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
The basis for the current public school funding system was established by the Tax Equity and Educational Opportunities Support Act passed in 1990. Commonly referred to by its acronym TEEOSA, LB 1059 established the principle of “Equalization Aid” paid by the state to individual school districts. The TEEOSA formula is intended to make up the difference between the costs to educate students in a district and the local taxable resources. Over the past 25 years the original act and formula have been amended and expanded significantly.
State Aid to Schools through TEEOSA is the single largest component of the Nebraska General Fund Budget. During this fiscal year $952 million of Equalization Aid will be distributed to Nebraska school districts. Representing 21.6% of the state budget, these dollars will be distributed among 80% of Nebraska public school students, primarily in urban areas. The vast majority of rural districts across the state will receive no equalization aid through the TEEOSA calculation.
The complexity of the TEEOSA formula is impossible to exaggerate. Found in Nebraska Revised Statutes 79-1001 to 79-1033, the act currently is over 26,000 words that span 50 pages of statute. While the basis for TEEOSA is a rather simple concept, Equalization Aid equals Educational Needs minus Tax Resources, over 25 individual components are factored into the equation. Local school boards struggle to predict the amount of equalization aid they will receive during development of their budgets, and state fiscal projections are notoriously unpredictable.
Determining the “Educational Needs” of a district is the first step of TEEOSA calculation. The state average cost is just shy of $12,000 per pupil, although the average for schools in District 38 is 25% higher at approximately $15,000 per student. Calculating need starts with a comparison of 20 schools of similar enrollment, establishing the basic funding level for a district.
The figure is then complicated by over 20 different metrics unique to each school. Allowance for additional transportation costs, more than one elementary school, greater than average instructional time, and student growth are factored into the needs calculation. The number of students with limited English proficiency and students in poverty are also considered through multiple metrics in the formula. Schools with small elementary class sizes receive additional needs, as do districts that must accommodate overcrowding through construction of a new facility.
The “Resources” side of the equation has fewer individual components. However, the largest proportion of the calculation is one of the most controversial elements of the TEEOSA formula. Determined by a theoretical tax rate, the Yield from Local Effort Rate estimates the potential property tax revenue available to a district based on the total value of local property.
The debate over how agricultural land, homes, and commercial property should be valued for tax purposes significantly impacts this calculation. In most rural districts, the rapid increase in the assessed value of ag land has resulted in a Yield from Local Effort Rate that exceeds the needs of the district. Thus, no equalization aid is provided via the TEEOSA formula.
District resources also include Net Option Funding, which are state dollars allocated for students who attend schools other than the district they reside in through open enrollment. Each district is also supposed to receive Allocated Income Tax paid by taxpayers living in the school district.
Once each of the metrics has been calculated for every individual district in the state, the formula determines the amount, if any, of state equalization aid for each district. Proposing changes to the formula is political, as each component represents a special interest. Nebraska’s education system, property base, and economy have all changed significantly over the past quarter century. To be transparent and effective, the school funding formula must reflect those changes as well.
Education is the foundation of a successful democracy. Education promotes social mobility for individuals, improves the quality of life for families, and stabilizes communities. In addition to developing an educated electorate and a well-trained workforce, Nebraska’s schools serve as an anchor in our communities, providing a common gathering place and a sense of identity.
According to Article VII of the Nebraska Constitution, “the Legislature shall provide for the free instruction in the common schools of the state all persons between the ages of five and twenty-one years.” Throughout Nebraska’s history, legislation, ballot initiatives, public referendum, and litigation have attempted to define how taxes fund free instruction in the common schools and how educational outcomes are evaluated.
Discussion about how education is paid for, school spending, and evaluation of student achievement is an important one. However, debate over how schools should be funded is not new. For the next several weeks I will address the fundamentals of how Nebraska funds K-12 education to provide you context for tax policy and school finance in Nebraska.
