LINCOLN — So, the state is forecast to have extra revenue, about $266 million, and Gov. Pete Ricketts and others say the money should be used for property tax relief measures next year.
But it’s far from a simple matter to cut taxes, and recent discussions by the legislative committee that oversees tax policy indicate that there are still vast differences over how any extra money should be used. The clock is ticking — the Legislature’s Revenue Committee wants to agree on a plan by Nov. 21.
Here are some key takeaways in the ongoing debate about property tax relief in the Nebraska Legislature:
First, some background
The state has been struggling for years to reduce historically high property taxes in Nebraska, a state with plenty of land and not enough people. This spring, plans proposed by the Revenue Committee fell about five votes short of advancing. It showed, once again, that while everyone seems to want property taxes to go down, there’s broad disagreement about how to do it.
But some good news arrived last week. The state’s economic forecasting board projected that Nebraska would have an extra $161 million in revenue next year, and $105 million the next. The money, according to Ricketts and some senators, should be used to lower property taxes.
But how do you do it?
That’s the snag. The easiest solution would be to add another $100 million a year to the state’s property tax credit program, which provides a state discount on local property tax bills.
But some members of the Legislature’s Revenue Committee, especially the chairwoman, Sen. Lou Ann Linehan of Elkhorn, don’t like the credit program. She argues that it doesn’t actually reduce local property tax bills — it just gives a temporary discount — and doesn’t structurally change the state’s taxes.
Linehan also feels that it gives some local school districts and other taxing entities a license to raise property taxes, because it will be offset by the state property tax credit.
But some farm groups, as well as the governor, like the property tax credits. People would explode in anger, they feel, if the credits went away.
What’s Linehan’s idea?
Linehan and Sen. Mike Groene of North Platte have a goal of reducing property taxes by 20%. They are floating a plan to use $400 million to $500 million of the state’s excess revenue over the next two to five years to reduce property taxes.
First, they’d lower the valuation of agricultural land used for computing property taxes due for local education from the current 75% of actual value to 55%, which would cut taxes for farmers. Some state money also would be distributed on a per pupil basis to each local school, which is known as foundation aid.
In the second year, they’d lower the valuation of residential and commercial properties to 80% of actual value (from the current 100%), providing a tax break to owners of commercial and residential property. They both want to increase state aid to K-12 schools, which would offset the local tax load. There would also be new restrictions on spending increases for local education.
Linehan said the governor wants to dig deeper into the details of the new plan and spread the changes out over several years. But limiting government spending and using the savings to accomplish property tax relief is what Ricketts has been preaching for weeks. “The root of our tax problem,” Ricketts recently wrote, is spending, and controlling it is the only way to achieve “real, sustainable tax relief.”
Sounds like a great idea, right?
Not to everybody. Some senators on the Revenue Committee expressed concerns Friday about financing tax reductions with such excess funds.
Revenue surpluses don’t happen every year, and haven’t occurred in recent years. Can the state bank on such surpluses in years to come? What happens if forecasts go flat, or negative, as in a recession?
Such excess revenue automatically goes to the state’s cash reserve, known as the “rainy day fund.” And that fund, because of lackluster tax revenue in recent years, has been drawn down. So some senators think the new $266 million should be used to replenish the rainy day account. And, oh, by the way, Nebraska had a major flood this year, and word is about $40 million will be needed from the cash reserve for that.
What about repealing some sales tax exemptions? Or taxing services?
That was the approach of the Revenue Committee this spring in Legislative Bill 289 — repeal a bunch of sales tax exemptions on things like junk food and pop, and start taxing auto repairs and other services to create a “tax shift.” It’s an approach used by several states, and one supported by some Nebraska think tanks to help lower property taxes.
But Ricketts hates the idea of raising some taxes to lower others, calling it “reverse Robin Hood.” And some on the Revenue Committee feel that without the governor’s support, that plan is dead in the water.
Linehan is now thinking that major tax reform, like broadening the sales tax base, might have to wait until after 2020. By June, a consultant hired by the recent Blueprint Nebraska effort to boost economic growth in the state will issue a report about the state’s tax system. That report, the senator said, could provide the ammunition for major tax reform.
But some rural senators, like Sen. Tom Briese of Albion, maintain that major changes, for his farm and ranch constituents, can’t wait. He said that spending cuts alone won’t achieve major reductions in property taxes. Both he and another rural senator, Curt Friesen of Henderson, believe that big tax changes could be phased in, over four to five years if necessary.
What about the ‘35% Solution’ ballot initiative?
That initiative, which its backers hope will qualify for the 2020 ballot, makes some senators nervous. If passed by voters, it would force the Legislature to figure out how to find $1.5 billion to provide all property owners with a state income tax credit equal to 35% of their annual property tax bill.
Some lawmakers and the governor predict chaos, and either massive cuts in services or big increases in sales, income or even property taxes.
Revenue Committee members on Friday debated “how much” property tax relief must be passed in the 2020 legislative session to take the wind out of the sails of the initiative drive. Organizers recently opened campaign offices in the Omaha area. Is $100 million a year enough? Not really, some senators said.
A big “if” is whether the ballot initiative can qualify for the ballot. The TRUE Nebraskans group (“Tax Relief Unites Everyone”) needs to collect at least 120,000 valid signatures by next summer to qualify, and so far, the group is using only volunteers.
Veterans of such campaigns say that hiring paid circulators is the only way to gather enough signatures to make the ballot. But TRUE Nebraskans officials hint that they’re going to hire some pros after the first of the year.
Stay tuned. Linehan said her Revenue Committee wants to reveal a property tax relief plan by Nov. 21, when state lawmakers hold an annual retreat.
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