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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.
Sen. John Kuehn
Money has a significant influence on politics and public policy. The public has a legitimate right to be concerned about money that flows to legislators and elected officials. Campaigns are expensive. Costs for legislative and regents races can easily exceed six figures. Donations from individuals, political action committees, and businesses to the campaigns of candidates and elected officials are filed with the Nebraska Accountability and Disclosure Commission and are publicly available. Regular media coverage of these reports make sure voters are aware of how campaigns are funded.
Voters are likely unaware of a much more substantial and influential source of money whose donors the media do not cover: the nonprofit group. In Nebraska the influence of nonprofit foundations and the groups they fund is particularly pervasive. Millions of dollars are spent annually by a handful of private foundations to influence legislation, run campaigns for political issues, and even employ elected officials. Look closely at any major policy issue in Nebraska and you will find a handful of interconnected nonprofit groups engaged in it.
If government is to be transparent and accountable to citizens, voters need to have a clear view of the money spent by 501(c)3 groups to influence policy. Nonprofit groups that identify themselves as “think tanks” or “advocacy groups” are actively engaged in the legislative process. In addition to public testimony at legislative hearings, paid staff of these agencies lobby senators, write legislation, and orchestrate extensive media and public affairs campaigns. Untangling the web of money that funds these endeavors is no easy task.
A nonprofit foundation is often used as a tool to shelter wealth from taxation and public scrutiny, while directing a substantial fortune for specific purposes, often political. Nonprofit groups, unlike political campaigns, are not required to publicly disclose their donors. As private organizations, their boards are not subject to transparency requirements. IRS Form 990 provides some detail about how a foundation may spend its money, but public access information is several years old.
In Nebraska, no single foundation has greater influence on public policy than the Sherwood Foundation, the private foundation funded by the wealth of mega-billionaire Warren Buffett’s daughter, Susie Buffett. The Sherwood Foundation supplies millions of dollars annually to a number of political nonprofit groups. OpenSky Policy Institute, a “think tank”, received over half its operating expenses in 2015 from the Sherwood Foundation. Groups that receive substantial funding from the Sherwood Foundation also employ state senators. Nebraska Appleseed, a politically advocacy group, employed Senator Kate Bolz and received over $700,000, while Nebraskans for Civic Reform, the group run by Senator Adam Morfeld, received $164,000 from Ms. Buffett’s foundation. One World Community Health Center, whose foundation employs Senator Sara Howard, received over $900,000. Center for Rural Affairs, Voices for Children, and other advocacy groups receive six figure support for their operations.
It is not uncommon for foundations to donate to other nonprofits, which may in turn fund additional nonprofits, effectively laundering donor money and removing it several steps from public view. Have you ever wondered who funds Nebraska Loves Public Schools? Founded in 2011 by the Sherwood Foundation, several Sherwood-funded groups also provide financial and logistical support to the organization. Thus, voters may have to look back through several layers of financing to identify the true source of funds.
It is in the public interest to be able to evaluate how a $1,000 campaign contribution may influence an elected official. It is of even greater importance for the public to evaluate how six-figure donations to an elected official’s employer and policy groups impact votes and policy choices. When Dorothy pulled back the curtain in the classic movie The Wizard of Oz, the Great Oz exclaimed “pay no attention to that man behind the curtain”. Nebraska voters and the media would be well served by pulling back the veil that shrouds millions of private dollars flowing into the Nebraska political process to identify who might be pulling the levers.
Compared to many states and the federal government, Nebraska has relatively few laws regarding conflicts of interest, reporting of interactions between elected officials and lobbyists, and rules regulating the influence of special interest on lawmakers. During my three years in the Legislature a number of ethical issues have emerged with no guidance for resolution. These include concerns of conflicts of interest, senators registering to lobby while in office, personal use of state resources, and expectations of residency within a district among others.
Outside of issues of campaign finance under the jurisdiction of the Nebraska Accountability and Disclosure Committee, there are no ethics rules for members of the Nebraska Legislature. Consequently, there is no process for addressing ethical concerns among members of the Nebraska Legislature unless it is illegal activity defined by statute via the courts.