1966 was a defining year in Nebraska tax policy and school financing. Dual ballot initiatives passed by voters eliminated the state property tax and repealed the state income tax, which had been established the prior year. Without a source of state revenue, the Legislature in 1967 had to create a state sales tax and revise the income tax. Also in 1967 the Legislature passed the School Foundation and Equalization Act. Prior to that year, K-12 education was funded almost entirely by local property taxes. The Act was the first attempt to replace local property tax revenue with state General Fund dollars for education. Under this Act, state support for K-12 education topped out at 13% of total costs.
Over the following two decades, significant differences in per pupil spending developed across the state. Many of these disparities were due to the difference in property tax base between districts. Nebraska Supreme Court rulings held that education must be free, but funding did not need to be equal. This led to a major reform of the school funding structure in 1990 with the passage of LB 1059, the Tax Equity and Educational Opportunities Support Act, commonly referred to as TEEOSA. A product of a multi-year School Finance Review Commission convened in 1988, LB 1059 established the basis of the school funding mechanism Nebraska schools operate under today.
The TEESOA Formula established in 1990 was an attempt to equalize the funding available to all K-12 students across the state. School districts with a lower property tax base would receive “equalization aid” from the state to meet financial needs. Levy limits were put in place to create similarity in tax bills for property owners in different districts. Over time this formula calculation has expanded, with a number of special interest carve outs and exemptions, as well as additional considerations for poverty, special education, and option students to name but a few. The school funding formula that has evolved is complex, confusing, and no longer addresses the property tax base disparities between rural and urban districts.
As we debate what the future of school funding in Nebraska, it is valuable to understand the history about how our system has changed over time. While the today’s discussion can be contentious, it is actually part of an on-going issue for the past 50 years. In the next several weeks we will exploring the TEEOSA formula and its impact on your property, sales, and income taxes.
Last week year-end tax receipts were released by the Department of Revenue. Following months of lagging revenues, the 2015-2016 fiscal year ended on June 30 with a $95 million dollar revenue shortfall. Thus, the state will collect 2.2% less in taxes than the revenue forecast we used to create the budget.
In June net sales tax revenue was 6.3% below forecast, while personal income tax and corporate income tax were 8.6% and 26.5% lower respectively. The decreases are largely attributed to the reductions in farm income due to dropping commodity prices, which has a ripple effect throughout our communities. Main street businesses and ag manufacturing suffer when farm incomes drop. This creates a cumulative economic impact.
Farm income in 2015 fell to levels not seen since 2002, and continues to drop even more during the first half of 2016. As detailed in a University of Nebraska report, ag production costs more than doubled, ag debt increased by 150%, and living expenses tripled during the same time period. The economic engine of our state, agriculture, is struggling. While record farm profits buoyed the Nebraska economy and government spending during the aftermath of the Great Recession, the cyclical nature of agriculture has now presented a correction.
Just like our families and businesses face tough decisions when income doesn’t materialize as expected, state government will need to quickly adapt to this reality. Prioritizing existing spending and careful oversight of expenses are the first steps required to address the shortfall. The circumstances are serious, but they are not catastrophic. With careful stewardship of your tax dollars I am confident state agencies will be able to adjust. If revenues continue to lag behind projections into the 2016 fiscal year, greater structural changes will be need to be implemented by the Appropriations Committee.
State Senators and our local government leaders must recognize several important lessons as we develop budgets for the next year and set priorities for spending and tax relief. First, we cannot continue to ride a wave of agricultural prosperity without being able to accommodate the natural lows of the industry. Record high agricultural land valuations boosted local government budgets, and high farm incomes sent unprecedented dollars into our local economies and state coffers. Continuing to tax agriculture disproportionately during this down cycle threatens to kill the proverbial goose that has laid the golden egg. Our tax policy should not amplify and perpetuate a boom/bust cycle of taxing and spending. Rather, we should seek to limit the wild fluctuations and the uncertainty they bring.
Second, a 2.2% decrease in state revenues cannot continue to be plugged temporarily with one-time dollars. Borrowing against our stability by raiding cash funds or state reserves without addressing long-term spending is short sighted. It is irresponsible to jeopardize essential state programs that provide economic stability, public safety, care to the vulnerable, and public education. We cannot starve agencies in need of additional resources, like the Department of Corrections, during this time. Thus, other programs need to strategically realize greater than average reductions to balance the budget.
