The policy challenges regarding reforming Nebraska’s Property Tax system can be broken down into two areas. The first is what functions of government we fund with locally paid property taxes as opposed state general funds. The second is how we equitably distribute the burden of who pays property taxes to support those functions of government.
The first area of consideration is what property taxes pay for. There are many schools of thought regarding “fair” tax policy. This leads to a discussion about the balance of funding government operation through a combination of property taxes, sales taxes, and income taxes. Currently, property taxes make up 39% of total taxes paid, compared to a total of 44% from sales and individual income taxes combined. Changing that distribution to reduce taxes collected on property would require sales and income taxes increases to cover the costs of functions currently funded by property taxes, functions of government that are currently funded by sales and income taxes to be scaled back or eliminated, or a combination of the two. Any reduction in total property taxes collected would most likely have an impact on the state General Fund.
At the center of the local versus state debate in rural areas is the issue of funding K-12 education, which makes up 60% of the average property tax bill. Current statute gives significant control of per student spending to local boards. In the 2013-2014 school year the average cost per pupil across the state was approximately $11,300. By comparison, the average cost for the school districts in Legislative District 38 was about $3,000 per student higher, with a wide range from $10,600 to $19,600. The percentage of that cost funded by local property taxes versus state general funds is determined by a rather complex formula that takes into account the local property tax base, reflecting the local ability to pay, and the needs of the district to perform the functions required by statute. School districts receive equalization aid from the state to make up the difference between the two.
As the value of agricultural land has increased in the past decade, the amount of state equalization aid from the general fund to rural districts has decreased dramatically. For the 2015-2016 school year, less than one quarter of the districts in the state will receive any of the $860 million in state equalization aid. For rural districts, that represents a dramatic shift in the burden of funding education to locally generated property tax dollars. Complicating the discussion is the fact the while only a minority of districts receive state equalization aid, the districts that do receive those general fund dollars educate over 80% of the roughly 300,000 students in Nebraska’s public schools. Re-evaluating the equalization process and increasing the amount of foundation aid each school district receives per pupil is a major step in rebalancing the funding of K-12 education between property taxes and general funds.
Furthermore, the expense incurred by counties and cities that are required by state statute or regulation must also be addressed. State general fund support for cities and counties has decreased significantly over the past decade, while operational requirements have increased. A careful examination of the regulatory burden imposed by state agencies and unfunded mandates in statute is underway. Dramatic increases in the tax revenue by community colleges and natural resource districts also stand out as areas of concern. At the core of these policies is the principle of local control of government. Local political subdivisions have the authority to collect property taxes in response to local needs. Granting budget authority to the state using state general funds gives greater authority to the state. If local control is a priority of taxpayers they must engage with their local boards and understand their spending to preserve local control.
The second area of policy concern is how the property tax burden is distributed among taxpayers and classes of property. In rural Nebraska, the inequity that has been created due to the rapid increase of agricultural land values compared to other classifications of property is at the heart of this discussion. One aspect of tax policy is to look at how “regressive” a tax is, or what proportion of an individual’s income is spent on the tax. For example, sales taxes have the potential to be highly regressive when charged against essential items such as food. A family earning $50,000 annually that spends $600 per month on food would pay a greater percentage of their income on sales tax of food compared to a higher income family earning at $100,000 annual income with the same food budget. Thus, exemptions for sales tax on grocery items are a policy decision to moderate the regressive potential of the sales tax. Conversely, income tax rates that increase as income increases is a “progressive” tax policy.
Since property taxes in Nebraska are based on the value of property, not on income, property taxes can be highly regressive in some instances, such as the tax burden passed through rent charged by property owners to tenants. On the other hand, it is assumed that owners of more expensive homes have higher incomes, so the tax would be more proportional to income. In the case of agricultural land and the improvements involved in agricultural production such as grain facilities, high taxes with decreased earning potential due to low commodity prices are highly regressive, meaning a greater proportion of total income is spent on taxes.
Policy changes to how property is assessed must go hand in hand with redistributing costs between local and state resources to be effective. If the total revenue needs remain the same in rural areas, decreasing valuations alone will likely result in levy increases to generate the revenue required. Most rural states employ a use-value assessment for agricultural land, as opposed to a market value assessment. Additionally, the period of time used to average valuations in many states is longer, which has a leveling effect on the tax burden in the face of volatile commodity markets. Any changes to the valuation process will affect all property taxpayers in varying ways. Carefully analyzing what those impacts will be and helping all taxpayers understand the implications is essential before statutory changes are made to avoid unintended consequences.
Finally, the nature of exemptions for specific classes and types of property from property taxes is also a policy consideration. While exemptions are important to promote certain industries or social priorities, they do shift the burden for funding local political subdivisions on the property owners who are not fortunate enough to receive an exemption. Expanding the tax base reduces the overall burden on all property owners. Accurate data about the economic impact of exemptions is needed to help inform policy decisions regarding their effectiveness and overall effect on local communities.
Nebraska’s property tax system has evolved over a period of decades, as have the economic conditions that have presented the current challenges. Reforming the system is neither a simple nor quick process. Ultimately, the participation of all taxpayers in the establishment of funding priorities and revenue decisions at the local level is critical to a sustainable and equitable property tax system. If you have any questions regarding property tax levies or any other issue across the state, please do not hesitate to contact my office by email at firstname.lastname@example.org or 402-471-2732. For daily updates, please follow me on Twitter @JohnKuehnDVM.
Senator John Kuehn, District 38