NEBRASKA LEGISLATURE
The official site of the Nebraska Unicameral Legislature

Sen. John Kuehn

Sen. John Kuehn

District 38

The content of these pages is developed and maintained by, and is the sole responsibility of, the individual senator's office and may not reflect the views of the Nebraska Legislature. Questions and comments about the content should be directed to the senator's office at jkuehn@leg.ne.gov

Welcome

January 3rd, 2017

Thank you for visiting my website. It is an honor to represent the people of the 38th legislative district in the Nebraska Unicameral Legislature.

You’ll find my contact information on the right side of this page, as well as a list of the bills I’ve introduced this session and the committees on which I serve. Please feel free to contact me and my staff about proposed legislation or any other issues you would like to address.

Sincerely,
Sen. John Kuehn

Each year the Nebraska Department of Revenue submits a report of the financial details of Nebraska’s tax incentive programs. Although the Nebraska Advantage Act is the largest, the report provides the benefits paid to companies participating in seven distinct programs. This year’s report identifies the fiscal impact to Nebraska taxpayers of 132 qualifying projects that have received benefits under one or more of the seven programs.

The Annual Report contains specific, detailed information about the benefits participant companies have received and will continue to receive from the program. To date, a total of $905 million in tax credits and $187 million in sales tax refunds have been given, with another $37 million in sales tax refunds pending approval. While sales tax refunds are paid to the company when earned, the tax credits represent a cumulative liability to Nebraska taxpayers.

Of the nearly $1 billion in tax credits earned, less than half of them have been used. When a company qualifies for the tax credits, they can apply the credit in a number of ways. They may use the credits instead of paying state income taxes, apply the credits as a refund for sales taxes, use the credits to pay the employer’s share of tax withholding on employee salaries, or obtain a state refund for their real estate property taxes paid. In some cases, companies can continue to collect on incentives as long as 16 years after they were attained.

A common misconception among taxpayers is that if the current tax incentive programs ended, so would the payouts. That is not correct. If no further applications were accepted or corporate benefits approved, Nebraskans are still on the hook for $484 million of tax credits earned that still remain to be paid.

In addition to the tax credits and refunds that reduce current and future state taxes paid by participating companies, certain projects are granted exemption from personal property taxes. To date, over $6 billion in personal property has been removed from local tax rolls, meaning no property taxes are paid to local governments. To put that in perspective, that is the equivalent of 40,000 homes valued at $150,000 each, or alternatively, 7,500 quarter sections of $5,000 per acre farm ground not paying property taxes. In comparison, the total taxable value of all ag machinery and equipment statewide was $4.1 billion in 2017, while the total taxable value of commercial and industrial equipment was only slightly higher than the cumulative exemption for incentivized companies at $6.5 billion.

While the costs to Nebraska’s taxpayers are known to the dollar, information about the benefits and economic activity created by the credits are estimates at best. For example, the report estimates a cumulative number of new jobs, although that number does not represent a new position created and filled by a previously unemployed Nebraska worker. In fact, the estimated number does not even reflect jobs, but rather “full time equivalents”. Any accumulated increase of 40 work hours per week is counted as an “FTE”. So 10 employees getting 30 hours of work per week instead of 20 would be counted as 2.5 new “jobs”, even though not a single full time job was created.

Additionally, we have no means by which to accurately evaluate the wage levels of the expanded employment. Estimated annual wages are calculated for the report, but they represent only an average wage that FTE’s created.  For example, if a company created one $100,000 management position, two $75,000 supervisor positions, and 10 $30,000 laborer positions, the average salary would be reported as $42,000. The few high wage jobs skew the average, even though almost all of the jobs created were relatively low wage positions.

The report includes a fiscal analysis that uses economic modeling to project the net benefit to Nebraska tax revenue through taxpayer subsidy of participating companies. According to Department of Revenue calculations, the total tax revenue gained by the economic activity created statewide by the incentives programs will be 25% less than the amount of state taxes not paid by participating companies. That is a net annual loss to taxpayers of $32 million in 2018. The Department of Revenue projects that annual loss to grow to $87 million by 2022 and peak at $93 million by 2025. Property taxes not paid are not included in that total loss.

The tax advantages to a handful of companies in Nebraska are clear to see. As a state senator and taxpayer, I have difficulty seeing the public benefit of the current programs, even when those benefits are calculated using optimistic estimates. That lack of measured data on outcomes is troubling. Despite my personal efforts to advance legislation that would provide information for taxpayers, companies receiving the public benefits resolutely opposed greater transparency.  A public hearing on the Tax Incentive Report will take place on Wednesday, August 15.