Finally, the state will be able to provide a concrete example to local governments with regard to spending. While special interests fighting property tax relief efforts last session called budget growth caps of 5% “draconian” and impossible, we will successfully decrease General Fund spending in state government. If families, business, and state government can adjust to the economic reality we are facing, local governments can most certainly operate with reasonable caps on spending growth.
These revenue shortfalls are a reflection of the economic conditions faced by families, farmers, and businesses. As your representatives, we cannot prioritize special interest spending and non-essential programs. We must be ever mindful that behind the revenue forecasts and data are families working hard to meet their obligations. My approach will be to promote accountability and to carefully prioritize state spending needs to insure our state will not only meet its obligations but prosper.
Education funding is central to the tax policy discussion in Nebraska. Who, how, and how much are questions that receive very different answers. The issue of fair, equitable, and reasonable school funding is not unique to Nebraska. Most states are grappling with similar issues. Texas, Arizona, and Kansas have recently had judicial opinions intervene in the legislative process for school funding, further complicating the challenges.
School funding quickly becomes politicized and controversial at both the local and state level. Too often discussions are short on facts and heavy on rhetoric that impede productive discussion that will lead to solutions to the funding challenges. Every Nebraskan supports a quality public education for our children. Teachers, administrators, and school boards need tools available to be effective. Parents and taxpayers have a right to transparent, accountable outcomes. On these fundamental concepts everyone agrees.
One fallacy which persists and obscures the school funding discussion is a concept referred to as the “three legged stool”. The idea suggests that education funding should be a three legged stool, with equal distribution among property, sales, and income tax. Proponents argue school funding in Nebraska has become imbalanced because one “leg” of the stool, property taxes, is currently longer than the other two.
The three legged stool is a great visual. It is simplistic and relates to an object we all can picture and relate to. The problem with the concept as applied to school funding is that it has no basis in reality. Nebraska has never funded K-12 education through an equal proportion of those taxes. No other state does either. Of the roughly $600 Billion spent nationally on K-12 education, 10% is federal dollars, with the remaining 90% equally split between local revenue (property taxes primarily) and state revenue (sales and income taxes). Nine states don’t even have a personal income tax, including Nebraska’s neighbors Wyoming and South Dakota. Per the concept, they would be missing a leg entirely, and a two legged stool is just a short ladder.
The term “Three Legged Stool” has its roots in financial planning for retirement during the early years of social security, not tax policy. It implies stability, so that retirees would have three stable, equal sources of income during retirement. An effective marketing tool for selling financial planning services, the three legged stool is invalid when applied to school funding.
In reality, equal funding between property, sales, and income tax would lead to greater instability in school revenue year to year and leave local school boards uncertain about their budgets. While property tax revenues are set using prior year valuation and consistent, sales and income tax revenues fluctuate from projections, influenced by a host of economic factors. Sales tax revenue in particular is especially volatile. A “three legged stool” in which one leg is stable while the other two change in length month to month does not provide a very comfortable sitting experience.
Moreover, state General Fund dollars are not segregated by sales tax versus income tax. They also do not constitute equal revenue amounts or exhibit parity in their variation. While the image makes for engaging political rhetoric, it does not translate into good public policy. We must move beyond distracting political visuals and address fundamental funding questions based on actual facts in an honest, frank manner.
A fundamental inequity exists in the system when most Nebraska’s rural districts do not receive any of the nearly $1 Billion of state equalization aid, shifting most of the burden of local education to local property taxpayers. Tax policy changes that do not address this structural imbalance will not provide meaningful, comprehensive, or lasting solutions.
Nebraska’s status as a comparatively high tax tax state makes tax relief a top legislative priority. Proposing changes to any tax quickly becomes a case study in the influence of special interests and political rhetoric. Many proposals are sold to voters as “tax relief” that will not actually decrease your total tax bill.
