Taxes in Nebraska > Sources of Major State and Local Taxes > Property Taxes > Major Tax Policy Trends - The Shift from Property Tax Support to Sales and Income Tax Support of State and Local Government

MAJOR TAX POLICY TRENDS -
THE SHIFT FROM PROPERTY TAX SUPPORT TO SALES AND INCOME TAX SUPPORT OF STATE AND LOCAL GOVERNMENT

Introduction

In general, one issue that seems to dominate any discussion of the property tax in Nebraska is the perceived need for property tax relief. The Nebraska Legislature has been about the business of property tax relief since the sales and income tax were enacted in 1967. Many of these efforts have been unsuccessful, but most have been quite effective.

In fiscal year 1970-71, about 54.2% of all taxes collected in Nebraska were property taxes. In FY2000-01, the percentage had dropped to 32.4%. This change in distribution of taxes is shown by the pie charts in the link entitled "Analysis of Major State and Local Taxes".

This shift in the financing of public services from property tax support to sales and income tax support has been accomplished mostly through state aid to local governments. Other factors include the shift of Medicaid responsibility from 20% county support to 100% state funding, the absorption of the University of Omaha into the University of Nebraska System and the authorization of new local taxes, especially the local option sales tax. But state aid to local governments, especially schools is by far the most significant. By comparison, it is interesting to note that while property taxes as a share of all taxes decreased from 59% to 32% from 1967 to 2000, the share of all spending that is spent by local governments only decreased from about 71% in 1967 to about 63% in 1997. Meanwhile, state aid grew from nearly zero to more than $1 billion today. Below is a year by year chronology of significant property tax relief measures enacted by the Legislature.

Chronology of Significant Property Tax Relief

 
Original Cost
($ Million)

1967
Sales and Income Tax adopted (c. 487)
Exempt household goods (c. 494)
Exempt intangible property (c. 498)
State assumption of UNO (c. 620)


$ 9.70

3.00

1969
Create Homestead Exemption Program (c. 632)
Authorize City Sales Tax (c. 629)

6.40
9.50

1972
State assumption of magistrates, justice of peace, County courts (LB 1032)
Phase-out of Personal Property (LB 1241)

 
1977
Exempt business inventory, livestock, farm machinery (LB 518)

6.2

* Reimbursement of the personal property tax exemptions was frozen at $82.6 million and distributed based on the 1976 assessed value. After the Supreme Court struck down this distribution formula as a "closed class," the Legislature passed LB 816 in 1982. Most of the $82.6 million was distributed to schools per pupil until LB 1059 changed this to an equalizing formula. Aid to cities is per capita and aid to counties and NRDs is based on property taxes levied.

Personal Property Tax Exemptions
(Percent of Value Exempted Shown)

Tax Year

Farm Equipment

 Livestock

Farm Inventories

Business Inventories

1973*

12.50

12.50

12.50

12.50

1974

25.00

25.00

25.00

25.00

1975

37.50

37.50

37.50

37.50

1976

50.00

50.00

50.00

50.00

1977

62.50

62.50

62.50

62.50

1978**

100.00

62.50

100.00

62.50

1979

100.00

62.50

100.00

100.00

1980

100.00

100.00

100.00

100.00

* LB 1241, enacted in the 1972 Session, phased in exemptions 1973 to 1977.
** LB 518, enacted in the 1977 Session.


Takeover of County Medicaid

Tax Year

Fiscal Year

From

To

Mid 60's to 1980

   
20.00%

1980

1979-1980

20.00%

18.00%

1981

1980-1981

18.00%

16.00%

1982

1981-1982

16.00%

14.00%

1984

1984-1985

14.00%

9.33%

1985

1985-1986

9.33%

4.67%

1986

1986-1987

4.67%

0.00%


Original Cost
($ Million)

1985
State assumption of Municipal Courts
(LB 13, 1984)


$ 4.51

1989
8.5% or $5,400 general homestead for one year only (LB 84)


110.9

1990
20% of Resident Income Tax - Equalized Aid for Schools (LB 1059)


