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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.
The American Automobile Association estimates 41.5 million people will hit the roads this Memorial Day weekend. Your family may be included in that total, attending community events, family get-togethers, or enjoying the three day weekend away from home. With the average price of a gallon of gas in Nebraska rising almost 16 cents per gallon from April to May, you may feel the impact of rising costs on your wallet this holiday. As you fill up at the pump, it is also a good time to keep track of your total tax bill by taking into account the portion of the $2.86 per gallon average that is going to fund state and local government.
Based on current prices, approximately 10% of the cost of every gallon of gas you buy this weekend is state and local taxes. The current “gas tax” in Nebraska is 28.4 cents per gallon. In 2017 total gas taxes collected by the state of Nebraska totaled over $363 million. Of that almost $75 million is directed to the cities and counties to spend, while the remaining 80% is spent by the state Department of Transportation.
The gas tax rate changes from year to year depending on variation in two of the three components that determine the tax. The fixed component is 14.8 cents per gallon, with 9 cents directed to the state and 5.8 cents per gallon designated for cities and counties. In 2019, that will rise to 16.3 cents as a result of a gas tax increase passed in 2015. That legislation increased the fixed portion 1.5 cents per year for the next four years. Two smaller components change from year to year. The wholesale portion, currently at 8.7 cents per gallon, is calculated to be 5% of the six month average of wholesale fuel prices. As prices go up, so does the tax rate–an interesting double whammy to consumers. The variable portion, currently 4.9 cents per gallon, is determined by the state DOT to match their expenditures.
The federal government also collects an additional 18.4 cents per gallon, for a total of 46.8 cents in local, state, and federal taxes per gallon of unleaded gas. Thus, for every 20 gallons you fill up in your car while travelling this weekend, you are paying $9.36 in taxes.
If you spend time away from home this weekend in a hotel, you will pay another tax to fund local and state government: the lodging tax. The amount of tax you pay depends on the cost of your room. The more expensive the room, the larger the tax you pay. The state lodging tax is 1% of the total charges of any hotel room in the state. County lodging taxes add up to an additional 4% to the bill.
During 2017, counties collected almost $21 million in lodging taxes. Those dollars are split equally between the County Visitors Promotion Fund and the County Visitors Improvement Fund. The state of Nebraska collected almost $5.5 million in lodging taxes, which are under the discretion of the Nebraska Tourism Commission.
It is worth noting that over $26 million in lodging taxes collected annually are not managed by elected representatives. The Nebraska Tourism Board is an appointed board, and the Tourism Department is a “non-code agency”, not under the direction of the Governor or any other elected official. In 2016 a state audit found considerable problems with the oversight and use of Tourism funds, leading to the termination of the agency’s director. Most counties have a similar set-up with Convention and Visitors Bureaus spending lodging tax revenue.
With the official start summer travel season comes increased traffic and increased tax revenue. As you keep your running total of your family’s financial support of state and local government in Nebraska, make sure to include your gas and hotel receipts to add to the total. The sum total of each of those pit stops and overnight stays is $390 million in expenditures by state and local governments every year.
Despite the lack of action in reforming Nebraska’s tax policy, there appears to be no shortage of catchy phrases, simple solutions, and political campaign slogans promising a fair and improved tax system for all. If it were so simple as a balancing out government funding between property, income, and sales taxes, a resolution would have been achieved long ago. The flaw in most talking points touted by politicos and special interest groups is that they fail to reflect the facts of Nebraska’s total revenue picture.
Virtually all discussion of Nebraska’s tax policy and spending is focused on the General Fund. Approximating $4.4 Billion, these are the dollars used to fund the most commonly thought of state expenditures. While the majority of General Fund dollars come from Sales and Income taxes, 5% is funded by excise taxes on alcohol and tobacco, as well as taxes assessed on insurance and financial institutions.
When comparisons are made between “government funding sources”, they are commonly made between the Sales, Income, and Property Taxes. Unfortunately, these combined represent only about half of the revenue that funds state and local government in Nebraska. Thus, the “three legged stool” commonly used to analogize tax policy only takes into account half of the total revenue picture, making it an inaccurate concept.
