Rural Nebraska property owners stand to benefit most from tax relief plans

History says that whatever alternative they choose for revamping the $1 billion aid formula will lead to major legislative battles.

LINCOLN — How property owners fare under a tax relief package being crafted by Nebraska lawmakers could depend on whether they live in an urban or rural school district.

Two key legislative proposals call for delivering relief through the state school aid formula. Both would direct sharp increases in aid to smaller, rural districts, while the largest districts, educating the bulk of Nebraska students, would see much more modest bumps.

That outcome seems reasonable to Dave Welsch, a Milford school board member and farmer, who saw the property taxes on his farmland, home and farm buildings double between 2010 and 2015.

“It’s very appropriate that they get a big chunk of relief because they’re the ones that have been hit the hardest,” he said of rural school districts.

But Rob Winter, who leads a group of the state’s largest schools, said the proposals would run counter to the goal of matching state and local resources to student educational needs in each district. Those needs include students coming from families in poverty or learning English.

“Some districts don’t have the student needs that others do,” he said.

Members of the Revenue Committee are expected to sort through the school aid options as they put together an omnibus tax relief plan. The committee members have set April 15 as their target for completing the task.

History says that whatever alternative they choose for revamping the $1 billion aid formula will lead to major legislative battles.

“Every year, it’s a dogfight between the schools,” said State Sen. Lou Ann Linehan of Omaha, who chairs the Revenue Committee and sits on the Education Committee.

Why school aid?

Leaders in the push to cut property taxes argue that the road to relief should go through school aid because about 60 percent of property tax revenue goes toward K-12 education.

They point out that Nebraska ranks 48th in the nation in state funding for K-12 education, according to U.S. Census Bureau figures. Conversely, the state ranks second-highest in the proportion of school funding that comes from local taxes.

They also point out that only 69 of the state’s 244 districts got equalization aid this year. Equalization aid accounts for the bulk of state school funding. It is intended to fill the gap between student educational needs and the funding available from property taxes and other resources.

The number of districts getting equalization aid has shrunk as agricultural land valuations have soared, allowing schools to collect more property taxes with a given levy. Meanwhile, a series of economic recessions prompted lawmakers to rein in the level of state support for schools.

Just six years ago, more than half of the state’s school districts — 135 of the 249 districts at the time— qualified for equalization aid.

“That creates an unfair discrepancy in the amount received from the state to educate our students,” Sen. Tom Briese of Albion said. “It creates an onerous burden.”

What’s being proposed?

Senators have proposed several options for divvying up increased state revenue among Nebraska school districts. Each would have differing results for taxpayers and schools.

Two key bills were introduced by Sens. Curt Friesen of Henderson and Mike Groene of North Platte. Both direct aid primarily toward rural districts but take different paths to get there.

  • Legislative Bill 497, introduced by Friesen, calls for the state to pick up half the cost of each school district’s basic funding. Currently, only a small number of districts, including the Omaha Public Schools, get that level of state support. All have high-needs students and relatively low property valuation per student.

“The state should have some obligation for every student,” Friesen said.

Another provision in his bill would discount the value of agricultural land when calculating equalization aid. That change would direct more money to rural districts by making them appear to have fewer local resources.

To ensure that additional aid translates into property tax reductions, LB 497 would cap the amount of property taxes each district could collect. The caps would be used to calculate a maximum levy for each district. The statewide $1.05 maximum levy would be repealed.

» Groene’s LB 695 would earmark 25% of state income and sales tax dollars to provide a basic level of state support for every public school student. That feature would have provided $3,474.40 per student based on 2018 revenues.

LB 695 would eliminate the current property tax credits, redirecting money from the Property Tax Credit Fund into school aid. The increase in aid would more than make up for the loss of tax credits for property owners in all but a few districts. The bill has a provision to prevent those districts from being harmed.

School math

Nebraska lawmakers are looking at changes in the state school aid formula to deliver property tax relief, particularly to farmers and ranchers. Here's how two key proposals could affect aid going to different districts when fully implemented.