Nebraska voters have the expectation that their interests are being represented by their elected officials, not those of paid special interests and lobbyists, and free of quid pro quo arrangements. Statutes and rules that reflect that intention are conspicuously absent. Additionally, the public assumes there are rules and a procedures in place for ethical conduct, even though none exist. Public confidence in the legislative process necessitates greater transparency in the ethical expectations of state senators.
Among the ethical issues unaddressed in current Nebraska law is known as the “revolving door”. This is the practice of elected officials and senior staff becoming paid lobbyists directly after leaving office. Immediately leveraging the influence and insider knowledge gained in public service is prohibited by 34 states and the federal government. Nebraska has seen two high profile examples of the revolving door in action in recent months, as former state senator Heath Mello has been hired as chief lobbyist for the University of Nebraska, and former director of the Department of Economic Development, Courtney Dentlinger, has been hired as the chief lobbyist for the Nebraska Public Power District.
In keeping with my firm belief that the lawmaking process in Nebraska should be transparent, responsive, and devoid of undue influence by special interest groups, I have introduced legislation to close the revolving door each of the past two years. My legislation would prohibit elected officials from taking a job as a paid lobbyist for two years after leaving office. The Governor, Lieutenant Governor, Attorney General, State Treasurer, Secretary of State, Auditor of Public Accounts, and members of the Legislature, Public Service Commission, State Board of Education, and Board of Regents of the University of Nebraska would be required to have a two year “cooling off period” before being paid to lobby. Their staff would be prohibited for one year.
The language of my bills mirror the federal statute passed in 2007. In Washington, D.C., varying revolving door statutes have dated back to as early as 1872. In addition, 34 other states have enacted “cooling off periods”, yet Nebraska has none. For a body that prides itself on transparency, we are failing when it comes to public expectation in this regard. The chairman of the Government Committee, John Murante, has failed to bring the bill to vote by the committee in either year. I am not the first senator to introduce a bill requiring a cooling off period before lobbying. In 2008, Senator Bill Avery introduced similar legislation which did not advance from the Government Committee. Four of the members of that committee later went on to lobby after their time as senator.
Influencing policy is big business in Nebraska. In 2016 over $16.7 Million was spent lobbying Nebraska lawmakers. Establishing a clear distance between those trusted to make laws and those paid to influence them reduces the opportunities for quid pro quo arrangements. Even the perception of impropriety degrades public trust in our government and the integrity of elected officials.
Since 1790 the Federal Government has conducted the decennial census every ten years. Originally established as a mere head count of residents of each of the states for the purpose of apportioning members of the U.S. House of Representatives, the census has grown into a comprehensive effort that collects data on a number of characteristics of Americans. That information influences distribution of federal funds based on population as well as serves as the major federal data set for policy analysis during the next ten years.
In the year following each decennial census, states use the population information collected to evaluate the population residing in different electoral districts to determine if they contain relatively equal numbers. These include not only Nebraska’s three members of the U.S. House of Representatives, but more significantly legislative districts for representation in state government, as well as districts for the University of Nebraska Board of Regents, Public Service Commission, and State Board of Education. As shifts in population occur, apportioning equal numbers of voters into each district may require redrawing district boundaries. This process is known as “redistricting”.
Residents of District 38 are quite familiar with the consequences of redistricting. In 2011, LB 703 created new boundaries for the district following the 2010 census. Kearney County was moved into the district, and Harlan County was moved into District 44. Clay County has also moved among different Legislative Districts through different iterations of legislative redistricting.
With the shift in population to Douglas, Sarpy, and Lancaster counties, the redistricting process will continue to have significant implications for representation of rural Nebraska in the Legislature. In 2011, the movement of District 49 from western Nebraska to Gretna created an important change in the Legislature. Of the 49 seats, 25 are now held by representatives of the Omaha and Lincoln urban areas. Current population projections would indicate two additional seats will be shifted away from rural Nebraska to the Omaha/Lincoln area. That magnifies the urban dominance in the Nebraska Legislature from a simple majority to a 27/22 split.
