The package of bills designed to lower property taxes paid to fund local government services is a complicated equation, but what does it add up to for Nebraska’s students?
The proposal included in amendments to LB 388 (AM 3203) and LB 1331 (AM 3264) would raise what the state generates through sales taxes and change how the state handles an existing state income tax credit, each move intended to lower property taxes paid to fund the state’s K-12 public schools.
The end result would be more state aid to public schools but not a new investment in education. Instead, policymakers propose a tax shift from property taxes paid by property owners to sales tax revenue paid by all consumers, along with changes to the state’s school funding formula that target property tax reductions. Changes to the formula to enhance educational outcomes are not a part of the equation.
The Institute on Taxation and Economic Policy modeled the proposed tax shift and, on average, the 5% of Nebraskans with incomes over $252,600 will pay less as a result of the changes, while for 8 in 10 Nebraskans, the sales tax increase will on average be greater than any property tax cut they may receive.
For schools, revenue generated through raising the state sales tax rate and removing some existing exemptions would be distributed through an increase in foundation aid from $1,500 per student to $3,000 per student. Financing education through foundation aid per student does not recognize differences in student needs that necessitate educational costs to vary across districts striving to meet state goals such as students reading at grade level, meeting benchmarks on standardized tests or graduating on time.
OpenSky compared budgets for individual school districts’ general fund expenditures in FY 24 to FY 23, the year before the state began sending $1,500 in foundation aid to school districts for all students. In 172 of 244 districts, per-pupil spending was budgeted to decrease. Those declines, observed in urban, rural and rapidly growing suburban districts, come even as districts continue to spend federal Elementary and Secondary School Emergency Relief (ESSER) funds. Nationally, Nebraska schools rank 24th, spending $13,826 per pupil across all funding sources (local, state, federal) in FY 21, the most recent year nationally comparable data is available.
In funding public education, the state’s role is to level the playing field so that all students have the opportunity to achieve, even when students have different needs and districts have different resources. If the state hopes to improve educational outcomes, research evidence clearly indicates that funding should be directed to low income communities where students have high needs, rather than used to reduce property taxes.
What’s included in AM 3264?
- The amendment retroactively sunsets the state income tax credit for a portion of property taxes paid to K-12 schools – the so-called 1107 credit – on Jan. 1, 2024. Funds that the state budgeted for tax credits will instead be divided among schools to reduce what property owners would pay to fund public schools on tax statements beginning in 2025.
- The proposal increases foundation aid to school districts – what the state allocates per student – from $1,500 to $3,000. Unlike state equalization aid, foundation aid is not responsive to the differing needs of students and districts.
- Funding to lower property taxes paid to schools would be paid out annually from the Education Future Fund created in 2023.
- The proposal would increase what the state pays into the Education Future Fund from $250 million a year to $1.217 billion in FY 25 and $1.5 billion in succeeding years to direct funding to schools. It will be up to future legislatures to sustain the Education Future Fund even as past cuts to the state income tax ramp up, reducing revenues available to pay for public education and other services that Nebraskans rely on.
The legislature is scheduled to resume debate on LB 388 on Tuesday, Day 53 of the 60-day session. Debate on LB 1331 has not been scheduled.