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Pillen tax plan limps forward after sponsor agrees to remove sales tax increase

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Pillen tax plan limps forward after sponsor agrees to remove sales tax increase

Apr 02, 2024 | 8:21 pm ET
By Paul Hammel
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Pillen tax plan limps forward after sponsor agrees to remove sales tax increase
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Off-the-mic conversations got serious Tuesday as state lawmakers debated Gov. Pillen's tax proposal. Pictured is State Sen. Lou Ann Linehan of Elkhorn, the main sponsor of the plan, talking with fellow Sen. Justin Wayne of Omaha. (Paul Hammel/Nebraska Examiner)

LINCOLN — Gov. Jim Pillen’s property tax plan limped forward Tuesday after its chief sponsor agreed to strip out its most controversial component: a proposed 1-cent increase in state sales taxes.

The bill advanced from first-round debate, 28-12, after lawmakers invoked cloture to shut off a filibuster.

State Sen. Lou Ann Linehan, the chief sponsor of the plan, said that Legislative Bill 388 didn’t have the votes to advance if it included the sales tax increase, which has been blasted as the biggest tax hike in state history by conservative groups and as a “tax shift” that didn’t reduce taxes by some business organizations.

Foundation aid increased

A companion bill to LB 388, a measure to use the additional revenue to increase school “foundation aid” from $1,500 to $3,000 per student, advanced unanimously to the floor of the Legislature on Tuesday.

LB 1331 also “front loads” the state income tax credits that Nebraskans now get to offset a portion of their property tax bills.

The income tax credit, however, wasn’t being claimed by all taxpayers — up to 65% of those in the Omaha school district weren’t claiming it — leading to concerns that the tax break wasn’t being fairly distributed.

Under the bill, the tax credit would show up on the yearly property tax statements that come each fall, rather than be sent out by check after someone files an income tax return and successfully claims the credit.

Linehan said she hoped that letting senators know exactly how the tax increases in LB 388 would be spent would increase support for both bills.

Linehan said she was unsure whether a new revenue source could be found in the waning days of the 2024 session to help fund the bill and whether it would return for debate this year.

Pause income-tax reduction?

LB 388 is designed to shift $650 million off local property taxes and onto new and increased sales taxes, resulting in a 30% reduction in property taxes.

One idea — pausing the state income tax reductions passed last year to fund the plan — was getting a fair amount of support among state lawmakers, but Linehan said it could lose as many votes for LB 388 as it gains.

“I don’t think it’s a leading contender,” she said. “(But) I don’t know.”

Pausing the income tax reductions would bring a fierce outcry from state business groups, who had been advocating for a cut in state income taxes for years. Farm groups and rural senators, generally, are more interested in reductions in property taxes.

The governor’s policy research director, Kenny Zoeller, said that his boss has a goal of providing more than $600 million in property tax relief and that it’s up to the Legislature to get there.

Open to ‘any avenues’

“However we get there, he’s open to,” Zoeller said.

Pillen later told the Examiner, “I am open to any avenues of funding this historic property tax cut.”

Floor debate on the bill during Day 53 of the Legislature’s 60-day session featured a lot of sidebar conversations about how to keep the tax proposal from going down in flames.

Opponents of the bill, which included organizations on both ends of

Jim Pillen
Gov. Jim Pillen held a series of town halls this year to pitch his plan to raise sales taxes to fund a reduction in local property taxes. (Paul Hammel/Nebraska Examiner)

the political spectrum, lobbed press releases Tuesday at the idea of raising one tax to reduce another tax, the local property taxes.

Poll showed 71% opposed to tax bill

Americans for Prosperity released a new poll indicating that 71% of respondents opposed LB 388 and its tax increase. The OpenSky Policy Institute slammed the bill as a “tax shift” that wouldn’t increase funding, overall, for local schools.

The Lincoln Chamber of Commerce warned in an email to lawmakers that a vote for the “controversial tax increase and shift” in LB 388 would be duly noted in grading senators on their support for business.

Supporters of the bill urged fellow lawmakers to ignore the lobbyists working against the bill. They argued that while LB 388 was not a “perfect” idea, it did address the top concern they hear from constituents — that property taxes are too high.

Pillen tax plan limps forward after sponsor agrees to remove sales tax increase
State Sen. Carolyn Bosn of Lincoln. (Zach Wendling/Nebraska Examiner)

“The second biggest concern isn’t even close,” said Lincoln Sen. Carolyn Bosn.

Bosn, like several other senators, said she wasn’t totally on board with a boost in sales taxes but was willing to give LB 388 a vote to advance it in hopes that a better idea would emerge prior to second-round debate.

The Lincoln senator added, though, that she would be OK with considering a pause in the state income tax reduction, which is scheduled to gradually drop the state’s top rate from 6.84% to 3.99 by tax year 2027.

Rural senators OK with pause

Two rural senators, Tom Brandt of Plymouth and Dave Murman of Glenvil, also told the Examiner they would be OK with pausing the next drop in state income taxes. It was an idea Brandt had proposed in a bill this year.

During floor debate, Linehan and other supporters of LB 388 argued that unless the bill was passed, property taxes would be forced to rise in many suburban and urban school districts because of how the state aid to schools formula reacts to rising property valuations.

Lincoln is looking at a $32 million reduction in state aid next year, Linehan said, which would force a steep property tax increase.

Opponents, led by Omaha Sen. John Cavanaugh and Lincoln Sen. George Dungan, said an increase in sales taxes would hurt low-income families more than families with higher incomes, and they said they couldn’t support that.

Late in the day, Lincoln Sen. Eliot Bostar introduced an amendment to strip out the sales tax increase, which both he and Linehan said had the necessary votes to pass.

While that saved LB 388 from dying Tuesday, just where the bill goes from here is uncertain.

Linehan told colleagues that if she can’t get an agreement among senators about replacement revenue, she will not seek to bring the bill back up for debate.

Would she be OK with a smaller property tax reduction?

The bill calls for about $200 million in new revenue from eliminating sales tax exemptions on digital advertising, candy, soda pop and veterinary bills for pets,  as well as increased taxes on cigarettes, vaping products and synthetic marijuana products. Would that be enough?

“I don’t know,” Linehan said.

There was some drama when the cloture vote finally came up late Tuesday afternoon. The initial vote came up one vote short of the 33 required.

After a brief pause, with groans erupting from behind the glass of the legislative chambers — where lobbyists stand — Sen. Steve Erdman changed his vote from “present and not voting” to “yes,” thus providing the necessary 33 votes to shut off debate.

Earlier in the day, Erdman had panned LB 388 as “not a solution” to the state’s traditionally high property taxes, instead pitching his solution: replacing all state taxes with a consumption tax.

The senator, who was among the 12 senators who voted “no” to advance the bill from first-round debate, told Nebraska Public Media that he lent a vote for cloture to allow more negotiations on the bill.