25,000 and $40,000, respectively.
- The lowest inheritance tax rate for nearer family members (besides spouses, who are currently exempt) is unchanged at 1%, while the amount of inherited property exempt from this tax rate increases to $100,000.
- Step-family members who were not adopted as children will no longer be taxed at a higher rate than other similar relatives in a blended family.
Senators should be commended, but not coddled, for passing LB310. The Legislature took a good first step that will modernize Nebraska’s county inheritance tax and prevent more families and businesses from having to pay inheritance tax. Fully exempting many younger people from the tax is an especially good achievement.
But 78% of Nebraskans, including solid majorities of Republicans, Democrats, and independents, say they don’t want anyone to have to pay inheritance tax in Nebraska. There’s lots of good reasons for this besides a knee-jerk opposition to taxes.
First adopted in 1901, the inheritance tax would be difficult to justify today if someone were to propose it. It has a number of bizarre features, including taxing beneficiaries more because their family structure is not the same as other similarly situated taxpayers.
For example, the heirs of a family with fewer or no children may pay higher taxes than those with larger immediate families. And, people who are more remotely related to the person who died pay a higher tax rate on less valuable property than people who are more closely related to the person who died. Meaning, the basic progressive appeal of inheritance taxes that existed in the 19th and 20th century–breaking up intergenerational wealth–doesn’t even hold up with this tax.
There is also the reality that levying this tax makes Nebraska uncompetitive with almost any state. We’re currently on track to become one of only five states with an inheritance tax. With our neighbors in Iowa phasing out this tax by 2025, we will be the only state west of the Mississippi River that imposes an extra tax when people receive property from a loved one who has died.
With 45 other states already figuring out how to get by without inheritance taxes, it strains credibility to think Nebraska can’t find a way to live without this tax, too.
I also want to make one quick point that was not brought up in legislative debate on this and other inheritance tax-related items. County governments have basically threatened that if the state ever eliminates the inheritance tax, even over a large number of years, they will increase property taxes.
In the past, this sounded like a very potent bargaining chip for county governments, but it doesn’t line up with how our laws work in Nebraska anymore. For example, if eliminating the inheritance tax someday caused a county to lose the equivalent of 10% of its property tax receipts, a county can’t raise property taxes by that much without scrutiny from local taxpayers.
At the Platte Institute, we’re all for modernizing the tax code and finding alternative funding to the inheritance tax for counties. But under Nebraska’s new Truth in Taxation law, counties seeking a property tax increase are not automatically entitled to raise property taxes without first informing taxpayers. A proposed annual property tax increase exceeding 2% plus real growth triggers a requirement to directly notify taxpayers, by mail, about their intent to raise property taxes, and to hold a public hearing to justify the hike. County boards then need to go on record and vote to raise taxes.
I suspect raising taxes will not be as easy as the county officials think, but there may be 93 different ways this works out. In some counties, taxpayers might tell boards a tax increase is not an acceptable response to getting rid of a tax they don’t believe should exist in the first place. In some other cases, taxpayers might be more understanding and think local services are worth paying a slightly higher levy. It’s important to remember counties are just one of many taxing subdivisions in Nebraska and property tax levies and values change all the time.
Your school district, city, community college, Natural Resource District, or any other property tax levies, are not impacted by the county inheritance tax, so the potential that eliminating the county inheritance tax over some reasonable period of years is going to make a drastic difference in property taxes is much less likely than opponents claim.
These are just some of the reasons senators should come back next year, and every year after, to build upon the progress they’ve made with LB310, until every family and business is free from this outdated and inequitable tax.
Find more Platte Institute inheritance tax resources below.