Property tax reform has been a big focus in Nebraska this session. This makes sense given the state’s high property tax burden.
The Tax Foundation ranks Nebraska 12th-highest for property tax collections per capita, and 8th-highest as a percentage of home value. Their taxes are way too high, especially for a lower cost of living state.
The state also faces an issue as the cost of agricultural land, and thus the tax burden for that land, has been driven up as people purchase the land for purposes other than farming. This is putting pressure on farmers as their baked-in costs rise.
So you could say the pressure for action in Lincoln is significant.
Governor Ricketts has championed a couple great reforms: a constitutional property tax cap, and a measure (LB 103) that requires that any additional revenue taken in as local property values rise is returned to taxpayers or there is a vote held before local government can keep it.
These are solid policies to protect taxpayers. Massachusetts, New York, and most recently, Iowa, have passed effective property tax caps.
Yet, in the Cornhusker State, while the control on rising revenue from values has been enacted, the cap legislation has stalled.
Both bills were introduced by Senator Lou Ann Linehan. The cap’s difficulties would be bad enough, but a third bill from Senator Linehan (LB 289) is really complicating the situation.
The idea of the bill is to provide immediate property tax relief. However, it attempts to do so by imposing a $200 million-plus tax hike, then sends the money largely to school districts in exchange for them lowering property taxes.
The tax hikes include increasing the sales tax overall, eliminating various sales tax exemptions (including for bottled water, soda, various moving-related services), and a hike in the cigarette tax rate over 30%. Monday, the legislature worked on expanding the expansion, but trimmed the rate of the sales tax hike. The bill will head to a full vote in the Senate, which will need 33 votes to override a Governor Ricketts veto.
There are good measures to limit property taxes in the legislation – chaining future growth to inflation and reducing the percentage of a property’s value that can be assessed for tax purposes.
The problem is that even with those limitations, the complex bill is likely to amount to trading a massive guaranteed tax hike for fleeting property tax relief.
Tax Foundation’s Joe Henchman testified to the committees that at best their reform would move Nebraska up two places in the state property tax burden rankings. Meanwhile the proposed 1% increase in the state sales tax would give Nebraska the 17th-highest sales tax rate in the country. Worse, it would become higher than neighboring Iowa’s, incentivizing people to shop across the border.
The sales tax hike and expansion is regressive, driving up the cost of living for everyone in the state. The cigarette tax hike is regressive as well, and compounding the damage is the strong likelihood that revenue falls short.
Less than 10 percent of state cigarette tax hikes from 2009 to 2016 met revenue projections. So relying on a cigarette tax hike in creating a new state aid program is likely to drive demand for other tax hikes in the future.
Those pushing this approach may well realize this, but they say they are getting desperately needed property tax relief in exchange.
However, Nebraska itself has imposed tax hikes to increase state aid and limit property taxes in the past and it has not worked out, as Governor Ricketts explains:
“In 1990, the Legislature passed LB 1059 which created the school aid formula known as the Tax Equity and Educational Opportunities Support Act (TEEOSA). With this bill, the Legislature raised the sales and income tax over the veto of Governor Kay Orr. This did not reduce property taxes, which continued to increase in the following years.
“Subsequent attempts to achieve property tax relief have continued to involve the TEEOSA formula. For example in 1998, the Legislature increased state aid through TEEOSA by about $125 million, or a 27 percent increase. In 1999, property taxes still went up about $48 million. In 2005, the Legislature boosted state aid another $70 million, or 10 percent in one year. In 2006, property taxes went up $161 million statewide.”
It is not only Nebraska that has seen this spend-to-save approach fail.
New York attempted to deal with its sky-high property taxes under Governor Pataki by implementing a property tax relief program, STAR. STAR created tax exemptions up to a certain amount of home value – with the state paying out to compensate school districts for lost revenue.
“From 2001 to 2005, however, property taxes per pupil shot up by 28 percent even after deducting STAR savings,” (Empire Center, NY Torch blog).
This session, New York State enacted a permanent 2% cap on property tax increases, at the behest of Governor Cuomo. This straight up property tax cap has proven to be an effective protection for taxpayers, having helped New Yorkers avoid over $20 billion in new taxes since its original implementation.
Nebraska can do better than Democrat-dominated New York, and must keep pace with Iowa. Governor Ricketts has put the right reforms on the table. It’s up to the legislature to pass them and avoid the high-risk attempt to trade tax hikes for relief.