Property tax relief popular with farmers and some businesses, but school districts have concerns
July 2, 2020
Nebraska News Service
Property tax relief is on the agenda for the 17-day legislative session later this month, but opponents argue that the proposed property tax relief plan will hinder school district spending and taxing authority.
State Sen. Lou Ann Linehan of Elkhorn, chairwoman of the revenue committee, is leading the charge to get a property tax relief package passed when the legislature resumes on July 20.
“We have a property tax crisis more severe now in agriculture but moving toward suburbia,” Linehan said. “If you buy a new home in Elkhorn right now, property taxes are one-third of your monthly payment, which is completely out of line with anywhere else in the country.”
According to the Tax Foundation, the nation’s leading independent tax policy nonprofit, Nebraska has an average property tax rate of 1.65% for owner-occupied housing, which is the eighth-highest rate in the nation. According to the state’s Department of Revenue, the 2019 average property tax rate in Nebraska was 1.7% of its assessed value.
Before the legislative session was dismissed due to COVID-19, the Revenue Committee moved Linehan’s bill LB1106 out of committee and onto the floor for debate. This bill would increase state funding to K-12 schools by $520 million over three years. It would also impose new spending limits and reduce land valuations for tax purposes.
Linehan wants to increase state funding for education so Nebraska isn’t ranked low in the country, and by doing this, she believes property taxes will go down. Nebraska has one of the lowest rates of state support for public schools.
TEEOSA, the Tax Equity and Educational Opportunities Support Act, is the current school finance formula for Nebraska public schools. TEEOSA was enacted in 1990 and has been amended various times since. The school finance formula under TEEOSA is a district's estimated needs minus its estimated local resources which are primarily property taxes. The gap between educational needs and available resources is filled by equalization aid which accounts for the bulk of school funding.
Under LB1106, adjustments to TEEOSA would include a foundation aid, which would provide every student in Nebraska funding. Foundation aid would be phased in over three years. In the first year, foundation aid would equal 5% of state general revenues divided by the number of public school students, then in year two 10%, and year three 15%.
The bill also states that by 2022, school districts would reduce taxes on agricultural land from 75% of actual value to 55%, and residential and commercial property would be reduced from 100% to 87%. According to the Nebraska legislature, actual value means the market value of real property in the ordinary course of trade.
Speaker Sen. Jim Scheer, of Norfolk, said he believes that in the last 20 years property taxes were too high on agricultural land, and in the last three to five years, the problem is now facing residential homes.
“Folks want to see a bill that would produce a property tax reduction for everyone in the state,” Scheer said.
Linehan’s property tax bill will be vying for attention among two other revenue and tax bills.
Scheer supports Linehan’s effort to adopt LB1106 and Seward Sen. Mark Kolterman’s effort to pass bills for the ImagiNE Nebraska Act and the NExT project.
LB720, the ImagiNE Nebraska Act, would provide tax incentives for business expansion across the state; and LB1084, the NExT project, would significantly expand the University of Nebraska Medical Center.
Scheer supports all three bills and would like to see each one passed, but he said he doesn’t believe that any one voted on by itself will obtain the necessary votes.
“The reason I became involved is because this is my last year and I would like to see something accomplished on all three of those items,” Scheer said.
Each legislative session, lawmakers have struggled to agree on a property tax relief bill, but some proponents of LB1106 are optimistic it will get the 33 votes it needs to pass.
Gov. Pete Ricketts said he believes that high property taxes put farmers and ranchers at a competitive disadvantage against other states. He hopes that the legislature will pass a property tax relief bill this session.
“I’m optimistic that senators can come together and deliver relief for working Nebraskans this session,” Ricketts said in a statement to Nebraska News Service.
Ricketts supports LB1106’s general framework because it satisfies three core principles: no tax increases, protection of the property tax credit relief fund and spending restraint in local governments.
Bryan Slone, president of the Nebraska Chamber of Commerce and Industry, said he also believes LB1106 will pass and is an important step to rebuild Nebraska’s economy and be more competitive with other states.
“I like LB1106 because it was intended to both use money from economic growth to fund tax relief but also to put reasonable limits on government spending over a period of time,” Slone said. “It is absolutely important this year that the legislature complete a package of economic incentives and property tax relief.”
Even though Slone is optimistic about property tax relief, he understands there is a lot of vested interest in the topic.
According to David Aiken, professor of agricultural economics at the University of Nebraska-Lincoln, property taxes account for 38% of state and local tax collections in Nebraska, which is the highest of any tax. Sales taxes account for 29% and income taxes are 26%.
The growing concern over property taxes in Nebraska has led senators over the years to propose relief packages, but it is a tough battle.
Jack Moles, executive director at Nebraska Rural Community Schools Association, said he believes a property tax relief bill will involve a lot of state spending, which he thinks will be difficult as state revenues are expected to be affected by COVID-19.
The impact of COVID-19 on Nebraska’s income tax receipts won’t be known until July 15, which is the deadline for payment of state income taxes. In the Nebraska Department of Revenue general fund receipt report for May 2020, May’s total was $519 million which is 1.2% below the state’s forecast of $526 million.
He said he opposes LB1106 for a variety of reasons, including the new controls being placed on school district spending and taxing authority.
“When we look at how TEEOSA ran over the years and the hundreds of millions of dollars that were lost by rural districts, we just can't see how the state will provide assurance that the state dollars will always be there,” Moles said.
Connie Knoche, education policy director at OpenSky Policy, said she doesn’t support LB1106. OpenSky is a non-partisan organization that advocates for a strong Nebraska through clear fiscal research and analysis.
Knoche understands that land values have increased over the years but is worried that school districts aren’t receiving enough state aid. Sixty percent of Nebraska’s property taxes go to K-12 education funding, and Nebraska’s school aid is the second lowest in the United States.
“I have concerns with limiting spending growth for schools to 2% and eliminating accumulated unused budget authority,” Knoche said.
Knoche is also worried about where the funding for LB1106 will come from since estimates say that Nebraska will see a loss in state tax revenue from federal tax changes enacted because of COVID-19.
“I think it is highly unlikely that a property tax relief bill will pass this year,” Knoche said. “The impact on state revenues from the COVID-19 pandemic is still unknown. Revenues are down and the surplus funding the property tax relief measures were counting on is dwindling.”
Nicole Fox, director of government relations for the Platte Institute, has been monitoring property tax relief legislation. The Platte Institute for Economic Research is a nonpartisan, nonprofit organization in Omaha, whose mission is to advance policies that remove barriers to growth and opportunity in Nebraska.
“Our state’s housing prices have risen at the sixth-fastest rate in the country and our ag producers are facing tax burdens that are many times greater than what they would pay in other states,” Fox said.
Fox said she is looking forward to watching the property tax debate when the legislative session returns on July 20.
There are many uncertainties and challenges ahead to finding the solution to property taxes but even if a bill is passed there could still be problems.
“The property tax issue is complex, so even if a bill is passed in 2020, future reforms will be needed,” Fox said.