Nebraska’s Property Tax Compromise Provides Temporary Relief, but Structural Reform Is Still Needed

August 13, 2020

On the last day of Nebraska’s recently reconvened 2020 legislative session, legislators today granted final approval to LB1107, a bill to provide state income tax relief to help offset local property taxes paid, as well as to make adjustments to Nebraska’s business incentives program. This compromise is the result of many months of negotiations in the Unicameral on various property tax relief proposals, but it is the only measure that secured the 33 votes needed to end a filibuster and advance for a final vote.

Gov. Pete Ricketts (R) has signaled support for the bill. If enacted, LB1107 would provide state income tax relief to offset some of the local property tax burden Nebraskans face, but the bill stops short of making meaningful structural changes to Nebraska’s property tax system or limiting local property tax growth.

Rather than setting out to accomplish comprehensive reform, as previous proposals would have done, LB1107 would merely provide temporary relief, both by establishing a minimum allocation for Nebraska’s existing Property Tax Credit Cash Fund and by creating a new refundable income tax credit for property taxes paid. As a slight offset, LB1107 would increase tangible personal property (TPP) taxes by repealing the state’s $10,000 de minimis TPP tax exemption.

LB1107 Boosts Property Tax Credit Cash Fund

Nebraska’s Property Tax Credit Cash Fund has existed since 2007 and provides a property tax credit based on the assessed value of a taxpayer’s real property as a percentage of the total assessed value of all real property in Nebraska. The total credit amount varies each year based on changes in property value and changes in the amount of revenue appropriated to the fund. Legislators budgeted $224 million for the fund in fiscal year (FY) 2018 and $275 million per year for FY 2019 and onward.

LB1107 would establish a statutory minimum requiring that the Property Tax Credit Cash Fund pay out no less than $275 million in credits per year. LB1107 also provides that—in the event that additional revenue is added to the Property Tax Credit Cash Fund pursuant to any other Nebraska law—the minimum yearly credit amount would increase accordingly. Currently, three measures are expected to appear on the ballot in November pertaining to the legalization and taxation of gambling at Nebraska racetracks. One of the measures would allocate 70 percent of the revenues generated from racetrack gambling to the Property Tax Credit Cash Fund.

LB1107 Creates Refundable Income Tax Credit for Property Taxes Paid

LB1107 would also create a new refundable income tax credit for school property taxes paid under what is referred to as the Nebraska Property Tax Incentive Act. As a refundable credit, even property owners who owe no income taxes would receive a check from the state.

For tax year 2020, $125 million in credits would be distributed. For tax years 2021, 2022, and 2023, if actual net receipts for the fiscal year come in more than 3.5 percent higher than projected current-year receipts and more than 3.5 percent higher than actual prior-year receipts, those excess revenues would be used to increase the income tax credit beyond the $125 million base allocation. For years in which the Cash Reserve Fund—Nebraska’s rainy day fund—has a balance of $500 million or more, 100 percent of the excess revenues would be used to increase the income tax credit amount. For years in which the Cash Reserve Fund balance is less than $500 million, 50 percent of the excess revenues would be used to increase the credit amount. In 2024, the credit amount would be set at $375 million. In tax year 2025 and years thereafter, the credit amount would be adjusted to capture annual growth in the total assessed value of all real property in the state, not to exceed 5 percent.

LB1107 Replaces Nebraska Advantage Act with ImagiNE Nebraska Act

As the other half of the “grand bargain” reached by Nebraska senators, LB1107 would replace the Nebraska Advantage Act incentives package, which expires at the end of 2020, with the ImagiNE Nebraska Act. Business incentives under this plan would be capped at $25 million each year in tax years 2021 and 2022, $100 million per year in 2023 and 2024, and $150 million in 2025. In tax year 2026 and years thereafter, incentives would be capped at 3 percent of state net tax receipts. These amounts are lower than those contained in LB720, the original business incentives bill as it was introduced, but the Nebraska Advantage Act incentives are among many other business tax incentives the state currently offers.

LB1107 Repeals Nebraska’s Tangible Personal Property Tax De Minimis Exemption

One of the provisions in LB1107 that has largely been overlooked is a provision that would repeal Nebraska’s TPP tax de minimis exemption. Under current law, owners of taxable TPP—including manufacturing and agricultural machinery and equipment—may exclude the first $10,000 worth of taxable TPP when calculating their TPP tax liability. This $10,000 de minimis exemption is Nebraska’s primary TPP tax reprieve, apart from the TPP tax relief certain companies can obtain if they meet the requirements set forth in the business incentives program.

By repealing the Personal Property Tax Relief Act, LB1107 would increase TPP tax burdens for farmers and businesses to the tune of approximately $15 million-$17 million per year at a time when most states have been reducing reliance on TPP taxes, either by increasing their de minimis exemptions or by exempting additional categories of TPP over time.

Repealing the de minimis exemption will also result in many Nebraskans owing TPP taxes for the first time. In a study conducted in another state (Connecticut), a $10,000 de minimis exemption was estimated to exempt almost 46 percent of all potential payers of TPP taxes at a cost of only 0.014 percent of property tax revenue. Repealing Nebraska’s exemption will sharply increase compliance costs for small businesses and farms for very little revenue.

LB1107 Provides Temporary Relief but Falls Short of Structural Reform

One major criticism of LB1107 is that it merely increases state tax credits to offset local property taxes paid while doing nothing to address the root of the problem: high local property tax burdens that are attributable to rising property valuations and to many local political subdivisions’ acceptance of those increased revenues. The state has poured ever-increasing amounts of money into the Property Tax Credit Cash Fund since its creation in 2007, but this has done nothing to prevent local property taxes from rising.

As property values rise, local taxing authorities by default are required to reduce property tax rates to keep the total levy constant. However, those political subdivisions can easily raise additional revenue from rising valuations if they simply hold a public hearing and vote to accept the revenue. With few hurdles to prevent local political subdivisions from accepting the additional revenue, property taxes remain on an upward trajectory in most subdivisions.

Earlier this session, legislation was heard in the Revenue Committee that would increase transparency by requiring local taxing authorities to providing direct written notice in the mail when a public hearing is scheduled during which a property tax increase will be considered. This legislation—modeled after Utah’s “Truth in Taxation” law—did not receive a vote this session. It was during the 2019 legislative session that Nebraska policymakers adopted a law to require a public hearing before a local political subdivision could simply accept the additional revenue, but public awareness of and turnout at these hearings remain low. While Nebraska’s current law requires notice of such hearings to be published in local newspapers, it does not notify taxpayers directly or specify how much a taxpayers’ tax bill would rise, as Utah’s law requires.

Another criticism of LB1107 is that it promises additional state resources to offset local property taxes paid without specifying where most of that additional state revenue will come from. During legislative debate of LB1107, several senators suggested that the tax relief provided within this legislation may need to be walked back in future legislative sessions if sufficient revenues fail to materialize, especially amid the economic uncertainty surrounding the COVID-19 pandemic. If revenues continue to suffer amid a prolonged recession, Nebraska policymakers may be unable to fulfill the promises contained in LB1107 without either reducing state spending or increasing the state income and sales taxes that are funding this property tax relief.

Ultimately, if Nebraska policymakers want to provide lasting relief to taxpayers while improving the state’s long-term economic competitiveness, legislators should remain focused on addressing the uncompetitive features of Nebraska’s tax code through comprehensive structural reform that broadens tax bases and lowers rates. Tax credits like the ones approved in LB1107 may help legislators buy some time to work toward a more permanent solution, but they are not, in and of themselves, an effective means of providing lasting relief or generating long-term economic growth.  

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The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

A 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.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.