While most rural states also face this population shift, the impact on the representation of rural areas in state government is not as extreme. In a two-house state legislature, the population shifts impact rural representation in the state House of Representatives, while geographic representation remains in the Senate. As the only unicameral in the nation, the loss of legislative seats in the single legislative chamber means a direct loss of representation in state government.
The consequences of this political shift can be enormous for rural Nebraskans. There is no better example than the dysfunctional school funding system that has left rural districts paying for public education almost exclusively with local property taxes, while urban districts consume almost a billion dollars of state equalization aid. Appeals to fairness by rural senators and rural citizen groups have fallen on deaf ears of urban senators, whose support is required to restore equity to the system. The problem has been recognized for almost a decade, with little action to resolve it.
The Nebraska Constitution specifically assigns the responsibility for apportionment and redistricting with the Nebraska Legislature. In advance of the anticipated redistricting process in 2021, several legislative proposals have emerged that attempt to divert the redistricting process to unelected commissions based on party registration. I opposed the first redistricting bill to come to the floor for a vote, LB 580 in 2016. Two additional bills, LB 216 and LB 653, were introduced in this past session and remain in Executive Committee, of which I am Vice Chair. I oppose the creation of any unelected advisory committee for redistricting on a partisan basis, and thus will not support either current bill for advancement to General File.
My experience in the Nebraska Legislature has reinforced the common expression that Nebraska’s greatest divides are not by party, but rather rural versus urban. Low commodity prices have had a direct and significant impact on state revenues, demonstrating that rural Nebraska remains the economic engine of our state and state government. Even with this reality, critical rural needs, such as school funding reform, remain unaddressed despite years of focus and discussion.
Rural Nebraskans should carefully watch and evaluate the redistricting process that will be taking shape in the coming years. To date the focus has been on concerns of political parties, not on the impact of the accelerating shift of representation to urban areas. Voters of District 38 should get engaged: the very nature of your representation in state government rests with the outcome.
The Nebraska Department of Corrections recently notified convicted death row killer Jose Sandoval of the four drugs that will be used as a lethal injection protocol to carry out his execution. This notification is in accordance with state regulations, which is required at least 60 days before the Attorney General can request an execution warrant from the Nebraska Supreme Court.
The four drugs that will be used by the state have been used medically for decades. Their mode of action, onset of activity, and clinical effects are well known and documented. Each is currently used in a wide variety of medical applications in practices across the state. It is highly likely you or a family member have been administered one or more of the compounds during routine anesthesia. Nevertheless, death penalty opponents have mischaracterized the combination as “untested” and “unproven” in an attempt to create doubt about their use. Regardless of one’s opinion about the death penalty, distorting the pharmacological facts about approved, widely used anesthetics to achieve a political end is unethical.
The four drugs in the protocol are diazepam, fentanyl, cisatracurium besilate, and potassium chloride. Diazepam is a sedative medication that is commonly known by its trade name, Valium. It has a wide variety of clinical uses, including for anxiety, seizure control, resolution of muscle spasms, and as a sedative before administration of general anesthesia. It is included on the “List of Essential Medicines” compiled by the World Health Organization (WHO), which is considered the standard of care for safe and effective medicines in a healthcare facility. Approved in 1960, an article in the journal ACS Chemical Neuroscience on diazepam states it “set the standard for pharmacotherapy in terms of potency, onset of action, and safety”.
Fentanyl is also a widely used and well known opioid. Also introduced in 1960, fentanyl is available in a wide variety of formulations for uses as a potent pain medication. In addition to its use as an injection and tablet, fentanyl is available in patches, which administer the drug through the skin. Fentanyl patches are also included on the WHO List of Essential Medicines. Fentanyl lollipops are used by the US military as an effective way of delivering pain relief to injured troops in the field. Its onset of action is within five minutes, and a single therapeutic dose provides over 30 minutes of effect. The effects of fentanyl overdose are well documented. Illegal use of fentanyl as a street drug by opioid addicts has led to the deaths of tens of thousands in the U.S. since 2000.
