Nebraska property taxes are the 10th highest in the U.S. Nebraska sales taxes are the ninth lowest, and both income taxes and total state taxes are in the middle.
Property taxes account for 38% of total state and local tax collections in Nebraska, the highest of any tax. Sales taxes are 29% of total tax collections, and income taxes are 26%.
If property taxes, sales taxes and income taxes were equalized as sources of state and local revenue, property taxes would need to be reduced by more than $600 million.
Sixty percent of property taxes go to K-12 education funding. Nebraska state school aid is the second lowest in the U.S., while the local share of K-12 school spending is the second highest.
Nebraska property taxes on agricultural land historically have been high relative to other states as a percent of net farm income. Since 1950, Nebraska property taxes on agricultural land are 46% higher than the U.S. average.
In 2017, agricultural property taxes paid were 47% of Nebraska net farm income. When other taxes are considered, this means that most Nebraska farmers or ranchers were paying 50% to 60% of their net farm income in taxes.
This agricultural property tax crisis has led to two efforts to place property tax relief proposals on the ballot. A 2018 initiative would have given property tax payers a refundable state income tax credit of 30% of property tax payments, effectively reducing property taxes 30%.
It also would have cost the state treasury $1.1 billion dollars — 25% of the general fund budget — and would have forced sharp cuts in state spending as well as major increases in state sales and income taxes.
The initiative campaign was called off April 27, 2018, and did not appear on the ballot. However, property tax reduction groups are attempting to place a new version on the 2020 ballot, called the "35% solution."
This proposal would give property tax payers a refundable state income credit of 35% of property taxes paid. It would work like this for a homeowner: $150,000 house x 1.6% tax rate x 0.35 = $840 refund. For a farmer or rancher, it may look like this: $2.5 million farm x 1.2% tax rate x 0.35 = $10,500 refund.
Implementing the proposed 35% solution would cost $1.5 billion, which would require even larger state spending cuts or state tax increases. If Nebraska lawmakers cut state spending $750 million and increased state sales and income taxes $750 million, the state tax increase would be 17%.
If there were no spending cuts, sales and income taxes would increase 33%. If there were no state tax increases, state general fund spending would need to be reduced by one-third.
To avoid these sharp tax increases and spending cuts, lawmakers have tried to find a political path to property tax relief with enough votes to overcome legislative filibusters (33 votes) and a likely gubernatorial veto (30 votes).
Several property tax relief bills were introduced in 2019 and a consensus bill, LB289, emerged late in the session. The product of intense negotiations among revenue committee members and other senators active in the property tax-school finance debate, LB289 would have:
- begun collecting sales taxes on candy, pop, bottled water, plumbing services, moving services and veterinary services for pets, among others
- increased cigarette taxes 56% to $1 per pack
- provided state school aid of 33% of total education costs per pupil to all schools
- limited school spending increases to consumer price index increases and growth in student numbers.
Every item on this list is politically controversial, and LB289 came up five votes short of the 33 votes needed to end a legislative filibuster. The proposal would have provided between $350 million to $500 million in property tax relief.
Rural senators managed to tie passage of property tax reform with reform of state economic development programs. The economic development program overhaul — LB720 — was stalled when a handful of rural senators withdrew their support after the property tax relief proposal was filibustered.
This political hardball does provide an improved chance that if enough common ground can be negotiated before next January, both LB289 and LB720 could be enacted early in the 2020 legislative session.
There are many challenges ahead. Urban school districts feel they are not being treated fairly under LB289. The governor may veto LB289, and the legislative veto override attempt may fall short.
The proposed 35% solution may be on the 2020 ballot, and voters could find it more attractive than LB289. But significant progress was made this year — LB289 appeared to have the support of at least 28 senators, which is something to build on. Stay tuned.
Aiken is a water and ag law specialist at the University of Nebraska-Lincoln.