School district Omaha Lincoln Millard North Platte Crete Aurora Elmwood-Murdock East Butler St. Edward
Students 51,088 40,638 23,395 4,021 1,956 1,226 419 272 172
Property tax levy $1.0825 $1.0629 $1.1110 $1.0861 $1.0534 $0.7619 $0.9825 $0.5990 $0.5345
Current state aid $276,519,122 $141,899,186 $73,802,223 $9,239,797 $9,433,883 $176,479 $430,322 $42,012 $16,190
State aid as % of basic funding 67% 43% 38% 28% 57% 2% 8% 1% 1%
Additional aid (LB 497) $9,917,152 $22,780,136 $22,220,010 $7,353,178 $2,438,186 $5,696,373 $2,230,478 $1,872,854 $1,344,524
% increase in aid (LB 497) 4% 16% 30% 80% 26% 3,228% 518% 4,458% 8,305%
Additional aid (LB 695) $35,425,234 $12,579,774 $21,760,735 $4,650,837 $2,519,009 $4,065,758 $1,280,637 $889,126 $567,508
% increase in aid (LB 695) 13% 9% 29% 50% 27% 2,304% 298% 2,116% 3,505%

Source: Nebraska Department of Education; Nebraska Farm Bureau; Nebraska Department of Revenue

The bill would also eliminate a school aid feature known as the “averaging adjustment,” which benefits large schools with lower-than-average spending per student. Groene said the adjustment is unnecessary because those schools have economies of scale. The change would free up $26 million a year.

His proposal would lower the maximum property tax levy to $0.95 statewide and limit levies even more on districts with large increases in property valuations. In addition, the proposal would tighten limits on school spending.

» Briese offered a couple of additional school aid options in LB 314.

His bill would increase state reimbursement for special education services to 80%, up from about 50% now, and send 20% of the state income taxes paid by district residents back to the districts, up from the 2.3% current rebate.

How much tax relief?

The three proposals would provide very different levels of property tax relief.

LB 497 is the most ambitious plan. When fully implemented, it would increase school aid by $661 million to offset property taxes. The bill would pay for the additional aid by raising sales taxes, applying sales taxes to more services, hiking cigarette taxes and more.

LB 695 would put $89 million more of state dollars into property tax reductions. It would boost school aid by $313 million when fully implemented. But most of that money would come from the Property Tax Credit Fund. The bill does not spell out where the $89 million would come from.

Briese’s LB 314 would provide $137 million more funding for schools, while directing additional money to the Property Tax Credit Fund. The bill would pay for the property tax relief by raising a variety of state taxes and eliminating some tax exemptions.

Who wins and loses?

The ideas offered by Friesen and Groene would provide substantial increases in aid to smaller, rural schools, which means substantial savings for property taxpayers in those districts.

Those schools have large proportions of ag land, which saw steep valuation increases over the last decade. In many cases, the valuation increases led to losses of state aid and a growing reliance on farmers and ranchers to support schools.

But those districts also tend to have property tax levies well below the maximum. At the extreme are the Elgin Public Schools, with a $0.33 levy, and the Newman Grove Public Schools, with a $0.34 levy this year. The Friesen and Groene bills would drive their levies down further.

More urban districts, with little or no ag land, would get small increases in aid. Groene’s bill would ensure some decrease in levies. The effect on levies under Friesen’s bill would be less certain because maximum levies would vary each year.

Both measures would tighten caps on school districts, which means that districts would have less flexibility to deal with increased costs.

Briese’s proposal to increase special education reimbursement would help all school districts. But it would be up to the districts whether they use the additional state funds for tax relief.

His plan to increase the income tax rebate would help smaller, rural districts that get no equalization aid. Among them, districts with higher-income residents would see the greatest benefit. The rebate would not make a difference for districts that get equalization aid because, under the state aid formula, the additional revenue would be offset by a reduction in aid.

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What do educators say?

Reaction to the proposals has been generally divided along urban-rural lines.

Jack Moles, executive director of the Nebraska Rural Community Schools Association, likes parts of all three proposals. His association represents 199 schools and some 75,000 students across the state.

He said property taxpayers have been forced to make up for the loss of state aid to rural districts. The bills would shift some of the funding responsibility back to the state, where he believes that it should be.

“We feel like every student should be supported somehow and not just with the local property taxes,” Moles said.

Winter, of the Greater Nebraska Schools Association, opposes the idea of providing funding to all districts, no matter their circumstances. The group’s 26 member districts are among the state’s largest and educate two-thirds of Nebraska students.

He said school aid should continue to be funneled to the districts where it is needed to equalize educational opportunities. That means sending it to districts with more student needs and less local valuation to fall back on.

“We need to meet the needs of all children,” he said. “The conundrum is the needs are different for all children.”

Neither like the idea of tightening levy and spending limits.

“No superintendent wants to see much in lids because it doesn’t give you a chance to react to things,” Moles said.

What’s next?

The Revenue Committee is expected to continue working on a property tax package over the coming week. In the process, the state aid proposal could take different shapes.

Martha Stoddard keeps legislators honest from The World-Herald's Lincoln bureau, where she covers news from the State Capitol. Follow her on Twitter @StoddardOWH. Phone: 402-473-9583.

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