Cisatracurium is a paralytic agent used by anesthesiologists in addition to general anesthesia during routine surgery. Paralytics are required when using a mechanical ventilator, such as heart surgery. Some anesthesia protocols also routinely use cisatracurium to relax the muscles of the head and neck to allow placement of an endotracheal tube in the airway. Atracurium is its parent compound, and has been in use since 1974. A 2014 study published in the Journal of International Medical Research details a double-blind randomized trial that demonstrated cisatracurium effectively prevented pain associated with the injection of propofol, a common injectable anesthetic agent. The pain prevention was as effective as administering lidocaine, the commonly used local anesthetic.
Potassium chloride is a salt that is added to intravenous fluids to treat low blood potassium. At high doses the potassium causes paralysis of the heart muscle and cardiac failure. Potassium chloride has been used as the third drug in lethal injection protocols that have satisfied judicial review. Accidental overdose of undiluted or improperly calculated potassium chloride via intravenous fluids is a well-documented medical error leading to sudden death in hospitalized patients. The journal Pharmacy and Therapeutics published an article in 2011 titled “Potassium Chloride Injection Still Poses Threats to Patients”, documenting steps health care facilities needed to adopt to address “lingering problems associated with concentrated KCl”.
It is true that the combination of these four drugs has not been used in an execution. That does not mean their clinical effects, when used alone or in combination, are unknown. Their use at therapeutic levels is common and well-studied. The fatal effects of overdose of each of these compounds, either accidental or intentional, has been documented.
Misrepresenting the science of the drugs for a political end has far reaching implications. Both diazepam and fentanyl are WHO Essential Drugs, as is another anesthetic, sodium thiopental. Activism and misrepresentation of sodium thiopental has virtually eliminated the drug from the global market, at the cost of untold lives. Accurate, evidence based information and reporting will hopefully prevent a similar fate for these medications.
As Thanksgiving marks the start of the holiday season, families across the nation gather to give thanks and celebrate. These end-of-year holiday gatherings give us an opportunity to reflect on the year that has passed, as well as focus on our goals and priorities for the year ahead with family and friends.
We have much to be thankful for across District 38 and throughout Nebraska. A survey of local newspapers from across the district demonstrates many of the great things happening every day in our local communities. Student success in a wide variety of school activities, including academic, co-curricular, and athletic, have great support from parents and residents. Our churches, civic organization, and local business groups are engaging citizens and responding to local needs as is the rich tradition of our rural communities.
Although this fall’s harvest encountered many challenges posed by Nebraska’s ever changing and unpredictable weather, for the most part yields were good. Current drought monitor indexes show normal moisture conditions across the district going into winter. Although commodity prices remain low, significant economic distress as has been seen in prior decades has not developed.
It is easy to fall into a pattern of only seeing the challenges that lie before us. With my focus on policy solutions, I personally do not always take the time to step back and fully recognize the successes happening every day and the opportunities before us. The upcoming holiday season provides an important reminder of the value of pausing, taking stock, and being thankful.
The coming year, as the years before it, will present a new slate of political challenges, policy choices, and opportunities to address them. As we focus in state government on addressing issues from appropriations to property taxes, the families who will be gathering to celebrate Thanksgiving and Christmas must remain at the forefront of our minds.
The values we share around the holiday dinner table should be reflected in the values we embrace in our policy. It is easy to assume government is a force unto itself. We see neighbors help each other harvest in a time of need, communities line main street to cheer the arrival of newly crowned state champion teams, and community groups hosting benefit suppers to help a family in need. We must celebrate and build upon the strengths that make our rural communities such a great place to live, work, and raise a family.
This Thanksgiving I will personally give thanks for many things. I am thankful for the opportunity to represent my home community in the Nebraska Legislature. I appreciate and value all of the conversations, letters, and calls from constituents who provide valuable feedback and information to inform my decisions. I cannot sufficiently express the full depth of my gratitude to my family, friends, and neighbors who pitch in and help with my responsibilities at home, especially around the farm, that enable me to serve.
