Although it may not feel like fall yet, it’s just around the corner. For taxing authorities, fall means the start of budget season. Taxing authorities need a sound budget to determine what their tax ask will be for the upcoming year. Nebraskans pay both state and local taxes. Although there are some city or county sales taxes, the bulk of local tax revenues come from property taxes.

We all want to see lower property taxes and we must understand how property taxes are assessed in order to make meaningful change. Nebraska’s state property tax was abolished via constitutional amendment in 1967. Since then, the state government has been funded by sales and income taxes, with property taxes only being used to fund local governments. Accordingly, property tax rates are set at the local level, not by the Legislature. The Legislature has taken significant steps to offer income tax credits and other tools to reduce Nebraskans’ total tax burden through LB1107 (2020) and LB873 (2022). LB873 alone will provide approximately $548 million in property tax relief. However, the most effective way to reduce property taxes is to start at the local level.

Property tax calculations all begin with your property’s valuation. First, the county assessor determines the “actual value” of real property within their jurisdiction. The actual value of real property is determined as of 12:01 a.m. on January 1 each year and is an estimate of the most probable price (market value) that a property will bring if offered for sale in the open market.

Then, the property is then assessed a valuation. All real property is valued at 100% of actual value, except for agricultural and horticultural land, which is valued at 75% of actual value or special value. Finally, property valuations are combined to determine the total value of property within the taxing authority that can be taxed.

In a competitive housing market, many see their property valuations increase and worry that it will lead to higher taxes. However, the tax levy (or mill levy) is the second factor in determining your final tax bill. If the levy stays the same from the previous year, then taxes would increase at the same pace as the increase in property values. However, when substantial property value increases occur, you should expect the mill levy to fall. For example, if each taxing authority has a 3% budget increase but property values increase by 5%, then the mill levy should drop.

The levy is a percentage tax rate applied to the assessed value. Each taxing authority (city, county, school district, etc.) sets its budget based upon operating expenses and determines the amount of property taxes needed to fund that budget. The levy is calculated by dividing the portion of the taxing authority’s budget by the taxable assessed value of all property in the area.

It is important to note that taxing authorities have two major components to their budget: the operating budget and the debt service budget. The operating budget pays for the annual operating expenses and the debt service budget is the amount needed to repay any bonded indebtedness. Taxing authorities can sometimes reduce their debt service budget by refinancing outstanding bonds and either obtaining a lower interest rate or extending the term of the bond so payments are smaller over a longer length of time. These changes would reduce annual budget expenses without decreasing spending.

This past year, many taxing authorities were encouraged to take advantage of the low interest rate environment and refinance their bonds. This should allow many taxing authorities to reduce their debt service budgets and therefore their overall tax asking, even if their operating budgets increase. As the old saying goes: The devil is in the details. This is why it is important to look beyond the headline budget ask and understand how the budget is calculated.

Even though the Legislature has little control over property tax calculations, there are some ways state government can support local services and therefore the overall budgets of local governments. In particular, it is important that rural districts – which rely heavily on property taxes from agricultural land – get their fair share of state revenues. I look forward to addressing this issue more in a future article and focusing on solutions during the next legislative session.

If you want to weigh in on ways to reduce Nebraska’s tax burden or have other ideas for 2023 legislation, please reach out to me at mjacobson@leg.ne.gov or 402-471-2729. My door is always open!