The term “local control” reflects Nebraska’s priority of self-governance at the community level. Each school district, city, natural resource district, and the thousand miscellaneous government bodies are governed by local officials who establish policies specific to their locale. With the ability to set policy comes the ability to spend tax money, which must be generated from Nebraska taxpayers.

The result of the historical emphasis on local control has been the establishment of 2,659 different local governments across Nebraska. The cost of so many different governments is far more than the half a billion dollars spent annually for general administration costs. With so many different governments, operational duplication is inevitable. Local governments collect 56% of the total taxes in the state and spend 64% of all your taxes paid.  

The annual taxing and spending of local governments in Nebraska only tells part of the story.  Local governments in Nebraska have issued over $9 Billion in public debt obligations. Regardless of any changes in tax policy or spending rates, those debt obligations remain for you and your children. Local government debt equates to $4,820 for each and every Nebraskan, and is equal to 85% of the annual spending by local governments.

The burden of local government debt is not only on future taxpayers. Putting the immediate fiscal cost in perspective with the other priorities of Nebraskans is shocking. According to U.S. Census Bureau figures, Nebraska’s local governments spend in excess of $200 million annually to cover the interest expenses alone, a cost of over $100 per Nebraskan each and every year. Annual interest costs on local government debt exceed the value of the state Property Tax Credit Relief Fund. Interest on debt exceeds 5% of the total value of property taxes collected by local governments each year.

How did a population with a reputation for “pay as you go” and a general public sentiment against debt accumulate $9 Billion of local government debt? Through the collective actions of thousands of individual local government boards, none of whom are required to consider the tax burden or debt obligations any other government is placing upon a single taxpayer in their district. For a taxpayer, it is almost impossible to assess the entire scope of the current and future tax obligations being assessed them by the dozens of local governments.  

One of my biggest surprises over the past four years in the Nebraska Legislature is the degree to which local governments view themselves as entities unto their own, without coordination with the larger policy goals of their community, county, region, or state. Coordination is almost non-existent. When the Legislature discusses policy that impacts local governments, the “local control” principle becomes front and center.

Nebraska is known as a “Dillon’s Rule” state. As described in the 1868 court case that established the doctrine, “municipal corporations owe their origin to, and derive their powers and rights wholly from, the legislature. It breathes into them the breath of life, without which they cannot exist. As it creates, so may it destroy. If it may destroy, it may abridge and control”. Thus, local governments are not entities unto themselves. Their creation, authority to tax, ability to spend, and areas of jurisdiction are granted entirely by the Legislature. They cannot exercise any authority not specifically granted to them by the Legislature.

Local governments choose how to implement state authorized taxing authority, set priorities for how to spend tax dollars, and constitute the majority of the tax burden on Nebraskans. With that local control must come local accountability.

At minimum, all local governments in a county should be required to hold a joint public hearing when setting budgets and tax rates. First, members from all boards and councils taxing citizens and spending tax money would be made aware of the totality of the tax burden placed upon their constituents by their fellow governments. Taxing and spending decisions made in isolation have led to the high local tax burden. Second, a single community hearing would allow for greater transparency for taxpayers and more effective voter engagement. Allow citizens to see a comprehensive picture of all the spending decisions, and the taxes that fund them, in a single public meeting.

I do not advocate for consolidation of more power in Lincoln. I do believe the coordination and cooperation among all local governments should be the operating standard. Program redundancies and turf wars raise the cost of government without improving service to the public. Local control will work best for Nebraskans when all local governments, and the state, work together.

 

With its wide open spaces, vibrant local communities, and a world renowned worth ethic, Nebraska would not appear to be dominated by government. Despite superficial appearances, the actual numbers tell a very different story. State and local governments in Nebraska collectively spend over $16 Billion annually. In terms of each of Nebraska’s 1.9 million people, that is over $8,500 per person each year.

Every 10 years the United States Census Bureau conducts a census of governments. Data from the last decennial census of state and local governments in Nebraska presents some startling facts. Despite ranking 38th in the nation for population, Nebraska’s 2,659 local governments place us in the 14th spot for absolute number of local governments. As a state, we rank high in the number of city, county, and township governments. However, almost half of the total number of local governments in Nebraska are classified as “special government districts”. These include Natural Resources Districts, Country Fair Boards, Sanitary and Improvement Districts, Educational Service Units, and the myriad of other local government entities that approach 1,300 in number. Nebraska law creates over 30 different types of political subdivisions, all of which have authority to spend tax dollars. Most have the ability to levy property taxes. The area of Douglas County alone contains 214 different governmental entities.