Over the course of the coming months there will be ample time and opportunity for discussion about politics, policy, and politicians. It is my prayer that this holiday season finds all Nebraskans in the company of family and loved ones. May we all take stock of the rich blessings that are afforded us by virtue of living in strong communities that value our liberty and our freedom. Happy Thanksgiving to all.
Most Nebraskans recognize and understand the three branches of state government: the legislative, executive, and judicial. The Nebraska Constitution establishes each of these branches with equal authority but different roles. Although not a complete delineation of responsibilities, the legislative branch controls the purse, the executive branch manages operations of government, and the judicial branch interprets the law.
The electoral races of state senators and constitutional officers, as well as the appointment of Supreme Court justices, are highly publicized events. The actions of state legislators, statewide office holders, and the justices are under constant public scrutiny, as they should be. Public accountability is essential to effective government.
Despite the attention focused on the branches of government whose offices occupy the state capitol building, a significant amount of state authority lies outside of these institutions. Among the functions of government that impact the daily lives of Nebraskans in very profound and specific ways, many are not directly accountable to either the Legislature or the Governor. Utilities, telecommunications regulation, and public education are three essential public services. Despite the magnitude of their importance, they are managed by independently elected and operated governance structures.
Do you know the name of your Public Service Commissioner, State Board of Education representative, or University Regent? Are you aware of their positions on taxes, regulation, and transparency? Do you know how they have voted on issues of importance to you and your family? If not, do you know readily where to find out and how to contact them?
Known as “non-code agencies”, the Public Service Commission, Department of Education, and University of Nebraska are three of the largest agencies in state government. They are independently managed by publicly elected boards that hire their own administrators, manage their own budgets, create their own policy, and set fees the public is required to pay.
The Public Service Commission, among many duties, creates policy that impacts your phone service, broadband, utilities, and commerce. They determine, collect, and spend fees that you pay every month, including the Universal Service Fund you see on each telecommunications bill. The State Board of Education determines the standards for your public schools, implements policy, and administers the learning assessment of Nebraska’s children. University Regents determine how over half a billion taxpayer dollars are spent, set tuition rates, hire lobbyists, and determine the social priorities of a public institution that reaches into almost every community in our state.
While the Legislature has the sole authority to appropriate taxpayer dollars, oversight of the individual spending decisions is indirect at best. The balance between oversight and independence is not clearly defined, and has been the subject of legal battles and court rulings spanning many decades. Constituents frequently contact me with questions or issues that fall under the jurisdiction of these agencies. My ability to assist is often limited. As a state senator, I don’t even always get a response to my inquires of non-code agencies.
Ultimately, the direct line of accountability lies between the voters and the individuals elected to govern non-code agencies. Given their impact on your daily lives and your family budget, individuals elected to the Public Service Commission, State Board of Education, and Board of Regents should publicly state their positions and be fully transparent about their official actions. You should be able to readily access how they vote, and the consequences of their actions to you, your family, and your business should be justified to constituents. You should know how they are lobbied and influenced. Voters should contact them directly with their concerns and hold them accountable for their actions.
Concentration of power in any single area of government is not good for democracy. Thus, a wide variety of elected bodies can serve an important role. However, the daily functions of the independent agencies that operate outside of the capitol building receive too little public scrutiny.
Given their impact, it is time for that to change. I will continue to publicly ask for information to inform voters. Non-code agencies should make voting records of officials, both in committees and the board as a whole, readily available to all voters. They should not be buried in meeting minutes. Voters should request these state level elected official’s positions on record, not just campaign platitudes during elections. The more information voters have, the better our representative government functions for all Nebraskans.
During the last legislative session I was clear with my concerns about spending levels in our state budget. In the face of lagging revenue receipts and decreased revenue forecasts, the Appropriations Committee and Nebraska Legislature balanced the state budget by transferring $173 million from the state Cash Reserve and sweeping almost $194 million from various Cash Funds to pay for ongoing expenses.
