Spending Restraint Key to Property Tax Relief

On Thursday, November 12, 2015, Platte Institute CEO Jim Vokal provided invited testimony before a joint hearing held by the Revenue and Education standing committees in the Nebraska Legislature. The committee is seeking feedback on ways to reduce reliance on local property taxes to fund K-12 education. These are Jim Vokal's remarks:

In 1960, eleven eastern and midwest states, including Nebraska, did not levy a personal income tax. We did not have a sales tax at the time either.

But people in these states were unhappy with high property taxes, so they pursued tax shifts with the promise to unburden property taxpayers from funding education.

It’s been half a century and nine of those states still have the highest average property tax rates in the country, including Nebraska. Worse yet, U.S. Census Bureau data show each of these states saw their share of population growth, Gross State Product, and tax revenue growth shrink in comparison to years prior to these tax increases.[1]

The reason the property tax problem is still with us after all this time is because policymakers have tried for decades to tax or spend our way out of it. Unfortunately, the list of potential options presented still mostly includes tax shifts or state spending that subsidizes local spending growth.

If the committee seeks an end result that sustainably reduces the reliance on the property tax to fund education, it can only be achieved through meaningful spending restraint.

Tax shifts are only beneficial if it shifts revenue collection from an unstable, economically destructive tax to a more stable, less destructive tax. Stability does not come from a three-legged stool. Stability comes from collecting the most revenue with the least amount of economic harm.

The property tax is great at raising revenue with stability, transparency, and neutrality between different types of taxpayers. But that’s exactly why we all hate it so much.

It makes the real cost of government very evident to everyone.

The pain people in Nebraska feel from property tax is not inherent to the tax itself, but from the financial burden imposed by high tax rates, which are the product of local spending. Even valuations lack meaning until applied against rates.

The state can play a role in forcing spending higher as easily as local political subdivisions. Unfunded mandates and state aid provide a signal to school boards that the state expects and invites them to spend more.

While state taxpayers can certainly choose to provide more funds to school boards, state aid alone can’t solve the problem without a guarantee that school boards will reduce property tax rates or their reliance on property taxes.

Without a responsible limitation on current school district levy rates, whether in a freeze or a reduction, new aid may only accelerate spending.

Current state spending must also be reallocated to increase aid. Otherwise, a state tax increase would be needed, which would only place even greater reliance on less stable, more economically destructive revenue sources to fund education.

Even the most substantial commitments to foundation aid which have been discussed, between $60-200 million, would not benefit average property taxpayers if it comes at a cost of other, higher taxes.

This committee must also address the conflicting desires of those hoping for more education spending while reducing reliance on the property tax. This is like hunting for a unicorn.

The Legislative Fiscal Office reports that equalizing reliance on each revenue source would require over $900 million in state tax increases without changing spending.

Consider this in light of the fact that the majority of states providing more state aid per pupil than Nebraska spend less overall.[2]

A good example is Idaho. It has a slightly smaller population than Nebraska, but appears to provide twice as much state aid to education than we do on a percentage basis. But in dollars per pupil, Idaho is the lowest spending state in the country.[3]

On the other hand, most states spending more on education than Nebraska don’t reduce their reliance on local sources of revenue like the property tax; they just spend more than we do from all sources. It’s worth keeping in mind that many of these states are among the eleven mentioned at the opening, which are shedding long-term population and revenue growth with prohibitively high taxes.

Spending restraint must be the key component to any meaningful property tax reform plan. Nebraska taxpayers on the whole pay substantial portions of each tax type, and a tax shift will only worsen Nebraska’s tax climate, particularly if it fails to truly reduce property taxes.

While some agricultural property taxpayers believe tax shifts will benefit them, rural communities are more diverse than people assume. Rural Nebraska is made up of producers and suppliers, small businesses and public workers, manufacturing and services. Just as easily as tenant farmers pay higher rents through high property taxes today, they will experience lost earnings from higher income or sales taxes in a tax shift.

The cost of government spending, which is taxation, will reach all of these members of the community, whether on their tax bill, in prices for goods and services, or in lost economic opportunities in their area. 

In summary, the Platte Institute recommends to the committee that any increase in state aid to education be matched with local and state spending restraints. Property tax rates must be reduced to account for state aid received, and reforms should be cost-neutral to payers of sales and income tax.

[1]  U.S. Census Bureau, Bureau of Economic Analysis, Laffer Associates
[2] U.S. Census Bureau, 2013 Annual Survey of School System Finances
[3] U.S. Department of Education, National Center for Education Statistics, Common Core of Data, “National Public Education Financial Survey”, 2011-2012 (prepared July 2014)
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