Tax relief clearly means total tax collections decrease or are revenue neutral. It does not mean shifting revenue to a less transparent tax, exempting a special interest so others pick up the bill, filling revenue gaps with state cash reserves, or pumping more state collected dollars into local governments without equivalent reductions. Such proposals are little more than a shill game, hoping that taxpayers will not realize they are paying more taxes, but in different forms. These complicated tax policy changes favor influential special interests at the expense of Nebraska’s families, small businesses, and ag producers.
Spending control is a mandatory prerequisite for tax relief. Limiting the growth of government budgets is the only method to limit the dollars taken out of your pocket. Drastic cuts to budgets and services are not necessary, but careful prioritization and responsible spending decisions can limit growth of local and state budgets to 3.5-4% annually. Spending growth that outpaces the economic growth of taxpayer’s wages is unsustainable on its merit. It is mathematically impossible to reduce Nebraska taxpayer’s burden if government spending continues to grow at its current rapid pace.
Simply shifting the funding source in the absence of spending limits does not work. Additional state dollars appropriated to the Property Tax Credit fund have not stemmed the rapid growth of property taxes. Additional state dollars allocated to TEEOSA, the school equalization aid formula, has failed to reduce either the property tax collections or the increases in spending by public schools. Each time state revenue was added to TEEOSA, property tax collections reached new highs within a matter of a few years. Increased state spending for natural resources projects, workforce development, and infrastructure has not dampened spending growth by NRDs, community colleges, or communities. To the contrary, their spending growth has reached record highs. Allocating more state dollars, to the tune of several hundred million suggested by some groups, does not provide tax relief. It merely hides the pea under a different cup.
Current proposals for tax relief primarily focus on shifting funding for various aspects of government to different sources. Increasing sales tax revenue has emerged as a common concept. Charging sales taxes for services in addition to goods, reducing the number of items that are exempt from sales tax, adding sales taxes to food, and increasing sales tax rates are being discussed. The stated intention would be to use increased sales tax revenue to offset property taxes or income taxes.
I will not support increases to one tax without mandatory dollar for dollar reduction in another tax and a reduction in the overall tax burden. Any shifts of funding sources must come with reasonable restrictions on spending growth. Also, sales tax shifts must not put small community businesses at a competitive disadvantage. Finally, transparency of the taxes collected and clear accountability for spending decisions is required for my support.
Nebraska ranks as a high tax state in large part because local governments refuse to cap their growth in spending. Any tax shift must accomplish real tax relief by reducing the overall tax burden on Nebraska taxpayers in a transparent and accountable manner.
The next Legislative session promises to focus on the distribution of the tax burden among Nebraska taxpayers. This is driven by agriculture interests focused on a more equitable distribution of property taxes in rural communities and urban interests focused on decreasing the income tax rates for business. Determining what is “fair” and “equitable” begins with an understanding of the taxes you are actually paying.
The proportion of sales, income, and property tax paid by any individual, family, or business is highly variable. Purchasing habits and whether you frequently shop in a community with a local sales tax means next door neighbors can pay varying amount of sales tax. Comparable sized local business owners differ between those who file their income tax return at the personal rate rather than the corporate rate. Farmers with parcels of ag land of comparable value across the road from each other can pay different property tax due to variance in levies set by school districts, NRDs, and other political subdivisions.
How taxes are collected also impacts the perception of a tax burden. Sitting down to write a check for my property taxes and quarterly estimates for my income taxes makes them quite evident to me. Although I may note the sales tax charged on my receipts while shopping, I don’t have an actual number for what each of those small point-of-sale charges add up to over the course of a year. Automatic withholding from a paycheck is less obvious than making a deliberate transfer of dollars. Many miscellaneous taxes and fees are not immediately apparent, like the gas tax or telecommunication fees.
Therefore, it can be a challenge to determine the direct impact of a change of tax policy to a specific taxpayer. Increasing the number of goods or services that are subject to sales tax to fund property tax relief may make the check you write to the county treasurer smaller, but you may pay more total tax over the course of a year with many larger, less obvious sales tax transactions.
