Farm Progress

LEAD Comment: Balancing property, income and sales taxes will take a combination of budget controls and tax shifts.

Dan Watermeier

January 5, 2017

5 Min Read
DISPROPORTIONATE BURDEN: Today, Nebraska farmers and ranchers represent less than 3% of the state's population, yet they pay over 30% of the total property taxes collected statewide. In the majority of the state, agricultural land comprises more than 60% of a school district's total valuation base.

About the author: Dan Watermeier is a state senator for District 1 in the Unicameral Nebraska Legislature. He farms on the family farm in Otoe County and is a Nebraska LEAD 7 fellow.

Question: What is the need for property tax reform in Nebraska, and what are some options to provide relief in this upcoming legislative session?

Answer: The last major tax reform occurred with the passage of LB 1059 in 1990, when the Legislature overrode a veto by Gov. Kay Orr. LB 1059 increased the sales tax rate by 25%, and the individual and corporate income tax rate by 17.5% to fund an increase in state aid to school districts. Also, LB 1059 directed 20% of all resident individual state income tax receipts to be allocated as aid to the school district in which it was paid. At the time, it was widely agreed that school districts relied too heavily on the property tax for funding K-12 schools.

Since LB 1059 significantly increased state aid to schools, senators tried to make sure that it resulted in property tax relief and not an increase in school spending. Lids were placed on districts' spending and maximum levies were put in place, but bonding was outside of the budget restraints. No cap was placed on valuation increases. Under LB 1059, state aid was increased more than $200 million annually, but property taxes did not decrease by a like amount, falling by approximately $83 million the first year. However, the 45% goal in LB 1059 for state funding was never met. In fiscal year 2015, the state's share of funding for K-12 schools was 37%.

The average statewide property tax rate was $2.5824 per $100 of valuation in 1989, compared with $1.6609 in 2015. The average levy for school districts was $1.5138 per $100 of valuation in 1989 and has decreased to $1.0015 in 2015. Although LB 1059 did reduce property taxes, or at least lowered the increase in taxes, I don't believe that legislators at that time envisioned the substantial increases in agricultural valuations that have occurred in recent years. Currently, 170 of the 245 school districts are non-equalized, meaning that property tax revenue is the primary source of funding for more than two-thirds of our school districts. Even with lower levies, if valuations continually increase, property taxes also increase.

Agricultural land has increased an average of 176% over the last decade, compared to a 35% increase in residential valuation. Nebraska farmers and ranchers today represent less than 3% of the state's population but pay more than 30% of the total property taxes collected statewide. In the majority of the state, agricultural land comprises more than 60% of a school district's total valuation base. Rural landowners are disproportionately funding our rural school districts, even though all residents of the school district benefit equally from having their children educated in public schools.

Even though valuation of agricultural land has increased substantially more than other classifications of land, all property taxes are too high. The notable increase in property valuations has led to government services being primarily funded by local property tax revenue (48%), with 33% from state income taxes and 19% from state sales taxes.

The same situation that existed more than 25 years ago, when a disproportionate burden was placed on property taxes to fund local school districts, has resurfaced and it is past time to make substantial changes in our tax system. An array of options are being discussed by senators and interested parties, and by the time this article is published, a number of them will have been introduced. Options include increasing the sales tax rate; eliminating some sales tax exemptions; expanding the sales tax to more services; instigating the collection of sales tax on Internet sales; adding a foundation aid component to the state aid formula; and increasing the funding for the property tax credit program, which has increased from $105 million of annual funding in 2007 to $224 million in 2017, with $20 million dedicated to agricultural landowners. Whatever path is chosen, senators must make sure that it results in dollar-for-dollar property tax relief and does not allow for increased spending.

The three-legged stool example has been used over the years, showing that revenue from the property tax, income tax and the sales tax should each contribute evenly in the funding of government services. This is a worthy goal, and work to meet it should start immediately, even though it may not be completed in 2017, considering the large projected deficit faced by the state. It will take a combination of budget controls and tax shifts. The Nebraska Farm Bureau's proposal for a $600 million shift, reducing property taxes to 40% in the funding of government, is a laudable goal for the 2017 legislative session. Some say that we shouldn't shift funding for government from one tax source to another, but there are annual fluctuations based on the way state aid is currently allocated. For example, funding for schools through the state aid formula increased by only $6 million this past year, primarily due to valuation increases. Furthermore, some say we should reduce income taxes. In the four years that I have served as state senator, I don't recall one constituent expressing their frustration with income tax rates. The number of complaints I receive on property taxes is too high to count. The problem is easy to determine; now we must work on the solution.

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