The General Fund only represents about 40% of the total $10.6 Billion appropriated annually by the State of Nebraska. Federal funds amount to over $3 Billion of state appropriations, primarily for healthcare, education, and transportation. Almost another $1 Billion is from revolving funds, primarily transactions between government agencies.
Almost always left out of the discussion of government revenue and tax policy are Cash Funds, which exceed both sales and individual income taxes as sources of revenue to fund government. Over $2.3 Billion are generated in various “fees” that most taxpayers probably don’t even notice. These include your lodging taxes, gas taxes, licensing fees, filing fees, hunting licenses, and hundreds of other small transactions. Ironically, the cumulative effect of all of these small, point of service fees is tax revenue generated in excess of all individual income taxes collected in the state.
Local governments also collect revenue in excess of property taxes that are not included in the bumper stick taglines of many tax policy discussions. These include local option sales taxes, motor vehicle fees, wheel taxes, occupation taxes, and inheritance taxes just to name a few.
The taxes that dominate the public discussion are the ones that are most readily seen by taxpayers. When you write out that check for your property taxes, you are acutely aware of the magnitude of the impact. You see the deductions on your paycheck for income taxes and see your total cost when you file your annual return. In contrast, do you know how much you spend annually on sales taxes? How much of your family budget is spent each year on the myriad of small “fees” that generate over $2 Billion of Cash Funds every year? Hiding taxes in small, less obvious, and more frequent tax bills is not transparent tax policy.
Over the next several weeks I will be digging deeper into each of the various sources of revenue that fund government in Nebraska. During the next two months, I encourage taxpayers to participate in an exercise to gain a better understanding of the taxes their family pays by keeping a running total. Collect your receipts from purchases and track how much sales tax you pay, a few dollars a time, every month. As you embark on summer travels, total the occupation and lodging taxes you pay for hotel stays. Every time you fill up at the pump, note how many gallons you purchase and track how much you pay monthly in gas taxes. When you renew your auto licenses, sum up the total impact of motor vehicle taxes on your disposable income. You may quickly find the sum of all of these taxes dwarfs the state deduction taken from each of your paychecks.
Informed taxpayers make the best choices. By the end of the summer you will have a better understanding of all the ways government is paid for in Nebraska, as well as the direct impact to you. Armed with that evidence, it might just change your perspective on how to best approach tax policy in Nebraska.
Voters engaging in the democratic process by casting their votes to select their lawmakers and voice their position on policy issues is the foundation of representative government. Nebraska Secretary of State John Gale recently predicted that only a mere 28% of Nebraska’s registered voters will vote in the primary election this spring. The anticipated 336,000 votes represents less than 18% of the population of the state. A small minority of Nebraskans will make the decisions that impact each and every one of us.
The implications of low citizen participation can be dramatic. At this level of voter turnout, less than 10% of the population is all that is required to achieve a majority and win an election. In many races for local offices in our communities that difference may be a matter of only a handful of voters. It is not an exaggeration to say that every vote counts.
There are a number of reasons for projected low voter turnout this May. It is a Primary Election. It is a midterm election relative to the presidential cycle. With all of the spring demands in agriculture and the end of the school year everyone is busy. While all of the reasons people have for not voting may be valid on the day of the election, the magnitude of the choices made on a single day have implications for the next several years of your life as a citizen and taxpayer.
Voting is a fundamental right. With that right comes responsibility. Participation is at the top of the list. The expansion of early voting options, both in person and by mail, provides additional access for voters. You are no longer limited to only the polling hours on Election Day. Each year the number of early ballots cast increases, which is a positive sign that voters are taking advantage of those options.
It is critical that voters understand the policy positions of the candidates on the ballot. For many local races, which have a direct effect on your property tax rates and local services, voters may not even be able to find information about where candidates stand on issues. Name recognition and familiarity has a shocking impact on the outcome of voter choices.
