It was to be the year of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform in Nebraska, and for months, legislators wrangled with property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. reform options. But with no consensus on what it should look like, or even whether the focus should be on real or personal property tax relief, senators now appear likely to close out session without enacting any substantial property tax legislation.
Since real property taxes are levied at the local level, there is little state government can do to provide relief directly; instead, some legislators have proposed property tax relief through the expedient of offsetting credits. (Last year, the legislature established a fund offering annual credits of 74 cents per $1,000 of property value.)
This can introduce an element of moral hazard: some localities may consider themselves freed up to raise property taxes further due to the existence of an offset. Since it’s predicated on tax shifting, it can also raise equity issues: should income and other state-level tax dollars be used to provide rebates to property owners (who are paying, at least in part, for services associated with property ownership)? And, at least with the leading tax-shifting proposal, an optional local income tax surcharge could drive up income taxes far above the levels necessary to pay down proposed property tax reductions.
An alternative plan zeroed in on tax relief for farmers, proposing that agricultural land be taxed at 65 percent of market value (down from 75 percent). While such a plan would of course reduce tax costs associated with agricultural land, it would do so at the expense of residential property owners and other taxpayers. Furthermore, it necessarily advantages all land zoned agricultural, whether or not it is used for strictly agricultural purposes. The bill was defeated in committee.
Other property tax relief plans focus on providing personal property tax relief. Nebraska taxes depreciable tangible personal property, which is defined as any tangible personal property “used in a trade or business (commercial, industrial, or agriculture) or for the production of income and which has a determinable life of more than one year.”
Senator Burke Harr proposed eliminating personal property taxes entirely. An alternative plan, introduced by Revenue Committee Chairman Mike Gloor, would exempt the first $15,000 of tangible personal property from taxation ($25,000 as introduced). States have been moving away from tangible personal property taxes in recent years, and with good reason: they apply to some (but not also) business inputs, distorting economic decision-making and disincentivizing capital accumulation.
Also stuck in committee is Senator Jim Smith’s proposal of modest individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. reductions, modeled off the Platte Institute’s “Strong Roots Nebraska” plan—which, full disclosure, we endorsed. Smith’s legislation calls for the gradual reduction of individual and corporate income tax rates over eight years, with the ultimate goal of getting the top individual income tax rate to 5.92 percent and the top corporate rate to 6.41 percent.
That Nebraskans pay high property taxes is undeniable, and taxpayers are justifiably looking for reform. It’s important, however, that the state gets it right. The leading tax-shifting proposal, LB 280, cannot actually reduce local property tax rate, so instead it proposes issuing credits to property tax owners funded through a 19.4 percent income tax hike, while granted local school boards the authority to tack on an additional 10 percent surcharge. Nebraskans already experience above-average tax burdens; hiking already high income taxes by as much as 29.4 percent doesn’t look much like tax relief.
With so much disagreement about how to proceed, the Omaha World-Herald is reporting that “instead of action this year, lawmakers appear ready to settle for another study of how to reverse Nebraska’s long history as a high property tax state.” But with a top corporate income tax rate of 7.81 percent and a top marginal rate of 6.84 percent on the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. (on all income above $29,000), Nebraska’s challenges go beyond the property tax. State lawmakers cannot afford to delay reform indefinitely.
The “great debate” will have to continue next year.
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