Foundational property tax relief is within our reach

In 2023, our state achieved the nation’s best tax reform, slashing our income tax rates to 3.99% by 2027 and eliminating community colleges’ ability to levy property tax. These changes significantly enhance our state’s tax code, improving our competitiveness nationally and allowing Nebraskans to keep more of their hard-earned money.

However, Nebraska cannot rest on its laurels as our neighbors continue to make their own improvements. Just this year, Iowa enacted a law to lower its income tax rate to a flat 3.8% starting in 2025. To remain competitive, Gov. Jim Pillen is right to target property tax relief. However, the immediate path should be one of foundational reform, bringing fiscal discipline and transparency to local governments, rather than fueling their spending with state funds.

First, impose a hard cap on all property taxes. This first step is necessary to ensure that any funds sent from the state government to local governments are strictly applied to property tax relief rather than new spending. Sending funds to local governments without imposing a hard cap on property tax levies worsens both the state and local tax regimes. In other words, before sending money, ensure the funds will do no harm.

A hard cap should be the greater of 3% or inflation. New state funds should be applied against the jurisdiction’s property tax levy. Only voters should approve an ordinance to exceed the hard cap through a popular referendum – the ultimate act of local control.

Second, provide for 100% rate rollback to end unlegislated tax hikes. Taxes should not go up just because home values increase. Each year, the property tax rate should be automatically reduced to fully offset any increases in jurisdiction valuations and any new state aid. In the new year, the rate should be automatically rolled back to such a level to raise the exact same amount of total revenue as the previous year. Any action to raise any new revenue from the property tax should require an affirmative vote of the local board to raise the rate.

For example, suppose a jurisdiction raised $100 in property taxes last year. This year, valuations went up by 15% and the state sent the jurisdiction $10 in net new funding. The jurisdiction’s tax rate must be automatically reduced to offset the valuation increase and the new state funding so that the rollback rate produces the same total tax revenue as the previous year.

Third, require truth in taxation transparency for the first $1 in levy increase. Truth in taxation creates healthy citizen engagement in local governments’ fiscal decisions. That engagement should begin with the first dollar of property tax increase, which, under condition #2, could be collected only by a tax rate increase. In other words, if a jurisdiction will raise its tax rate, it should undergo truth in taxation to fully engage local citizens in a transparent fiscal process.

Fourth, reallocate the 1107 income tax credit to each school district. After steps 1 through 3 have been accomplished, the 1107 tax credit can be allocated proportionately to each school district under the assurance that it will result in dollar-for-dollar tax relief. The 1107 tax credit provides Nebraska income tax filers with an income tax credit for a percentage of school property taxes paid. This program, however, requires taxpayers to proactively claim the credit.

The 1107 reallocation will cause the property tax rate to automatically roll back in each jurisdiction. Furthermore, any effort to raise jurisdiction property taxes above the prior year’s levy will require truth in taxation and a voter referendum if the tax increase exceeds 3%/inflation.

Caution: Avoid unreliable revenue sources. The state must avoid making any funding commitment on revenues that involves taxing business or agricultural inputs. Further, relying on unreliable and shrinking income from tobacco tax increases is not fiscally responsible, and the taxation of digital advertisements is constitutionally suspect. Revenues derived from digital advertisements can completely disappear via judicial declaration, imperiling any tax changes made contingent upon the taxation of digital advertisements.

Finally, Nebraska government must preserve its own ability to reduce state taxes and plug state spending gaps in future years. Therefore, the state must avoid dedicating ongoing revenue gains to local governments in perpetuity. LB 388 contained language that would have dedicated all state revenue growth greater than 3.5% to local government funding. This would have tied the state’s hands and prevented future state tax cuts and emergency spending programs.

The time is ripe for property tax reform that would be a worthy sequel to the transformational reforms made in 2023. The overarching goal for policymakers, however, must be to keep local spending growth under control while not tying state government’s hands for the future. The recommendations we outline will ensure Nebraskans benefit from property tax relief, economic growth and accountable local government.