Property tax relief is always top of the agenda in Lincoln, as Nebraskans struggle under the weight of one of the nation’s heaviest property tax burdens. Nebraska should target two taxes to take off the rolls, and two technical changes to restructure the property tax system to deliver better relief.
Currently, Nebraska puts $1 billion per year into direct property tax relief programs administered through credits, and hundreds of millions more into indirect property tax offsets such as new school funding. The next $300 million of property tax relief should target tax elimination. Furthermore, property tax administration should be reformed to maximally incentivize local fiscal restraint.
Two Taxes to Target
Property tax relief is best when it results in property tax elimination. While Nebraska’s $3 billion school property tax is a huge levy to replace, there are smaller property taxes that can be removed from the rolls entirely. For example, Nebraska’s 2023 tax reforms included the elimination of community college property taxes by providing state funds for replacement.
Educational Service Unit (ESU) property taxes can be eliminated in the same way. The units are spread across the state, meaning that elimination would provide relief to all corners. In addition, the total statewide burden is slightly over $50 million per year, a manageable amount for a near-term elimination. For property tax relief, elimination is good policy and good politics because voters can see the line items shrink on their tax bills.
The second elimination opportunity is a tax that impacts farms and factories. Nebraska’s tangible personal property tax (TPP) generates $250 million per year. It skews investment decisions and economic behavior, especially compared to property taxes on immovable property. Tax studies consistently show that taxation of immovable property has a relatively small impact on growth. But taxing movable property, such as tangible personal property, has an outsized impact on growth and production investments. Therefore, the second tax Nebraska should eliminate is the tangible personal property tax.
The next $300 million of property tax relief should focus on elimination in this way. The ESU property tax can be replaced quickly. The TPP tax would need to be phased out over a few years. The first step to eliminating the TPP tax should be to create a robust de minimus exemption to remove businesses from the tax rolls entirely if they possess less than a threshold amount of TPP, such as $10,000 or $20,000. From there, rates can be phased down as state replacement dollars are phased in.
Two Technical Transformations
The first technical reform is to deploy school tax credits to direct reductions in school property taxes. Roughly speaking, Nebraska school districts collect $3 billion in school property taxes. The state provides approximately $750 million in property tax relief through credits that are applied at the county level. Instead, the same state relief dollars can be allocated to school districts exactly as they are today with a mandatory dollar-for-dollar reduction in tax levies. Property taxes would drop by 25% and credits would no longer need to be applied.
Nebraska’s current application of school property tax credits is a meaningful improvement upon the original structure. Originally, property taxpayers would get property tax relief through a refundable income tax credit. This indirect approach resulted in too many Nebraskans not getting the tax relief that was provided for them by law, which is why lawmakers transformed the credits to an automatic reduction at the county level. Deploying these funds to direct school tax reductions will finally put the onus for property tax relief on the school districts themselves, which is where it belongs.
The second technical reform is to create an automatic revenue-neutral rate rollback. Taxes should not be increased by a dollar without an affirmative vote by the local government. Therefore, when valuations increase, the tax rate should automatically decrease so that the total tax collections are the same dollar amount as the prior year. Collections can be increased by an affirmative vote of the board to raise the rate from revenue neutral to a higher rate that brings in new revenue.
Nebraska should target two taxes for elimination and two technical reforms to deliver a new round of property tax relief. These changes make for better policy and better politics, and will create lasting relief for Nebraskan households and industries.
