LINCOLN — Gov. Pete Ricketts’ property tax plan could have had dramatic effects if it had been in place before farm- and ranch-land prices exploded during the past decade.
A World-Herald analysis shows that the governor’s proposal to cap annual valuation hikes would have left ag land valued at a small fraction of its market value during that period.
That could have meant substantial savings in property tax bills for at least some farmers while shifting the tax burden onto homeowners and businesses.
Ricketts wants to cap the growth of taxable ag land valuations at 3 percent annually. Actual valuations increased an average of 14.2 percent in the past decade.
If his plan had been in effect starting in 2005, Nebraska farmers and ranchers would have been paying taxes now on 27 percent of the market value of their property by 2015. Current law sets farm valuations at 75 percent of market value.
Ruth Sorensen, the state property tax administrator, said the analysis demonstrates that the governor’s proposal “will result in controlled growth in ag land valuations and much-needed property tax relief.”
The impact of limiting ag valuation hikes varies depending on the time period studied.
If the plan had been in place during a period of moderate growth in land prices, it would have had a smaller effect. In fact, from 1995 through 2005, Ricketts’ proposal last year to lower the taxable value of ag land to 65 percent of market value would have been a bigger boon to farmers.
On the other hand, if Ricketts’ new proposal had been in effect three decades ago, farmers would be paying taxes on just 18 percent of market value.
Ricketts called the cap an “important component” of his broader property tax relief plan. He said it would address the rising property taxes that Nebraska farmers and ranchers say are threatening their way of life.
“I think it is very important to address this key issue for the people who are driving our economy,” he said.
The valuation cap is part of Legislative Bill 958, introduced by State Sen. Mike Gloor of Grand Island, the Revenue Committee chairman. The committee will hold a public hearing on the bill, which also tightens budget limits on local governments, at 1:30 p.m. today.
Sen. Kate Sullivan of Cedar Rapids, the Education Committee chairwoman, introduced a companion measure, LB 959. That bill, to be heard by the Education Committee on Tuesday, would tighten budget limits on school districts.
Three major agricultural groups have endorsed Ricketts’ plan, including the valuation cap.
But others say it has the same flaws as the earlier proposal to lower taxable values of ag land to 65 percent.
It would not necessarily result in lower property tax bills for owners of ag land because tax levies could still increase. It could squeeze funding for schools and other local governments and it would not alter the state’s heavy reliance on property taxes.
“The reality at the end of the day is that unless we change the way we’re funding local government,” we will not reduce property taxes, said Renee Fry, executive director of the OpenSky Policy Institute, a Lincoln-based think tank.
Under Ricketts’ proposal, the taxable value of ag land would be allowed to float up and down in comparison to market value. While it could go no higher than 75 percent of market value, there is no floor on how low it could drop.
Residential and commercial property would continue to be taxed at 100 percent of market value under the plan. Voters passed a state constitutional amendment in 1990 allowing ag land to be valued separately from those two classes of property.
The analysis looked at how the cap would have affected statewide taxable values for ag land during past years. Taxable values for individual parcels of land could increase or decrease more than the statewide level, depending on local land prices.
From 1995 through 2005, the market value of ag land grew by an annual average of 4.7 percent.
With the 3 percent cap on taxable values, farmers and ranchers would have been taxed on a slowly decreasing proportion of market value. The taxable value would have reached 67 percent of market by 2005.
In comparison, from 2005 through last year, the market value of ag land grew by an average of 14.2 percent annually.
With the cap, the taxable value of ag land would have fallen well below market value. It would have quickly passed the 65 percent mark and dropped to 27 percent of market value by the end of the decade.
Sorensen, the state property tax administrator, said the proposed valuation cap has advantages compared to last year’s plan for dropping taxable ag land values to 65 percent of market value. The cap is more gradual, allowing planning time for local governments and annual adjustments instead of a one-time change.
Jay Rempe, senior economist with the Nebraska Farm Bureau, said the analysis highlights the dramatic rise in ag land values during recent years and the resulting shift in property tax burdens.
Agriculture’s portion of the total state property tax bill grew from 18 percent in 2005 to 30 percent in 2015, according to the State Department of Revenue.
Rempe said the valuation cap would stabilize ag land values and lead to a rebalancing of the property tax load.
Pete McClymont, executive vice president of the Nebraska Cattlemen, said the group supported the 65 percent plan last year and is backing the valuation cap this year, even though neither offers a long-term solution to property tax woes.
“To have substantial reform is not in the cards this year,” he said. “We’d like to see some relief.”
That relief might be minimal in the next few years. Both Rempe and McClymont said they expect ag land prices to flatten out, following the past eight years of double-digit increases.
The Nebraska Farmers Union opposed the 65 percent plan last year. The group has not taken a position on the proposed valuation cap.
John Hansen, the group’s president, said farmers and ranchers might not get much help on property tax bills from either measure, depending on the location of their land.
Ag land owners near towns and cities could benefit from lower valuations because the tax burden could shift to residential and commercial property owners.
Owners of property in more rural areas, with relatively little residential and commercial property to share the burden, could see little change in their tax bills. Local governments could raise their property tax levies to offset lower ag land values and keep their funding stable.
“They’re different pockets on the same set of pants,” Hansen said.
However, Larry Dix, executive director of the Nebraska Association of County Officials, said counties and other governmental subdivisions could reach their levy limits if the taxable values of ag land fall enough.
That would put a squeeze on local governments, especially those with no other options for funding.
The state school aid formula could help school districts that reach their levy limits and can show a need for additional funding. Legislative fiscal staff estimate that the cap would require boosting the state aid pool by $8 million, starting with the 2017-18 school year.
But it would not alter the tax mix that goes into paying for schools. About 60 percent of property tax revenues goes to support K-12 schools, and Nebraska ranks 49th among the states in the percentage of school funding that comes from the state.
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