According to Census Bureau data, just the general administration costs alone to maintain each of these government bodies costs each Nebraskan $275 a year. Education expenses by far constitute the largest portion of government spending at 38%. In comparison, transportation is fourth in proportion, making up 9% of the total, while public safety, at 7%, ranks fifth.

After education, the second largest piece of state and local spending is public welfare at 17% of the total, more than roads and public safety combined. Spending on hospitals and health also outranks traditional government roles at 10% of the total reported by the Census Bureau. Of the total statewide tax expenditures, 63% of the spending is by the 2,659 local governments.

Nebraska’s tax policy is inextricably linked to the spending decisions made by elected and appointed officials managing thousands of governments across Nebraska. Each spending decision must be backed by a tax. While the central focus of tax policy is on the Legislature and state budget decisions, the simple numbers indicate the largest proportion of taxing and spending decisions are made by local governments.

The vast network of local governments make it difficult for taxpayers to see the total, transparent picture of tax policy. It also makes setting priorities impossible, as each local entity has their own priorities that do not have to align with the spending decisions of any other local government. Rather, it is up to each individual government, and elected or appointed public official,  to evaluate its role in the total tax asking of Nebraska taxpayers. Every spending decision by even the smallest local district contributes to the $8,500 per person annual total.

The justification for so many different governments in Nebraska is often described as “local control”. However, the privilege of local control comes with accountability for those decisions. Evidence based spending decisions are as important by local boards as they are the state government. Recognizing the magnitude and scope of government in Nebraska is only the first step. Next week I will examine some policy option for improving the transparent and accountable use of all of the $16 Billion spent by state and local governments in Nebraska.

 

One way Nebraskans pay to fund government without using the word “tax” is to rename revenue a “fee”.  Of the $2.3 Billion annually appropriated in several hundred state Cash Funds, many are funded by a myriad of different fees paid by Nebraskans. These fees are, in theory, intended to fund a specific program or cover the costs of their administration. The Brand Committee, for example, is a small cash funded agency that charges an inspection fee to cover the costs of enforcing Nebraska’s brand inspection laws. If you do not own any cattle in a brand inspection area, then you do not pay for the cost of the program.

If you work in one of the 43 occupations that require a state credential, you must pay a fee to maintain your license. For example, every two years I pay $168 to the Department of Health and Human Service Credentialing Division to renew my license to practice veterinary medicine in the state of Nebraska. In the last fiscal year Nebraskans paid over $9 million in occupational licensing fees for professions from acupuncture to well drilling. The revenue was used, in part, to pay for the $5 million spent by the various boards that oversee the individual licenses.

The permit fees for hunting, fishing, and other game activities totaled almost $16 million per year, while entry fees and taxes at Nebraska’s state parks and recreation areas totalled another $27 million. The revenue is used by the Game and Parks Commission, a noncode state agency managed by an independent board of commissioners, for a variety of purposes. Administrative costs use about $4.2 million, while enforcement of hunting and fishing laws is about $5 million, and the operation and maintenance of parks costs over $17 million. Research and education use much of the balance of the funds generated.

If you look at your phone bill closely, you will notice a number of additional fees. One such fee is the Enhanced Wireless 911 fee, assessed at $0.45 per phone line. You will also see the Universal Service Fee, which is 6.95% of the cost of the intrastate portion of your phone bill. Both of these fees are intended to subsidize the expansion of specific telecommunications services across the state. Administered by the Public Service Commission, a constitutionally established noncode agency with independently elected commissioners, Nebraskans pay $8 million annually to enhance wireless 911 technology and an additional $38 million into the Universal Service Fund every year.

Over time, both of these PSC funds have accumulated significant surplus balances by collecting substantially more in fees than they spend. At the end of the last fiscal year, there was over $14 million surplus in the Wireless 911 Fund and a $43 million cash balance in the Universal Service Fund after the year’s expenditures. These are not isolated examples. Many cash funds carry significant cash balances.  

The existence of these balances leads to a number of policy questions. When balances accumulate, they become targets for being “swept” to other spending. In the current budget, over $200 million in excess balances was transferred to the state General Fund to offset declines in sales and income tax revenue. In some cases, funds accumulate and are then redirected into other cash funds or projects rather than their intended use, as has happened repeatedly with the Affordable Housing Trust Fund.

