Policy brief – LB 1103 offers another option for property tax relief
LB 1103 – as amended by AM 2808[1] — offers an alternative to LB 947 that provides significant property tax relief while protecting school funding. The amended LB 1103 would alter several parts of the state’s tax code to generate nearly $500 million in revenue to provide property tax relief. The changes in the amended LB 1103 are:
- A one-cent increase in the state sales tax from 5.5 cents to 6.5 cents;
- A $1.50 increase in the state’s cigarette tax (from 64 cents to $2.14 per pack);
- The creation of a new surcharge for those who make more than $500,000 in annual income. The surcharge applies a 2.5 percent tax on state income tax liability of those with adjusted gross income (AGI) between $500,000 and $1 million and a 5 percent tax on state income tax liability of those with AGI greater than $1 million;
- The reinstatement of the state’s Alternative Minimum Tax – or AMT (repealed in 2013) — which is intended to ensure that high-income taxpayers do not itemize so much that they don’t pay taxes;
- A cap on the amount of property taxes a school district can collect. Under the cap, a school district would see decreased ability to collect property taxes if its state school aid increases. Conversely, a district’s ability to collect property taxes would increase if its state school aid decreases. A district can exceed its cap if it receives approval from 75 percent of its local school board, a simple majority of the public via mail-in ballot or if a levy override is approved by voters prior to Jan. 1, 2019; and
- The repeal of the $10,000 personal property exemption passed in 2015.
Revenue generated by these changes would be used to:
- Offer each public school district $500 of per pupil aid. This aid would be distributed to schools outside of the school funding formula, which ensures that it would go to schools regardless of whether they receive equalization aid;
- Increase the Allocated Income Tax portion of the school funding formula from about two percent to 30 percent of income taxes paid by residents of the district. Allocated Income Tax is state income tax revenue that is directed back to a taxpayer’s local school district in the form of state school aid;
- Increase State Reimbursement for Special Education from the present level of 44.78 percent to 61.55 percent;
- Restore $43 million in state school aid that was cut by LB 409 in 2017;
- Increase the state’s Earned Income Tax Credit from 10 percent to 15 percent of the federal credit. This would lead to an average $114 increase in the refundable credit for those who receive it; and
- Deposit any remaining dollars generated from the tax changes above into the state’s Property Tax Credit Fund.
The amendment also calls for a comprehensive school finance study to be completed by the Nebraska Department of Education and it requires school districts to reduce property tax levies by the amount of new allocated income tax and per-pupil aid they receive.
Balancing Nebraska’s funding streams
The amended LB 1103 would increase state funding to education, and when property tax levies are reduced by the amount of new state aid, the bill would change the funding mix for education in Nebraska to be closer to the national average. Nebraska’s ranking in terms of the percentage of school support that comes from the state would rise from 49th to 34th. Also, the percentage of education funding that comes from local sources would drop from 2nd highest to 15th highest. Presently 59.2 percent of school funding in Nebraska comes from local sources such as property taxes. LB 1103 as amended would lower that percentage to 49 percent. The national average is 44.5 percent.
LB 1103’s effect on Nebraska’s three-legged stool
The amended bill would provide some more balance of Nebraska’s three-legged tax stool in terms of property and sales taxes but income taxes would remain the shortest leg of the stool. Presently 37.5 percent of state and local tax revenue comes from property taxes, 28.9 percent comes from sales tax and 27 percent comes from income taxes. Under the amended LB 1103, 32.8 percent of state and local tax revenue would come from property taxes, 33.6 percent would come from sales taxes and 27.1 percent would come from income taxes.[2]
Impact on levies
Statewide, school district levies on average would decrease 17 cents – or 21 percent — under LB 1103 as amended. The Santee Community School District would be able to lower its levy the most as it would be able to completely eliminate its $1.05 levy. The Wheeler Central School District would experience the smallest levy reduction as it could reduce its levy 4 cents – or about 10 percent — from 39 cents to 35 cents. The new influx of special education dollars under the amended bill could help reduce levies, as well. Nebraskans would also see their property taxes reduced further as a result of the increase in the Property Tax Credit Program. The elimination of the personal property exemption, on the other hand, would cause an increase in property tax liability for some Nebraskans.
LB 1103’s regressive components somewhat offset by other changes
Some of the amended bill’s proposed changes, however, fall more heavily on low- and middle-income Nebraskans. The increase of the sales tax rate by one cent would move us from having the 30th highest sales tax in the nation as a share of GDP to the 21st highest as a share of GDP. The sales tax is the most regressive tax – meaning low- and middle-income Nebraskans pay more of their income in this particular tax than do wealthier residents. The cigarette tax increase, which would move us from having the 41st highest cigarette tax in the nation to having the 14th highest, also is a regressive change. The proposed increase in the state’s Earned Income Tax Credit, however, is intended to lessen the impact of the regressive changes on low- and middle-income Nebraskans. The enactment of the high-income earner surcharge and the reinstatement of the AMT also are progressive changes that offset some of the regressive effects of the sales-tax and cigarette-tax increases.
Conclusion
LB 1103 as amended by AM 2808 is a more responsible approach to providing property tax relief than some other measures currently before lawmakers because it would offset its cost with replacement revenue. It also falls in line with findings and recommendations from every major study of Nebraska’s tax code, which all noted that our high reliance on property taxes is rooted in low state support for K-12 education and that increasing state aid to schools is the most effective way to address property taxes in Nebraska.
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