Special interest groups take advantage of low information voters. Standing by a tractor in a campaign photo doesn’t mean a candidate will advocate for agriculture, nor does a picture with kids mean they understand the fiscal intricacies of public education. Voters need to critically evaluate what candidates say, as well as what they don’t. Candidates aren’t likely to include their pro-abortion views or comfort with raising taxes on their campaign mailers. Voters need to seek information independent of what they passively receive to know the full impact of their choices.
Every race on the ballot matters. City council, county offices, and school board races are often decided by a relatively small number of votes in rural Nebraska, yet those officials make some of the most significant decisions for you. In a recent search for information about candidates on my local ballot, I was unable to find any information about their positions, nor did I receive any response to my direct inquiries to them. It is easy to see why voters become frustrated and cite lack of knowledge about candidates as a frequent reason for not voting.
Having the right of self-government comes with the responsibility to inform yourself and participate in the electoral process. The outcome of elections matter. Make sure your voice is heard and your values are represented at all levels of government.
The lawmaking process should be transparent and devoid of undue influence by special interest groups. The annual lobbying report of Common Cause Nebraska released this week provides insight into the ever-increasing amount special interests spend lobbying elected officials. In 2017 a record high $17,446,838 was spent on lobbying in Nebraska. This represents a 26% increase since 2013. In total, 377 paid lobbyists representing 550 special interests sought to influence the decisions of your elected officials.
During my four years in the Legislature I have introduced a number of measures intended to increase voters’ ability to clearly see how special interests are influencing state policy. A quixotic effort, none of the bills were ever advanced from the Government, Military, and Veterans Affairs Committee. The data contained in this year’s Annual Lobby Report by Common Cause underscores the urgent need for greater transparency.
Aside from the shocking amount spent on lobbying, the source of the bulk of the money is equally jarring. Of the top ten largest spenders over the past five years, half represent political subdivisions. The biggest spender is the League of Municipalities, which is funded by Nebraska cities and towns. The University of Nebraska is the fourth biggest spender, while the Nebraska Council of School Administrators and the Nebraska State Education Association are ranked seventh and eighth, respectively. Omaha Public Power is ninth.
Voters are often unaware how much of their tax dollars are used to pay for lobbying activities. The use of taxpayer dollars for lobbying is not new, but it obscures the policy process. In some cases, public dollars are used to employ full time lobbying staff. In addition, most also hire private contract lobbyists. The ever increasing amount of public dollars used to lobby state government indicates the success of the effort to keep state money flowing to the local governments that spend your taxes on lobbying.
A look at the lobbying efforts of some public school districts provides insight into why revising Nebraska’s dysfunctional school funding formula to distribute equalization aid to all schools has been unsuccessful. $2,399,081 has been spent over the past five years by 17 schools districts and the Learning Community of Douglas and Sarpy County. The seven biggest spenders–Omaha, Lincoln, Millard, Bellevue, Papillion, Ralston, and Grand Island–represent 70% of that total.
In the name of open government, political subdivisions using money derived from public funds should file the entire contract for public evaluation. All Nebraskans should be able to clearly identify how public money is used to lobby. Voters should be able to take this spending into account when voting for elected officials that serve on these local boards and councils.
For Nebraskans who wonder why income tax cuts continue to drag down efforts to address voter’s top concern, property taxes, follow the lobby money. Almost a quarter million dollars, the largest amount by any single special interest group, was spent opposing property tax reform and promoting income tax cuts by the Nebraska Chamber of Commerce. Although Nebraska’s cities spent the most on lobbying as a five year total, the Nebraska Chamber of Commerce comes in at a close second, edging into the top spot for single year spending during 2016 and 2017.
The money spent on lobbying does not exclusively represent money spent to buy drinks and dinners for lawmakers or contribute to their campaign funds. The impact of the money is to buy a constant presence, access, and relationships with elected officials. The continual presence of the lobby, both in the capitol and at social events attended by lawmakers, creates an echo chamber of special interests. Voters should expect their elected representatives at all levels of government to at least be transparent about when and how special interests leverage their influence.