As a proportion of total tax receipts for state and local government in Nebraska, the distribution of the source of revenue has remained relatively unchanged over the past ten years. In the fiscal year ending 2005, sales taxes represented 23% of the revenue generated, with income taxes making up 30% and property taxes 43%. A decade later, in 2015, sales tax had decreased to 19%, while income rose to 32% and property taxes to 47%. The slight shift of the mix toward property taxes represents the greater growth of local government spending compared to state spending. However, the general distribution remains unchanged over a decade.
Distribution of the property tax burden among different types of property owners is dependent on the mix of property in any given political subdivision. While ag land makes up 31% of the total property taxes collected statewide, in Kearney County it represents 69% of total property taxes. Within District 38, the proportion ranges from 30% in Buffalo County to 80% in Franklin County. This variability is in part geographic, part economic. Policy changes applied statewide have very different impacts from community to community.
As a voter and taxpayer, it may be useful to track your tax expenses over the course of a month and make a comparison of the different taxes you pay. Shifting taxes from one source to another is not a straightforward solution for tax relief. It may merely obscure the transparency of the taxes you pay. The only direct means of tax relief is control of spending.
It has been said the only fair tax is a tax paid by somebody else. Issues of fairness in tax policy is as old as taxes themselves. I have yet to meet a constituent has does not feel overtaxed. Similarly, special interest groups frequently argue for tax exemptions for a wide array of reasons, as taxes are an impediment to business growth. Over the next three weeks, I will discuss the different types of taxes in Nebraska, the distribution of the tax burden among different groups of taxpayers, and some of the proposed changes to Nebraska’s tax policy.
Compared to all 50 states, Nebraska ranks high in all categories of tax collection. The Tax Foundation collects data on tax collection and revenue and reports rankings on a per capita basis, allowing taxpayers to evaluate the tax burden per person between states. The higher a state ranks, the more taxes paid. Combining state and local tax collections, Nebraska ranks #17 among all 50 states. Looking closer at different types of taxes, Nebraska is toward the top, ranking #13 in both income and property tax collection, #18 in corporate income tax collection, and #19 in state general sales tax collection. In some specific categories Nebraska is extremely high. For example, we rank #2 in state and local cell phone tax rates at a shocking 18.53%.
Local governments are funded primarily through property tax receipts. Many cities also have a local sales tax, and state and federal aid dollars support many local programs. Property tax collections for 2014-2015 totalled $3.8 billion to fund local governments. That is a 65% increase from the property taxes collected 10 years ago.
The state General Fund represents revenue collected from personal and corporate income taxes and state sales taxes. Additional revenue comes in the form of excise taxes levied on certain items such as fuel, cigarettes, and alcohol. Total receipts to the state General Fund for 2014-2015 were $4.3 billion, which is 41% greater than a decade ago.
In light of these facts, it is difficult to assert that an increase in taxes of any category is a rational policy solution. How the entire tax burden of all is distributed among taxpayers must be the focus of reform. Central to this discussion is the divided nature of Nebraska’s tax system, with property tax rates set and revenue spent by local governments, while income and sales tax rates are set and revenues spent by the Legislature.
Each revenue type also has its own inherent unpredictability. State budgets are established based on prospective revenue forecasts. Sales tax revenue is particularly volatile, responding to local economic conditions. If revenues do not match budget appropriations, as is currently the case, tough decisions must be made about spending commitments. In contrast, local budgets are built using retrospective property valuations of the prior year. Levies are set to match the budget needs, and the revenue is insensitive to fluctuation during the funding period. Budget stability is directly linked to the source of revenue.
Next week I will discuss the distribution of the tax burden among different groups of taxpayers. In the meantime, don’t hesitate to contact me at email@example.com . Please note my office location in the Capitol has changed to room 1308.
During constituent meetings across District 38 over the past month, community and business leaders have expressed a common challenge facing our rural communities: housing. City councils of small villages and larger communities alike struggle with a range of policy issues around housing in their communities, while business owners frequently find adequate housing a challenge in the recruitment and retention of employees.