While there are legitimate reasons for accumulating some excess balance for proper management, in some cases the accumulated balances indicate a failure of the program to function as intended.  In others, it may mean the fees and taxes charged are set too high, relative to the needs of the program or agency. Regardless of the cause, you should not assume that the fee you pay is necessarily going only toward the function which it was statutorily intended. Money collected by state government, whether as taxes or fees, is often fungible between fund types and budget areas.

Because fees collected typically exceed the annual appropriations, it is difficult to arrive at a reliable total of the various fees paid by Nebraskans. Regardless of what they are called, the $2.3 billion of Cash Funds appropriated annually are a significant part of the overall tax burden that funds state and local government in Nebraska.

My grandpa, known for his Hereford cattle and team of Belgian draft horses, once said “I’ve never lost money feeding cattle, but I’ve sure fed a lot of pretty cheap corn”. By assigning a lower price to the corn he raised and fed, his cattle operation always showed a profit.  In his characteristically practical way, my grandpa was illustrating an important fiscal concept: fungibility. Dollars are mutually interchangeable. Currencies work because the individual units are identical and can be substituted with equal value. To illustrate, $100 has the same value whether it is a single $100 bill, five $20 bills, 400 quarters, or a legal check for $100.

When applied to a budget, fungibility means that all the dollars available to spend are interchangeable, regardless of the source. If your family has a single joint checking account that you deposit all salaries and incomes into for paying expenses, you recognize the principle. If you divert some of your salary to contribute to a retirement account, each of those dollars are interchangeable with the rest of your wages. Each dollar earned by two working spouses, even if applied to different areas of the family budget, is equal in its purchasing power and value.

Over the past nine weeks I have been providing you with information about many different sources of taxes collected by state and local governments in Nebraska. Although they come from many sources, vary widely in amount, and are deposited into different fund accounts, the dollars are still fungible. The doc stamp tax you pay when you purchased your home is interchangeable with the state income tax withholding from your paycheck.  Although, the former goes into several cash funds and the latter into the state General Fund, both are spent by the Department of Economic Development. Additionally, from the perspective of your family budget, both are dollars you no longer have in your pocket to spend as you choose.

Almost every aspect of state and local government is paid for with multiple revenue streams. There is only one source of that revenue: taxpayers. How you perceive what you pay is a function of psychology, not economics. Each dollar paid for that single property tax check is identical to the income tax dollar withheld from your bi-weekly paycheck to the sales tax line on your oil change receipt to the state park entry fee your family paid to go camping to the gas tax paid that is not even itemized when you filled up your car. However, those different taxes don’t “feel” the same. The large, lest frequent sums hurt. The small, frequent taxes don’t seem very burdensome. The ones you do not even see cause no consternation at all.

It is common for constituents to contact me with requests to revise Nebraska’s Supplemental Nutrition Assistance Program, commonly known as food stamps. During a trip to the grocery store, they will see someone use their SNAP benefits card to pay for groceries, then use their cash to purchase alcohol or tobacco. The taxpayer feels wronged that they are subsidizing an unhealthy habit with their hard earned tax dollars. In that instance, taxpayers understand the concept of fungibility and apply it to policy.

Why then, do we not equally apply the fungibility of revenue in university spending, local city budgets, or economic development programs? Why do we behave differently with general funds versus cash funds versus federal funds? The interchangeability of the dollars has not changed. The fundamental principle of currency remains, regardless of the account it is placed in or the manner in which it was collected.

Failing to take into account the totality of revenue to fund state and local government spending leads to dysfunctional tax policy. Not scrutinizing the judicious use of cash funds in the same way as general funds leads to waste and inefficiency. Acting as if federal funds did not come out of the pocket of Nebraska taxpayers ignores reality. Using psychological manipulation to deceive taxpayers with non-transparent taxes and spending is just plain wrong.

My grandpa, also John Kuehn, understood how fungibility applied to his farm. He made the joke to justify his love of his Hereford cattle. However, at the end of the day my grandma, Lona Kuehn, still had the same amount of money to feed and clothe their five children, even if Grandpa raised “cheap” corn to feed his “profitable” cattle. Regardless of how much complexity and political spin is added to tax policy, a dollar is still a dollar, and it all spends the same.

