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This week the Legislature will finally debate a tax reform bill on day 53 of a 60-day legislative session. The proposal has three distinct components of new policy. First, it decreases the corporate income tax rate. Second, it transfers $5 million from the state’s Cash Reserve to a Department of Economic Development cash fund. Finally, it creates an income tax credit equal to 2% of ag land and 1% of residential property taxes. The intention is that the size of the credit will increase annually, with eventually reaching 20% of total property taxes paid by 2030.
I evaluate tax proposals using the principles of simplicity, transparency, neutrality, and stability. First, I look for simplicity. Complex tax policy creates opportunity for abuse of the tax code and makes it impossible for taxpayers to clearly understand their tax bill. Second, I look for transparency. Policies that hide taxes or obscure how they are paid create a disconnect between taxpayers and how their dollars are spent. Third, I support tax policy that is neutral. Neutrality means that tax policy does not favor or punish one group or industry at the expense of another. Finally, I look at the stability of tax policy, avoiding wide swings in revenue that create unpredictability.
Two of the three components of the tax proposal are currently unnecessary. The $5 million transfer to the DED cash fund is nothing more than a financial earmark to buy votes. The Cash Reserve has been ravaged to only one-third of what it was two years ago. The property tax refund requires $34 million from the Cash Reserve to achieve the meager property tax relief offered. It is foolish to drain the fund of another $5 million to add pork to a tax relief bill. The corporate income tax reduction in a time when we are already implementing budget cuts also does not seem logical.
While I welcome any opportunity for property tax relief and have opposed any measure that would increase property taxes on Nebraskans, the “income tax refund for property taxes paid” scheme fails to meet my standards for good tax policy. The use of state General Fund revenue to provide an income tax credit to offset property tax collections is marginal on the simplicity standard. While initially you can look at your property tax statement and calculate the 1 or 2% of the refund, that number will grow annually. Local spending growth has outpaced state revenue growth for many years now. As the cost of the income tax credit grows for the state, it is likely sales or income taxes will be increased to cover the cost. That shift creates complexity.
Using tax dollars collected and appropriated by the state to offset property taxes levied and spent by independent local boards fails the standard of transparency. State General Fund spending would be dictated by local officials with no accountability to state lawmakers or residents in other communities. Spending decisions made by board members in Omaha and Lincoln would be covered by taxpayers in District 38, while neither you nor your senator will have any influence or control over those dollars. A clear line of sight between taxpayers and those who spend their money does not exist.
Neutrality is also marginal with this proposal. Applied to current income tax policy, the refund will magnify any favoritism and carve outs that exist in the current system. The existing inequities in the distribution of the property tax burden in rural school districts for funding K-12 education are also perpetuated, as they are not addressed.
The long-term stability of the income tax refund proposals is also an open question. Nothing in the proposals alters that pattern of local spending. In fact, past experience has demonstrated that increased state spending to cover local spending results in increased local spending. The impact on the state budget is a percentage of local property taxes levied, which state legislators have no control over. The long-term stability of the state budget would be determined by the individual actions of all the local boards across the state, with no accountability at the state level.
Taxpayers need to be clear on two points about the proposal. First, you will continue to pay the full amount of your property taxes when they are due. You will not receive the refund until the following year when you file your income tax return and apply for the credit against your income tax liability. Second, your property taxes will continue to rise at the same rate as they have in prior years. Nothing in this proposal changes any of the structural problems that have made Nebraska the 5th highest property taxes in the nation. Given past history, it is highly likely the rate of growth of your property tax bill will exceed the growth of the income tax credit over the 10-year phase in plan.