Safe, affordable housing is essential for communities to thrive. Rural communities require a full spectrum of housing options, including rental apartments, starter homes for young families, mid-priced family homes, and housing to meet the needs of seniors and retirees. All of the communities in District 38 struggle to have an adequate number of available homes in one or more categories of housing. In most towns, were a new business to locate there bringing 10 new families to town to fill 10 new upper-middle class jobs, there would not be enough local housing options available for the new employees to live in the community.
Additionally, many employers report to me that few communities have available enough short term rental housing to recruit young adults from college and technical programs. Rather than living in the community of their jobs in Sutton, Minden, or Holdrege, they live in larger communities nearby and commute to work. Many seniors who may want to downsize out of larger family homes cannot find affordable, accessible housing in our rural communities.
Specific housing needs are unique to each community, even though common challenges exist. Unfortunately, communities, business owners, and economic development interests have few options to proactively address housing challenges. Several community foundations have joined together to finance housing developments and multi-family dwellings to facilitate employee recruitment. Others have sought limited federal rural development dollars to help provide affordable housing for seniors and young families. Tax Increment Financing, commonly known as TIF, is one of the only options most communities have for community development.
The vitality of our rural communities is dependent upon addressing the fundamental need of housing. We must develop new tools in our policy toolbox for local communities to address their specific circumstances. One-size fits all, heavily bureaucratic programs won’t be flexible or responsive enough to adapt to each community. I have ideas, but I don’t have many solutions.
So I am issuing a challenge. Over the coming months, I want you to share your ideas for addressing the housing needs on our rural communities. You have a better understanding of what may work and what won’t in your specific community than I. Share your ideas with me at firstname.lastname@example.org, contact your local city council members, or engage in community planning processes taking place in many communities. I am confident that new, innovative solutions can be developed locally. As I continue meeting with local community officials and business leaders to listen to their concerns, I hope to be able to share with them ideas from residents across District 38. I look forward to hearing your ideas.
Voter frustration is high. The lack of expediency and political will to address complex issues like tax reform and abuse of the public trust as seen in the recent Tourism Commission debacle leave voters disenfranchised. Voters throughout District 38 frequently express a sense of bewilderment regarding actions of the Nebraska Legislature that are out of step with the values of a majority of Nebraskans. I am frequently asked “What’s going on up there in Lincoln?” in conversation with constituents.
Public confidence in their government requires transparency and accountability. The votes I cast as a state senator are public votes, visible to the public for scrutiny. Accountability for my votes does not occur only at the ballot box. I have an obligation to be forthright during my term with my constituents about the votes I cast.
At the state Republican Convention last month, Governor Ricketts discussed several issues of importance to the Republican party platform and Republican senators who voted in opposition. Stating the public votes of elected officials at a political convention has drawn the ire of some editorial boards and a handful of state senators. I am bewildered by the criticism.
The Nebraska Legislature is officially nonpartisan. As a matter of practice and organization, this means that political party affiliation has no bearing on committee assignments or legislative leadership. Party affiliation does not appear on the ballot, nor are candidates restricted to a specific party on the primary ballot. I value this tradition. No threat to this process exists.
That said, the party affiliation of each senator is well known among other senators, voters, and the media. It is frequently referred to in reporting. The fact that party affiliation does not play a role in the organization of the Legislature does not mean individual senators are devoid of political ideology, nor does it mean voters are unconcerned with the political party of their state senator.
I am a Republican. That is not merely a superficial label I chose as an 18 year old when I registered to vote. It is a reflection of my principles and view of the role of government. It is a signal to voters of a slate of practical issues to which I subscribe. While I am in no way bound to adhere to a formal party platform, I have an obligation to be honest and forthright with my constituents when I depart from my publicly stated positions. Voters deserve that transparency and accountability.
Open and frank discussion of public votes by elected officials should not be stifled under any circumstance. Among all of the defense of the institution of the Nebraska Legislature, separation of powers, and the independence of state senators, the most important component of state government has not been mentioned: the voters. Every opportunity for the public to know and understand the context in which elected representatives vote on issues important to them should be encouraged, not criticized. An informed electorate is the very foundation of our representative democracy.