Nebraska lawmakers should turn a skeptical eye toward a state tax-cut proposal known as Legislative Bill 461 when the measure is debated Friday.
While the dedication by Sen. Jim Smith of Papillion, the Governor’s Office and others who worked to assemble LB 461 deserves respect, parts of the proposal raise major concerns and uncertainties.
The legislation would change the ag-land valuation process, expand tax credits for low-income families and change personal and corporate income tax rates. Some changes would occur only if state revenues were projected to reach certain thresholds in future years. Some of the concerns:
» Land-value unfairness. State tax legislation needs to strike a responsible balance between urban and rural interests. LB 461 would cap the annual increase in ag-land valuations at 3.5 percent but wouldn’t cap increases on residential or commercial valuations. It also would require that agricultural-use valuations fall between 55 percent and 65 percent of market value. Yet the state-required values for commercial and residential property would be far higher, between 92 percent and 100 percent.
No one can deny the stress on the ag sector at present, but urban Nebraskans can justifiably argue that it’s unfair for the state to extend such extraordinary privileges to one type of income-producing property, while denying it to other kinds, including commercial and industrial.
» Ag-land valuation complexity. Under LB 461, ag land would be assessed based on the property’s income potential. The current assessment method is based on the land’s market value. A new state Agricultural Land Valuation Committee would use complex formulas to determine rates for different classes of ag land. Assigning tax values to specific properties, however, would still fall to county assessors — with all the room for disagreement, argument and ill will familiar to Nebraskans.
» State school aid uncertainty. LB 461 would shrink the property tax burden in rural areas, reducing available local funding for schools and other local governments. Its backers say that to compensate, the state would boost state aid to K-12 by about $30 million initially, rising to about $45 million when fully implemented. But there’s no guarantee the state would maintain that commitment long term. State aid to schools has yo-yoed regularly over the years, and it’s hard to see why that would change. In any case, the extra school aid would replace only a portion of the reduced revenues anticipated. For example, revenues would have dropped an estimated $147 million if it had been in effect this year, assuming flat tax rates.
» Tax-relief overpromising. LB 461 raises concerns about whether it fulfills its promises or not. It’s a guessing game when or if many of the incremental personal and corporate tax-rate reductions might occur, given the uncertainty over when Nebraska would reach the revenue-projection “triggers” spurring the reductions. Recent history shows it might take three or four years to hit a 3.5 percent revenue increase triggering one incremental reduction in personal income tax rates.
» Budget sustainability. If LB 461 were fully implemented, total state income tax revenues would drop by an estimated $400 million. Some of this tax relief undoubtedly would spur business activity, but the question remains: Would state government have adequate revenues to fund key needs?
For example, if the state lived to up to LB 461’s commitment for increased aid to schools, wouldn’t the share of the state budget continue to fall for other needs, such as the University of Nebraska and prisons? Such funding would be further threatened if Medicaid continues to consume more and more of the budget.
» Relying on revenue forecasts. Critics of LB 461 point out that revenue forecasts — rather than actual revenues — would determine when tax cuts occur, setting up the potential for revenues to fall short after tax cuts are scheduled to kick in.
» Impact on the little guy. Lawmakers are sure to disagree over whether LB 461, if fully implemented, would tilt toward some high-income earners. Supporters will note that changes benefiting middle- and lower-income households would occur first and are guaranteed. Changes benefiting higher-income households would depend on whether state revenues exceed certain thresholds. Based on a World-Herald analysis, a married couple earning $250,000 would save $1,277, while a couple earning $65,000 would save $51.
LB 461 came about through good intentions and months of hard work. But the legislation raises serious concerns and question marks. It’s no wonder the bill is encountering an uphill fight.