I did not vote for those transfers or to advance that budget from committee, nor did I vote for the budget on the floor. As I stated repeatedly, the next budget cycle would require $367 million in revenue growth just to cover ongoing expenses paid for with one time transfers. That is a pretty deep hole to “grow” out of in the midst of a struggling agricultural economy. At the conclusion of the legislative session in May, a group of my fellow senators and I continued to publicly state our concerns, predicting that a sluggish farm economy and its financial impact on our communities would continue to weigh down state tax receipts.
On October 27, the Nebraska Economic Forecasting Advisory Board (NEFAB) met to update the revenue forecast for the current fiscal year and the 2018-2019 fiscal year. Tax receipts, specifically personal income and sales taxes, have not met the forecast levels in any month since the board last met in April and lowered the revenue projections. Thus, it was no surprise that the NEFAB again reduced the projection for tax receipts to the state General Fund, this time by a total of $224 million over the current budget biennium.
A deeper examination of the details behind the declining numbers presents greater concern. For the current fiscal year, FY18, the NEFAB reduced revenue by $100.4 Million. In the second year of the budget cycle, FY19, the revenue level was reduced by $123.5 million. The revenue declines in sales and income taxes are greater in the second year than the first. The economic models used by the NEFAB to project revenue indicated the need for a steeper reduction with the passage of time. There is no objective evidence to support the claim we will “grow” out of the spending hole the Legislature has created any time soon. On a positive note, corporate income tax receipts were revised upward by $50 million over the biennium.
Here is the scorecard: the budget passed last session plugs a $367 million hole with one time money. If spending restraint is not exercised to accommodate the $224 million revenue downgrade, it will need to be covered by the transfer of more one time money, primarily the Cash Reserve. The next budget cycle would begin with a $591 million gap to fund ongoing expenses.
If the entire $224 million from the current revenue decrease is taken from the Cash Reserve rather than in spending reductions, it would leave $155 million in the state’s “rainy day” fund. Current revenue models have a greater negative impact with time, and the potential exists for an ongoing revenue deficit almost 4 times the size of the Cash Reserve.
The very fact that personal income tax revenues continue to come in below economic projections indicates Nebraska families and small businesses are not earning as much as expected. Lagging sales tax revenues reflect the decreased spending by Nebraska consumers that accompanies those reduced incomes. Any strategy that increases state revenue by taking it from already strapped Nebraska taxpayers, rather than reducing state spending, is illogical.
I believe in the resilience of Nebraskans. Inherent in that belief is the faith that we can strategically set priorities and responsibly address funding needs using evidence and cost/benefit analysis. A quick recovery of Nebraska’s fiscal health depends on it.
Financial decisions for yourself and your family are a personal choice. How you spend your money is unique to your situation, depending on your priorities and values. You decide your comfort level with risk, personal savings, and future goals. If you make a poor decision, it does not impact the livelihood of your friends and neighbors. Even when we try our best to be rational, it is a natural tendency to let emotion influence our personal decisions. When the consequences are our own, that is acceptable.
Public policy decisions are very different. When legislators make decisions about spending tax dollars, making tax policy, or creating regulations, those choices impact everyone. Far too often policy decisions are “eminence based” rather than “evidence based”. The most coordinated media campaigns or most popular catch phrases become accepted as true, whether or not evidence to support the claim exists. Unfortunately, ideas can become popular and gain support even when evidence contradicts the premise.
My recent columns on tax incentives exemplify the need for good evidence to support policy decisions. The original legislation that created the Nebraska Advantage Act did not require reporting of the many metrics that would allow evaluation of the intended impact of the programs. Supporters and opponents alike make claims about the value of the Nebraska’s tax incentives. In the absence of evidence, it is not credible to say the programs are successful economic tools, just as it is not credible to say they have not been.