Each year the various agencies of the state of Nebraska spend $2.3 Billion dollars in taxes and fees that are designated as “cash funds”. Many of the taxes discussed in recent weeks, including the gas, lodging, and documentary stamp taxes, are not accounted for in the $4.4 Billion “General Fund” of sales and income taxes, but rather are directed to special designated cash funds. These various cash funds pay for specific government programs. If you would like to look at the hundreds of different cash funds and the fees that pay for them, you can access a digital copy of the “State Government Cash and Revolving Funds” book on the Legislative Fiscal Office page of the Nebraska Legislature website.

Although almost never mentioned in discussions about tax policy or tax burden, these various cash funds represent a significant amount of money paid by Nebraskans. On a per capita basis, cash fund spending is about $4800 annually for a Nebraska family of four. More taxes are collected annually in cash funds than either sales taxes or individual income taxes.

Understanding where all the tax revenue for cash funds comes from and how it is spent requires a look at an organizational chart of Nebraska state government. We are all familiar with the three branches of government: executive, judicial, and legislative. However, within the executive branch of Nebraska state government are 72 different state agencies. Only 20 of these agencies are known as “code agencies”, which are managed by the Governor.

There are 52 state agencies that are not the responsibility of the Governor, but rather report to independent boards. They are referred to as “noncode agencies”. Their board members, within statutory parameters, set the rates of tax money collected. While the Legislature appropriates the “authority” to spend the cash funds, the budget specifics and spending decisions are the responsibility of the governing boards. While some of the noncode agencies are managed by elected boards, most are appointed with no direct connection to voters.

The Nebraska Constitution establishes 13 of the 52 noncode agencies. Five of these agencies are the constitutional officers elected by the voters of the state, including the Secretary of State, State Treasurer, Auditor, Attorney General, and Lieutenant Governor. The state Department of Education and the Public Service Commission are the most notable large state agencies that are not managed by the Governor. Three constitutionally established noncode agencies deal with higher education–the University of Nebraska, the State Colleges, and the Coordinating Commission for Post-Secondary Education. Two more are quasi-judicial agencies, the Tax Equalization and Review Commission (TERC) and the Commission of Industrial Relations (CIR).

The 39 other noncode agencies, established by statute, are a diverse mix of entities. Six agencies are funded specifically by ag commodity checkoff dollars. Ten are agencies that administer specific professional licenses, such as the Board of Landscape Architects and the Real Estate Appraiser Board. Some agencies oversee specific areas of commerce in Nebraska, such as the Liquor Control Commission, Racing Commission, and Oil & Gas Conservation Commission.

The sheer number of executive branch agencies–72–can be overwhelming. There is almost always a historical, rather than consistent rationale for the existence of many of these agencies. For example, licensing for your health care providers is almost exclusively handled through the Department of Health and Human Services, while land surveyors and abstractors each have separate state agencies. The checkoffs for dry beans and grain sorghum fund state agencies, while beef and soybeans do not. Specific services for the blind and deaf are each provided by independent organizations, unlike other disabilities. The Commission on Indian Affairs and the Latino American Commission are two state agencies administering programs for specific populations.

While several code agencies spend significant cash funds, notably Economic Development and Transportation, most of the noncode agencies operate almost exclusively on cash funds. With no direct connection to either voters or any specific office for oversight, these agencies are frequently overlooked. When a scandal emerges, such as the debacle with the Tourism Commission, public attention is focused on the specific agency. That accountability quickly fades as attention shifts to other stories.

The coming weeks will provide a deeper look into the financial details of some of the cash funds and the agencies that administer them. Paid through a myriad of small fees, the cumulative impact of $2.3 Billion should not be overlooked. They are dollars going out of your pocket to fund government services.

 

Last week I addressed the legal history behind the collection of sales tax by online retailers who do not have a physical business in Nebraska. The recent U.S. Supreme Court decision in the case Wayfair vs. South Dakota negated the physical presence requirement that had been the constitutional precedent for over 25 years. The high court did not simply reverse its prior decision, but rather upheld the South Dakota law and laid out specific provisions that meet the constitutional test. Specifically, a state law should provide safe harbor for businesses that have only a few transactions in the state, nor should the collection of taxes occur retroactively.

Even more important, the Supreme Court specifically established a basis for streamlined tax collection and administration that does not present a burden to businesses, and therefore, interstate commerce. Included was access to sales tax collection software paid for by the state that, if used, provides the business immunity from audit liability.

