When multiple property tax reform proposals failed to advance in the Nebraska Legislature in the just-completed session and there was no call for a special session to follow, all eyes turned to the pending petition initiative for property tax relief aiming for the 2018 ballot. When, just a couple weeks later, that ballot issue was halted, the outlook for property tax reform or relief became rather uncertain.

Tax reform, and particularly property tax reform, has been a primary issue for the Nebraska Legislature for at least the past few years. Recent efforts that have increased state funding for the property tax rebate (the credit on the bottom line of a property taxpayer’s bill) have provided some relief. But, larger efforts to address the overall property tax system, local spending levels or state aid to local jurisdictions have continually stalled.

Efforts in the 2018 session to address property tax reform were varied. They included a proposal to substantially increase the property tax credit program as part of a larger tax reform package. They also included a proposal to establish a refundable income tax credit for a portion of property taxes paid for local schools, and a proposal to increase state aid or provide minimum levels of state per pupil to local schools. Simultaneously, the refundable tax credit proposal was also moving forward through the petition initiative for the 2018 ballot.

Increased property tax burdens, particularly for agriculture, are clearly driving the efforts. In the past decade, property taxes levied on agricultural land in Nebraska have nearly tripled, from $476 million levied on $28.3 billion of ag land in 2007 to $1.2 billion levied on the same ag land — now valued at $99.3 billion in 2017. During the decade, ag land valuations rose an average of 13.4% per year, although they slowed and actually began to decline in the past two years of the decade. During the same period, tax collections on ag land rose an average of 9.7% per year, although they, too, have slowed and nearly flattened out in the past two years.

State aid to school districts affects property taxes
The current formula for state aid to local school districts under the Tax Equity and Educational Opportunities Support Act (TEEOSA) has also impacted local property tax bills. While ag land valuations rose an average 13.4% per year during the past decade, residential and commercial real estate, the two other largest components of assessed property in the state, rose just 2.8% and 3.6% per year on average, respectively. As a result, rural school districts with a larger proportion of ag land became relatively more “wealthy” as compared to more urban districts, and the formula shifted aid from more rural districts to more urban districts over time.

The proposed refundable tax credit on property taxes paid for local schools, in either the legislative proposal or petition initiative, could have amounted to about $1.1 billion from the state general fund for property tax relief based on a credit equal to 50% of the $2.2 billion total property taxes (from all classes of property) levied for local schools, not counting bond issues or levy overrides. The other policy alternatives promised substantial, but lesser, relief for property taxpayers. None of the policy proposals provided a clear picture of how the relief would be funded — whether through substantial budget cuts to the $4 billion-plus annual state budget, or substantial revenue (tax) increases, or a combination of both.

Another element in the debate is the road ahead for ag land valuations and the TEEOSA formula. With ag land valuations based on a moving three-year median market value, they have not caught up yet to softening land markets over the past few years and sharply lower farm profitability. If ag land markets and eventually, ag land valuations, continue to soften or simply flatten out while non-ag real estate grows substantially, the TEEOSA formula could begin to shift state aid back to more rural districts dominated by ag land, if “wealth” in more urban districts rises faster than need. Interestingly, the total state aid to local districts under the TEEOSA program amounted to nearly $1 billion in 2017 (out of a total of $1.3 billion in state aid for education). While the shift in aid away from rural districts was a major factor in ag property tax increases, a shift back toward rural districts could substantially change the environment for future property tax proposals, although it would likely set the stage for a renewed debate on overall state aid to schools as well.

A continued focus on property tax issues is all but certain for the next session of the Legislature. The various policy alternatives that were on the table this year are each likely to emerge again, along with other ideas or modifications. The various features, benefits and trade-offs of each should be fleshed out again, but perhaps next time under a changing setting for property taxes, tax policy and state support for local schools.

Lubben is an Extension policy specialist at the University of Nebraska-Lincoln.