Despite common political strategies that use fear, anecdote, and false dichotomies to promote a particular policy, sound governance should use evidence to support decisions that impact the daily lives of Nebraskans. Many popular policies sound reasonable, yet the evidence does not support the claims made. One of the most common arguments in support of expanding Medicaid eligibility is to reduce the use of expensive emergency room services for non-emergency care. The state of Oregon used a lottery system to expand Medicaid to a randomized group of working adults. Use of Emergency Room services increased in those newly covered, versus the same population without Medicaid. Expanding Medicaid had the opposite effect on costs. Nevertheless, the claim continues in spite of the evidence.
Studies examining the long term impact of early childhood education programs have provided evidence that contradicts the popular claims. Research at Vanderbilt University examining Tennessee’s universal public early childhood program and data from Head Start have shown the impact of early childhood education programs, when applied broadly, vanishes in early elementary school. Nevertheless, data from boutique programs are used to advocate for additional investments, while ignoring the more comprehensive evidence.
Cost and benefit analysis of government programs is essential for judicious use of tax dollars. All too often it is assumed that more money spent equates to equal or greater outcomes. There is a basic economic principle that states “there is no such thing as a free lunch”. There is a cost associated with every dollar spent, including trade-offs to other programs. When making decisions to spend taxpayer money, lawmakers have a responsibility to make decisions based on data that supports their decision.
There is no evidence that supports the claim that more dollars spent on education equates to better learning outcomes. The rate of return diminishes with additional investment. Beyond a basic level of funding, there is not compelling evidence to support the claim that students perform better when more money is spent. However, education spending is frequently used as a metric to reflect educational quality.
Using evidence and data to make good policy decision does not mean they are devoid of compassion. Emotional stories and anecdotes are powerful, but they are not evidence. Public decision making is distinct from private choices. The careful balance between the individual needs and public good can be easily influenced by cognitive biases. Good data and careful standards of evidence provide the foundation for sound public policy.
Central to all tax reform proposals are the changes required to compensate for decreased revenue created by a tax cut. The most simple and obvious solution is to reduce spending in direct proportion to the amount of any tax cuts. Another approach is to restrict the growth rate of spending, with the expectation that growth of the tax base will exceed the rate of spending, allowing for a reduction in the tax rate.
None of the current tax reform proposals currently being discussed publicly take either approach. Rather, they divert revenue from one form of tax to cover reductions in another tax. In order to fill the hole created by the diversion, the amount of diverted tax collected is increased. For example, one proposal would provide an income tax credit equal to 50 percent of the K-12 education portion of your property tax bill. No taxes are actually reduced. Rather, revenue collected by the state in the form of income and sales taxes would be credited to taxpayers in proportion to their property tax bill collected by local schools. The credit would be applied when taxpayers file their state income tax return. In order to cover over $1 Billion of credits that amount of additional sales or income taxes would be collected by the state.
Two revenue sources frequently targeted to increase state tax revenue to cover the cost of large scale tax shifts are tax incentives and tax expenditures. Tax incentives are specific reductions, credits, and exemptions paid to companies who enroll in programs intended to promote economic growth and development. I have discussed them at length in previous columns this fall. (If you missed them, you can read them on my legislative website, http://news.legislature.ne.gov/dist38/.)
Tax expenditures are reductions to the base tax rate. An exemption of an item from sales tax, such as food or agricultural seeds, are considered a tax expenditure. Some organizations are exempt from all taxes, such as certain nonprofit, religious, or charitable organizations. They pay no property, sales, or income taxes. Any tax deduction, exclusion, tax deferral, or credit also falls under the category of a tax expenditure.
Put simply, “tax expenditures” represent income not collected by the government because a law has specifically identified that good, service, or property as exempt. Generally accepted tax policy recognizes that a product should be taxed only once. Thus, components used in production of a good should not be subject to sales or property tax, only the final product. Other exemptions are intended to promote growth in certain industries, such as the exemptions on agricultural machinery and parts.
In even numbered years the Department of Revenue prepares a comprehensive “Tax Expenditures Report” that uses economic data to estimate how much revenue was not collected, categorized by each exemption created by statute. Smaller, more focused reports are produced annually that provide a closer detail of specific exemptions on a four year rotation.