The clarity provided by the ruling is critical to developing state policy that complies with the U.S.  Constitution. I was firmly opposed to a proposed online sales tax collection bill in Nebraska during the past two sessions on the basis that we knew any law passed was not constitutional by current standards. The South Dakota case was making its way through the courts, and it was prudent to know with precision how the court would rule rather than pass laws based on speculation.

Citizens should also consider two other philosophical tenets of the proposed bill, principles which I had significant concerns about. First, the bill presented a serious threat to the personal privacy of consumers. Under current law, when you make a purchase and pay sales tax at the point of sale, there is no identifying information linked to that tax payment. The state cannot tell you how much sales tax you as an individual paid, nor what specific purchases you made upon which tax was due.

Under LB 44, online retailers would have been required to send the Department of Revenue a list of all transactions and the identifying information of the purchaser. In other words, state government would be collecting detailed reports of your online purchases that specifically identify you. Government possession of such detailed information about private taxpayer behavior is unprecedented. Such intrusion into your privacy should not be taken lightly.

The other argument I found interesting was the claim that not collecting sales tax at the point of sale creates a competitive disadvantage between brick and mortar and online retailers, thereby decimating main street businesses. This was a frequent assertion of many local officials and retail organizations. The argument ignored differences in the retail price of goods, business costs of local property taxes, as well as the influence of convenience on consumer behavior. However, if the 5.5% state sales tax truly does create a significant competitive disadvantage, retailers and local governments are asserting that sales taxes have a negative impact on consumer purchases.

This has two interesting implications. First, it would mean that cities that charge an optional sales tax are actively discouraging consumer purchases in their community. If their logic holds, it is counterproductive to local businesses for cities to raise their sales tax rates to generate additional spending. Shoppers will simply take their business to communities with a lower tax rate.

The second implication of the argument that paying sales tax negatively impacts consumer purchases applies to the continued movement to generate more tax revenue by increasing the number of goods and services on which sales tax must be paid. Small town retailers, especially grocers, are already faced with higher business costs compared to their large-chain counterparts in larger cities and low-overhead online retailers. Our rural communities should apply the same logic the chambers of commerce, local governments, and retail interests used to lobby for online sales tax collection. If their logic is true, expanding the sales tax base to increase government revenue could decimate rural and small town businesses that now must charge new sales taxes.

Finally, the online sales tax issue reveals an important philosophical perspective about taxes and governments. No matter how you wish to spin it, collection of online sales taxes at the point of sale means Nebraskans will have $30-40 million less in their pockets next year. When people say “the government is missing out on revenue”, they mean you are not keeping money to spend as you choose. It is my belief that money is yours. Nobody knows how best to spend it efficiently and effectively in a market economy than you, the person who earned it. Across state and local government, officials and special interest groups see the Supreme Court ruling as a revenue windfall. Despite all the legal arguments and special interest lobbying, you are still the one who pays the bill.

Tax policy discussions in Nebraska tend to focus on the “big three” taxes: property, sales, and income. Most of the graphics you see and statistics you read compare the total amount of property taxes collected by local governments with the sales tax and income tax revenues of the state General Fund. Ignoring almost half of the other sources of revenue collected by state and local government in Nebraska, these oversimplified comparisons exclude a substantial tax you pay: local sales taxes.

In addition to the state sales tax rate of 5.5%, cities and counties have the option to charge an additional sales tax rate of 0.5, 1.0, 1.5, 1.75, or 2% on your purchases. The location of the point of sale determines the total tax rate. Over 200 cities and villages charge sales tax. One county, Dakota County, has a 0.5% sales tax. Of those cities, 16 communities, including Minden in District 38, charge the highest rate of 2%. The state collects the combined rate and distributes the municipality’s portion back.  

During calendar year 2017, $462 Million were collected by cities in local sales and use taxes. To put this amount in perspective, the total sales tax collections by the state of Nebraska for fiscal year 2017 was $1.55 Billion. Local communities charged you an additional 30% of the state total in local sales taxes. Each of those small, interval amounts on your receipts add up to a substantial sum.

As we all are aware, the property tax burden is a subject of much conversation across Nebraska. Cities set a levy and collect property taxes as well. In 2017, cities collected $398 Million from property owners. This amount is dwarfed by the $462 Million in sales taxes collected by cities during that same time period–a total of 16% more to be exact. Combined, cities and villages assessed $860 Million in local taxes to fund city government. These, of course, are not the only sources of revenue for cities and villages.