In Lewis Carroll’s novel “Through the Looking Glass”, Alice, of Wonderland fame, encounters the character of the Red Queen. Alice runs next to the Queen who exclaims ““Now, here, you see, it takes all the running you can do, to keep in the same place.” Known as the Red Queen’s Race, the characters represent an arms race of sorts, were no matter how fast one competitor runs, the other matches speed. The net result is neither gets anywhere.
Many state economic development programs intended to recruit and retain businesses to Nebraska remind me of Alice racing the Red Queen. No matter how extensive the package of incentives and tax breaks, another state is willing to up the ante to lure the company away. What ensues is a vicious cycle of incentives paid for by all Nebraska taxpayers. When large companies leave Nebraska, such as ConAgra and Cabela’s have, a new, more aggressive cycle begins again to retrain workers and recruit new businesses to fill the vacant space.
The argument in favor of economic development incentive programs is that they create economic activity that ultimately produces more in tax revenue in the form of jobs and investment than the cost associated with the incentives. While the argument sounds logical, supporting evidence is scarce. Ironically, the companies that profit from incentive programs provide the greatest political obstacle to obtain data needed to valid their benefits.
For the last four years I have served on the Legislative Performance Audit Committee, serving as chair for the past two. Since 2015 the Legislative Performance Audit Office has been required by state law to conduct evaluations of Nebraska’s tax incentive programs, the largest of which is the Nebraska Advantage Act. The overall goal of the performance audits is to objectively evaluate the outcomes of the taxpayer investment in the companies that receive benefits under the program. The financial benefits include income tax credits, sales tax refunds, and personal property tax exemptions.
According to Department of Revenue data, participating companies have qualified for over $842 million of income tax credits, $158 million of sales tax refunds, and over $5 billion of personal property value exempted from paying local property taxes. Despite the large financial cost of these programs, data to support the policy outcomes of the incentives is not readily available. Questions as basic as where are the incentivized jobs located in the state are not easily answered. These outcomes are important when determining the impact of the taxpayer investment.
Evidence does not exist to support claims that the Nebraska Advantage act provides returns greater than the investment Nebraska taxpayers have made. The companies do not report data that is useful in answering that question. However, I can say with certainty that participating companies, and the Chambers of Commerce that represent them, aggressively oppose any effort to obtain data to evaluate the incentive programs. With hundreds of millions of dollars invested by Nebraska taxpayers in these companies, having accurate and complete information about the impacts is simply good government.
In some cases, a few individual companies have been very forthright and willing to provide all information they can to support the economic impact of the incentive programs. However, the opposition to transparency by some of the largest companies receiving Nebraska Advantage Act benefits is concerning. It creates doubt about the true result of the programs. Are they actually creating new and critical economic activity in the form of better jobs and new investments, or are they little more than corporate welfare?
This past session the Performance Audit Committee introduced and prioritized LB 935 in an attempt to obtain the information needed to thoroughly evaluate the outcomes of Nebraska’s incentive programs. Opposition from Advantage Act beneficiary companies was strong. The bill advanced to Select File where it stalled due to costs requested by the Department of Revenue, claiming the need for a full time IT specialist to include an additional data field in the reports filed by recipient companies.
Without more and better information about the jobs and investments paid for by taxpayers, it is difficult to understand the full opportunity cost of the programs. While it may not be feasible to end the Red Queen’s Race of incentives, Nebraska taxpayers should know with clarity what the cost of the race is. Nebraskans deserve more than investing and investing without getting anywhere.
The 105th Nebraska Legislature adjourned sine die on Wednesday, April 18. Latin for “without day”, adjournment sine die means the legislature has adjourned with no specified date to reconvene. This concludes the 60 legislative days specified in Nebraska’s Constitution for the Legislature to meet during even numbered years. This is the only time during my four years in the Legislature the body has used all available days for legislative business.
The conclusion of the legislative session is accompanied by the usual volume of articles summarizing what was accomplished and what was not. Reasonable distance allows for more objective analysis, and I will address specific issues in greater detail in columns in the coming weeks. The most pressing issues facing Nebraska deserve more than a superficial discussion.
