Click here to download a flyer summarizing this article.
As the 2019 Nebraska Legislature moves beyond its first 30 of 90 working days, the Revenue Committee remains a merry band.
So far, the committee has worked in harmony across the urban-rural divide, advancing numerous pieces of legislation to the floor of the Unicameral.
But the committee’s hardest work is just beginning. Between now and April, the eight senators will consider the most ambitious parts of their property tax reform package. That includes any potential tax shift the committee may pursue, along with policies that might use those new revenues to effectively cut property taxes across the board.
Here’s our list of key reform options heard before the committee that could be combined to result in substantial, sustainable property tax reductions:
1. Expand the state and local sales tax base.
Currently, state and local sales taxes are only collected on 1 in 3 purchases in Nebraska. Experts from the Tax Foundation recommend that states levy sales tax on all final consumer transactions, exempting only business inputs.
Ultimately, it’s up to the committee to decide if it wants to pursue a major reduction in sales tax exemptions, or a modest one. But because these broad and stable revenues can be used to reduce tax rates, including the sales tax itself, or to fund targeted credits for taxpayers in need, the less the committee proposes to reduce these exemptions, the less revenue they'll have to make changes.
Bills with sales tax base expansion language include LB314, LB497, LB507 and LB508.
2. Codify online sales tax requirements.
Nebraska must pass legislation establishing an appropriate transaction threshold for sales tax collection compliance, and prohibiting retroactive sales tax collections. LB284 would achieve these objectives.
3. Increase voter participation for bonding.
All bond issues should be voter-approved, and elections should be scheduled for a primary or general election in order to maximize voter participation. Bills that address bonding include LB20 and LB412 (heard in the Government, Military and Veterans Affairs Committee).
4. Limit property tax windfalls.
When valuations increase, local political subdivisions should reduce their property tax levies. LB103 would require a levy reduction by the same amount as the overall increase in valuations, until a public hearing and vote is held to adopt any property tax increase.
5. Reduce property tax levies and/or assessment ratios.
In combination with revenue replacements from state or local sources, a reduction in allowed property tax levies or assessment ratios of real property makes for an effective reduction in local reliance on property tax. Bills including levy rate reductions or assessment ratio changes include LB183, LB530, and LB695 (heard before Education).
6. Reduce state income tax rates gradually as reserve and revenue growth requirements are met.
Requiring a cash reserve balance of $500 million or more and actual General Fund revenue growth of 3.5% or greater before any state income tax reductions are made would prioritize property tax reform and avoid tax reductions in years with weaker revenue growth. Language in LB615, with amendments, could achieve this goal.
There are some sour notes among the many proposals, however.
Several bills propose increasing the Property Tax Credit Fund. However, in absence of more serious tax limitations, this policy has not worked to keep a lid on the growth of property taxes. As an alternative, those revenues can be used to fund structural property tax reforms
Another pitfall to avoid is increasing state tax rates. Nebraska already has the 7th highest average property tax rate, the 16th highest income tax rate, and the 25th highest combined state and local sales tax rate. In total, Nebraska’s Tax Foundation State Business Tax Climate Index ranking stands at 24.
Many of the session’s proposed tax rate increases, including high-earner income tax rates and excise tax increases are less stable revenue sources than expanding sales taxes at current or lower rates. As an alternative, the Unicameral could enact legislation permitting counties to seek voter approval for countywide local option sales tax increases for property tax reduction.
It’s healthy to be skeptical about whether the Legislature can reach a 33-vote consensus on any proposed package. But with LB103, LB183, and LB284 already moving forward, there is a promising opportunity for reform in this year’s session.