A number of tax reform proposals include charging sales taxes on goods and services that are currently exempt. The concept is to expand the tax base over more goods and start charging sales taxes on previously untaxed services. The purported purpose would be to use the additional revenues collected by the state to fund local government activities currently paid by property taxes. The historical experience and practical outcomes of that tax policy are the topic of another column, but the proposal does have significant tax implications beyond generating state revenue. Charging sales taxes on more goods and services will increase the amount you pay in local sales tax as well.

Unlike a simple increase in the state sales tax rate, which only increases your tax bill to the state, eliminating current sales tax exemptions increases both state and local taxes. Whether or not local cities would lower their property taxes in the same amount their sales tax revenue increases would be determined by each community. They could simply use the increased revenue as a windfall and increase their spending and your total tax bill.

Since 2006 Nebraska municipalities have collected over $4.6 Billion in local sales and use taxes. A 54% increase in sales taxes collected, over $162 Million more is charged annually by city governments today. During that same time period, city property taxes collected increased by 57%, from $253 Million to the current $398 Million. I don’t know about your personal situation, but I can assure you neither my income nor my disposable budget have increased by 50% since 2006. It is no wonder Nebraska tax payers are feeling pinched in every direction.

Any honest discussion about balancing Nebraska’s tax burden must include all of the taxes Nebraskans pay. Excluding significant tax burdens from the analysis of any tax solution, such as local sales taxes, is akin to trying to solve a Rubik’s cube with the specific color of half the squares covered. The “big three” is an incomplete representation of Nebraska’s tax burden. It must include all taxes collected by state and local government, including local sales tax.  

 

In addition to your annual property tax bill there is another tax assessed on property you are likely unaware of. When the legal ownership of a piece of real estate changes, by sale or by gift, a tax is imposed. Known as the “documentary stamp tax”, the County Register of Deeds affixes a stamp to each deed at the time of transfer that documents the tax has been paid.

The Doc Stamp Tax is assessed at a rate of $2.25 per $1,000 of value of the property. Unlike the theoretical value assigned for your annual property taxes, the valuation is determined by the actual amount paid for the property at time of transfer. If the transfer is the result of a gift, a market value is determined. To illustrate, upon the sale of a $100,000 home a tax of $225 is paid and the deed is stamped accordingly.

In the last fiscal year approximately $24.7 million was paid in Doc Stamp Taxes. The proceeds are divided five different ways.  Of the $2.25 tax rate, $0.50 per $1,000 of values stays in the county in which the property is located, or about $5.4 million. Other four recipients of proceeds from this tax are two economic development funds, the Affordable Housing Trust Fund and the Site and Building Development Fund, and two human services funds, the Homeless Shelter Assistance Trust Fund and the Behavioral Health Services Fund.  

The largest share of the Doc Stamp Tax, 42%, is directed to the Affordable Housing Trust Fund. The intent of the AHT is to provide financial assistance for affordable housing projects to address local needs. Communities can apply for loans, credits, subsidies, or grants to build affordable housing. Approximately $10 million on Doc Stamp Tax revenue goes into the fund each year.

Given the identified needs for affordable housing throughout the state, it would seem logical every dollar going into this fund would be utilized. That is not the case. A 2017 Legislative Performance Audit found several significant problems with the Affordable Housing Trust Fund, including an unobligated balance of over $11 million, insufficient tracking of trust fund money, incomplete reporting, and a failure to follow the law with required match levels. Last year $7.3 million of accumulated balance was swept from the trust to create a new program for workforce housing through LB 518. In essence, mismanaged taxes intended for affordable housing, which would be for workers, were reallocated into a new program for more expensive “workforce” housing. Had the AHT Fund been properly managed and funds used as the law intended, it would have gone a long way to addressing the housing concerns in many communities.

Another portion of the Doc Stamp Taxes is directed to a program to provide public subsidies for industrial site development. Approximately $2.5 million annually is generated to provide financial assistance for recruiting industrial business to Nebraska. Ironically, in both 2012 and 2013 money from the Affordable Housing Trust Fund was transferred to the Site and Building Development Fund, taking dollars intended to build housing for working Nebraskans and using it to subsidize expansion of private businesses.

The Homeless Shelter Assistance Fund has received $0.25 of the $2.25 per $1,000 valuation since 1992.  Beginning in 2005, $0.30 of the $2.25 is directed to the Behavioral Health Services Fund, which funds the requirements of the Behavioral Health Services Act.

In 2005 $2 million was transferred from the Affordable Housing Trust Fund to the Behavioral Health Services Fund. You may note a common theme: tax money directed by statute to address the need for affordable housing across the state is not used as intended. As an unobligated balance accumulates due to poor management of the program, those funds are swept and redirected toward other projects, which may be unrelated to housing.