Although the Legislature has adjourned its regular session, a special session can still be called during the interim. As I wrote two weeks ago, it is my opinion that a special session dedicated to addressing property taxes is the most likely opportunity for structural reform. Shortly after I began discussing the idea with some of my legislative colleagues a group of 13 senators submitted a letter to the Secretary of State requesting a special session.
According to Nebraska statute, once a request is made to the Secretary of State by at least 10 senators, the first of two timelines is initiated. The first is a 10 day period for at least 33 senators to respond to the Secretary of State in support of a special session. Should that benchmark be reached, the Governor then has 5 days to issue a proclamation calling the Legislature into special session. The Legislature has never called itself into special session. The last special session, held in 2011, was called by the Governor, as were all prior special sessions.
The initiating request, made before the session even ended, illustrates why a solution to the property tax crisis has not been accomplished. The short time period for debate and “take it or leave it” approach of the past few sessions has prevented a successful legislative proposal from thorough discussion and debate. Repeating that mistake by calling the Legislature into session a week after it adjourned, locked in a stalemate, is simply repeating the same mistake. The timing of the request is more political than practical. It seems more important to “appear” to voters and the public that senators are “doing” something about property taxes by joining the call to an immediate special session than actually working toward success.
The advantage of a special session is to allow time for all senators to give sole focus on addressing property tax reform without distraction. Waiting until mid to late summer for a special session is far more practical. Proposals need time to be developed, vetted, and analyzed. With a primary election less than a month away, electoral politics would influence good policy, and those senators running for re-election would have their attention divided.
During my term the property tax reform proposals have been largely developed and negotiated by special interests. It is time the Legislature takes the reins and addresses a legislative solution by talking to each other. There have been no policy votes on any single property tax proposal in the past several years, only procedural votes used for political maneuvering. Until there is a clear picture of where each senator is at on specific components of the various proposals, an immediate special session would be a waste of taxpayer money and legislator time.
Success or failure of even the best idea rests in its execution. I am disappointed, but not surprised, by the rush to repeat the same mistakes that have prevented legislative success on property taxes. I support a special session that has been carefully prepared for with a high probability of success. Leadership, rather than political gamesmanship, is needed now more than ever.
Reliable and affordable access to the internet has become an essential need for most Nebraskans and is a common concern expressed by constituents in District 38. Many rural residents have significant challenges with speed and reliability of land-based internet service, and instead must turn to wireless providers to gain internet access. In fact, over half of internet access is currently via wireless devices rather than traditional computers connected to wired internet service providers.
Each generation of wireless technology brings with it a 10 fold increase in speed and capability. Increasing sophistication of applications and the sheer volume of data being exchanged during even basic tasks makes the deployment of the next generation of wireless infrastructure, known as 5G for 5th Generation, critical for rural Nebraskans.
This past week the Nebraska Legislature saw defeat of a bill critical to laying the foundation for deployment of 5G technology in Nebraska. Ironically, much of the opposition of the bill came from rural communities who would not be impacted directly by the bill’s provisions, but have the most to gain from a rapid upgrade to 5G technology.
The bill, LB 389, was written to provide consistency and facilitate the deployment of small cell technology in Nebraska’s urban centers. If you have ever been at an arena or stadium in Omaha or Lincoln for an event and been unable to send a text or access the internet from your phone, you experienced the need for small cell deployment. A typical cell tower has a coverage radius of several miles. When use is high, such as when ten thousand people are in a single arena, the coverage area of a cell tower shrinks and congestion occurs. Small cell devices are placed on utility poles in areas of high density use to provide network access.
Currently cities have the ability to charge whatever they want for a wireless provider to “lease” space on a publicly owned pole to install a small cell unit. The city of Lincoln charges $2,000 annually for each device. That is a cost that is passed along to you, the wireless consumer. For the governments of Lincoln and Omaha, these fees represent revenue streams that you experience no differently than a tax on your wireless bill. Each city also has its own process and restrictions for applying for placement. This patchwork of regulations and excessive cost has hindered the widespread installation of small cell technology in Nebraska’s urban centers.