Tax exemptions vary in their size, importance to the Nebraska economy, and purpose. Some are textbook examples of political rent seeking, such as sales tax exemptions for purchases made by zoos. Others represent a broad policy goal, such as exemptions on machinery, which promote agriculture and manufacturing, Nebraska’s two largest industries. Exemptions for charitable activities reflect our collect belief in rewarding altruism.
Lawmakers have different perspectives on who is “first in right” to the money not collected by tax exemptions. I believe the money belongs to the taxpayer, and the government should take only what is necessary. Others refer to tax exemptions as revenue owed the state, operating from the perspective the government is entitled to your money. Taxpayers need to carefully study tax reform proposals to insure that while additional money may be left in one pocket, the proposal may take even more money out of another pocket. In the end, you may have less net dollars than you had before.
The discussion of property taxes commonly references the taxes paid on the assessed valuation of real estate, including your home, buildings, land, and other improvements physically fixed to your property. One advocacy group and some state senators have recently been advocating for reform of the personal property tax system in Nebraska. Of the $3.9 Billion of property taxes collected, almost 6% of the total is assessed on personal property. Personal property includes all items owned that are not physically associated with a piece of real estate.
Under Nebraska law, intangible personal property–financial wealth in the form of stocks, bonds, cash, bank accounts, and contracts–has been exempt from taxation since 1967. Tangible personal property includes all other “things” owned, such as equipment. Most Nebraska taxpayers are unaware a tax exists on tangible personal property, likely because they do not pay personal property taxes.
A simple way to know if your family is impacted the personal property taxes is whether or not you prepare a depreciation schedule with your annual tax return. Household goods, motor vehicles, personal items, and non-depreciable property are exempt from taxation. Therefore, unless you have a business, you are not paying taxes on personal property you own.
Not all items owned by a business are subject to the personal property tax. Inventory for resale or materials used in production are exempt. In agriculture, livestock and grain inventory are not taxed. In 2015, the Nebraska Legislature passed a bill exempting the first $10,000 of taxable personal property from taxation for every business owner. All personal property owned by data centers, wind energy generators, and charities is also exempt from personal property tax.
Because the tax is assessed only on depreciable property, items are only taxed for the duration of their depreciated lifespan, which may or may not match the time of use or ownership. Unlike real estate which is valued at market rate, the value of personal property is determined by “net book value”. Items are depreciated over a period of three, five, seven, ten, fifteen, or twenty years, depending on the item. As each year passes, a depreciation factor is applied that reduces the value of the equipment over time. After the value of the item is fully depreciated, the tax no longer applies even if the property is still owned and used. Thus, the taxes paid over time always decrease for an item of personal property.
Because only property owned by business, and not even all property owned by all businesses, is subject to taxation, the distribution of personal property taxes across communities and different taxpayers is highly variable. To illustrate, neighboring farmers in the same county with similar sized operations may have very different property tax bills. A beginning farmer can qualify for an exemption of $100,000 per year for three years on their machinery. A farmer who regularly trades for new equipment will pay more property taxes than a farmer who owns similar equipment but of older age. A horse used by a ranching operation is not taxed, but an ATV is.
Similar variation is found among other businesses. A restaurant that installs all new equipment will have a higher tax bill than a competitor who purchases used equipment. The same restaurant owner will pay less taxes over time on the same equipment as it depreciates in net book value, regardless of its functionality or potential for generating income.
As discussion about personal property tax reform continues, taxpayers must be careful to not confuse it with property taxes on their home, farmland, or improvements. Since not every taxpayer is subject to the tax, or even a majority of property tax payers, metrics based on population of a town or county such as “per capita” are of little value to the discussion.
All taxes deserve strict scrutiny and evaluation for the principles of simplicity, transparency, neutrality, and stability. Voters need to understand the nature of the personal property tax, including its application and exemptions, when deciding whether or not it is the top priority for reform among the mix of different taxes.