The Documentary Stamp Tax is another example of an obscure tax that most taxpayers don’t readily see. The proceeds are then used to fund specific projects. Those tax dollars, if not carefully managed and subject to strict oversight, can accumulate and then be used as a slush fund toward pet projects. It provides yet another example of non-transparent taxes collected outside of the General Fund that easily slip through the cracks of accountability.

 

Being ranked “#1” isn’t always a good thing, especially when the list is highest tax rates. Although Nebraska ranks high in a number of tax rankings, it earns the dubious honor of highest inheritance tax rate of any state in the nation. Only six states have an inheritance tax. Although you will never pay this tax, your heirs will. The rate paid is determined not by the property owner who has died, but rather who the individual chooses to leave their assets to and the nature of their relationship. Because of its steep inheritance tax, a Forbes article listed Nebraska as a state “where not to die”, a distinction you won’t likely see on chamber of commerce fliers.

Although the inheritance tax is established by state law, the tax is paid directly to the county in which the individual lived or where the property was located. If the deceased owned property in multiple counties, the tax is paid to each county. Inheritance tax revenue is, by its very nature, unpredictable. The current market value is used to determine the taxes due. Thus, as property values have increased, the amount collected by counties has sharply increased, rising more that 75% over a 6 year period. Over $70 million is paid to counties in inheritance taxes annually.  

Using the nature of an heir’s familial relationship to the deceased as the basis for the tax rate and amount of assets taxed is unique to the inheritance tax in Nebraska tax law. It also creates some rather odd scenarios. All property left to a spouse is exempt from the inheritance tax.  Lineal descendants and ascendants–children, grandchildren, parents, grandparents, and siblings–pay no taxes on the first $40,000 of assets inherited, and 1% on any amount above. The relationship does not have to be biological. Relatives of a spouse, even a deceased former spouse, can be included even if they have no biological relationship to the deceased.

If you inherit property in Nebraska but fall outside of a lineal relationship with the deceased, your tax bill rises dramatically. It is these rates that puts Nebraska at the top of the national rankings. Should you leave assets to a niece, nephew, cousin, aunt, or uncle, they will be taxed 13% of any amount over $15,000. Should you leave any of your estate to a non-relative, they will pay the highest rate in the nation: 18% of any amount over $10,000.  For comparison, the often maligned federal inheritance tax exempts over $5 million in assets before it applies.

The steep tax penalty for non-familial heirs has a curious loophole in Nebraska law. Any person to whom the deceased for not less than ten years prior to death stood in the acknowledged relation of a parent qualifies for the 1% lineal relative rate. This legal standard, known as in loco parentis, can apply to adult-adult relationships with no legal, biological, or familial ties. For example, a business owner could leave their business assets to a long-time employee whom they “thought of as a daughter”. The distinction has rather larger financial implications for the heir: the difference between a 1% and 18% tax rate.

The inheritance tax is controversial for a number of legitimate policy reasons. Depending on the type of asset inherited, the taxes due represent a second, third, or even fourth taxation of the same property. For example, a piece of farm ground you leave to your nephew was purchased with money you already paid income taxes on. The ground has been assessed property taxes annually. When the title changes, a documentary stamp tax will be assessed. The nephew will then be assessed a fourth tax on the same asset at a rate of 13% of the value above $15,000.

Using the assessments of simplicity, transparency, neutrality, and stability to evaluate tax policy, the inheritance tax fails all four standards. The various exemptions, rates, and use of familial but not necessarily legal or biological relationships to determine who pays the tax is far from simple. It is unlikely most heirs are even aware they are responsible for paying the tax, which may require them to sell some of the asset just to cover the tax bill. The taxes are due within 12 months of death, and will function as a lien against the property if unpaid. That makes the tax far from transparent. By treating different heirs very differently, the policy is not neutral. Finally, as a revenue source, counties cannot predict any stable level of revenue. Most counties direct inheritance tax revenues to special designated funds rather than general funds.

It has been said that only two things are certain in life: death and taxes.  Under current Nebraska law, those two events intersect with the inheritance tax. If you inherit assets from a loved one, you can be certain that within 12 months of their death the county will come knocking to collect.

Sen. John Kuehn

District 38
Room #2000
P.O. Box 94604
Lincoln, NE 68509
Phone: (402) 471-2732
Email: jkuehn@leg.ne.gov
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