There are lots of things mounted on public utility poles. In Nebraska, these are poles owned by you, the ratepayer. The practice is so common that NPPD has a set rate for “leasing” this space. It is $11.50 each year. The placement of small cell devices does not result in increased costs for the city. It does, however, provide an important consumer service to the taxpayers who own the infrastructure.
Small cell technology will never be deployed in the small towns across Nebraska. They are used only in situations where thousands of data users are concentrated in a very small area of a few city blocks. Despite this fact, many rural communities, including several in District 38, actively lobbied against the legislation with false claims. Unfortunately, their opposition has created serious consequence for rural Nebraskans. Nebraska now goes to the back of the line for 5G deployment, which delays the technology for several years.
With the increased speed and data transfer afforded by 5G technology, congestion in high density urban areas will be magnified. In order to accommodate the increased traffic, deployment of an extensive small cell network in Lincoln and Omaha will be required before upgrading Nebraska’s cellular network to 5G. The barriers of cost and regulation established by cities to generate revenue has a very real and profound cost to all Nebraskans, beyond the increase on their cell phone bills.
Nebraska had an opportunity to streamline a regulatory process and facilitate better technology access at a lower cost, a process already adopted in 15 states almost unanimously. It highlights the need for voters to know clearly how their local elected officials are lobbying on legislative issues and the impacts of their efforts. Rural Nebraskans will be paying the price for years of the failure of their local officials to study and understand this very important issue.
When I ran for the Legislature four years ago, property taxes were the top issue with voters. As we approach the final days of my fourth year, substantive policy changes to address the property tax burden have yet to be adopted. Like most taxpayers, I am frustrated by the inability of the legislature to substantively address such a widely recognized and commonly discussed problem.
It is my belief the Legislature is not able to accomplish the major policy overhaul needed to correct the property tax problem during a regular session. The politics involved in completing the required duties of a legislative session get in the way of productive, thoughtful policy discussions that are necessary to reform the system. Thus, I assert a special session for the specific purpose of property tax reform is the only option for crafting a meaningful solution.
A regular session requires focus on a number of issues necessary to keep state government running. The top of the list is adopting a state budget. Having served on the Appropriations Committee for the past four years, I have spent five days per week in committee in the development of the state budget. Spending decisions, by their nature, should take top priority. There are necessary state adjustments in response to ever changing federal policy, including revenue, education, transportation, and natural resources. These immediate concerns take precedence over the comprehensive approach needed for restructuring the property tax system.
Property tax reform requires a frank and honest discussion about a number of topics that are often deemed “sacred cows”. Property taxes fund many of the most visible and direct services taxpayers experience every day: education, local government, and emergency services. The spending decisions are made locally, by our neighbors. Policy discussions, rather than focusing on facts and a strategy for the future, are taken personally.
The special interest groups that represent each of those constituencies have a tried and true formula for protecting their specific piece of the pie. Each year property tax reform bills begin their debate on the floor late in the legislative session. Despite the fact all bills must be introduced in the first 10 days of the session, lobbyists “run out the clock” as a negotiating tactic. Rather than working to find compromise and bring the bill for floor debate early in the session, interest groups stall and drag their feet. Once the deadline looms, each group tries to force senators into a “take it or leave it” scenario. As we have seen, this approach does not lead to progress.
Given the importance and magnitude of the property tax issue, bringing bills to the floor for consideration, debate, and compromise as early as possible would be the best strategy for achieving reform. Yet year after year the bills are stalled in committee and delayed until the final days of the session. Of the many ideas introduced, few are allowed full discussion by the entire Legislature.
With all of the issues being addressed in a regular session, every senator and group has their own priorities and interests. Vote trading among senators on tax bills is rampant. Interest groups promise to support or withdraw opposition of unrelated issues to leverage their bargaining power. The sequence of unrelated bills on the floor has more influence on the success of a property tax bill then the policy itself.
Honesty and candor are rare commodities in political discourse. A property tax solution that works for all Nebraskans–homeowners, farmers, commercial property interests–requires everyone to set their parochial interests and short term needs aside and work collectively for the good of the state.
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.
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