177.8

1991
Exempt Personal Property for 1991 only


9
7.9

Effects on property taxes - This aid has clearly lessened the growth rate of the property tax. From 1987 through 2000, the average rate of growth for sales tax collections was 8.3%, income taxes 9.6% and property taxes 4.6%, barely more than inflation. For the 1960s, prior to the enactment of the sales and income tax, property taxes grew by an average of over 3.5% every year after adjusting for inflation. Since that time the real growth in property taxes has been less than 1% annually and from the passage of Laws 1990, LB 1059 through 2000, the real growth was near zero. For an analysis of the Legislature's property tax relief efforts in the late 1990s, go to "Property Tax Relief in Nebraska: Progress Since 1995." Below are detailed descriptions of property tax relief measures in Nebraska and elsewhere. Since the fiscal difficulties faced by state government beginning in 2001, the rate of growth in the property tax has again exceeded the rate of growth in the economy, primarily due to cuts in state aid to local governments.

Current Property Tax Relief Measures

1. Expenditure Lids - LB 989, passed in 1998, extended and modified a lid on what is defined as restricted funds for political subdivisions other than schools with the authority to levy property taxes, and a lid on general fund expenditures for schools.

(a) Restricted funds are defined to include property taxes, local sales taxes; payments received in lieu of taxes, surpluses generated from a fee-supported activity (like an electric utility) which are budgeted for general uses, and state aid. State aid includes homestead exemption reimbursement, insurance premium tax receipts, street and roads funds, MIRF funds, general personal property tax exemption reimbursement funds, equalizing city and county aid, and state aid to community colleges.

(b) The law prohibits adopting a budget which contains restricted funds totaling more than the budgeted restricted funds for the previous year, plus

i. a statutorily set percentage allowable growth rate, currently 2.5%,

ii. growth in valuation due to improvements to real property between the two most recent available years but only to the extent such growth exceeds the basic allowable growth rate (2.5%),

iii. any carryover of unused budget authority from previous years, including amounts under previous limitations,

iv. 1% if approved by at least a three-fourths majority vote of the governing body,

v. amounts approved by the voters.

Adjustments are to be made if a subdivision annexes property, transfers responsibility for paying for a government service, or changes fiscal years.

(c) There are six exceptions to the limitation:

i. expenditures of restricted funds for capital improvements, defined as real property and improvements thereto.

ii. expenditures of restricted funds to retire bonded indebtedness,

iii. expenditures of restricted funds from a sinking fund set up to fund equipment purchases,

iv. expenditures of restricted funds in support of a jointly financed local service,

v. expenditures of restricted funds to repair infrastructure damaged by a declared natural disaster, and

vi. expenditures of restricted funds to satisfy judgments, except judgments of the Commission on Industrial Relations.

2. School districts are allowed growth in general fund expenditures between 2.5% and 4.5%. The specific limitation is determined district by district based on the spending of the local school district relative to other districts. Above average or average spending school districts are limited to 2.5%, while below average spending districts may have greater spending increases up to a maximum of 4.5%. The law also allows any district to increase spending by 1% after a special meeting and a three-fourths vote of the school board, so from a practical standpoint, the limitation is actually 3.5% to 5.5%. Cash reserves are limited to between 20% and 45% of the general fund budget depending on the size of the school.

Exceptions to the lid are for:

(a) expenditures in support of a service which is the subject of an interlocal agreement or modification of a prior agreement,

(b) expenditures to pay for infrastructure damage caused by a natural disaster,

(c) judgments, except those by the Commission of Industrial Relations,

(d) expenditures to pay for voluntary termination of employment by certificated employees, and

(e) amounts approved by a vote of the people.

3. Levy Limits - Beginning with FY1998-99, all political subdivisions with authority to levy a property tax were operating under levy limits which were designed to limit the maximum property tax which may be levied on any one parcel of property. That limited authority is then allocated among the various political subdivisions either according to law or using procedures provided by law. The levy limits per $100 of taxable value are as follows:

(a) School districts or multi-district school systems - $1.05. Excluded from this limitation are bonded indebtedness, which is an exclusion available to all political subdivisions, severance payments made to teachers, and appropriations from the building fund for projects commenced prior to April 1, 1996. Federal aid school districts may exceed the limits, but only if necessary to qualify for federal impact aid.

(b) Community Colleges - 7 cents. Six cents may be used for operations and one cent for capital construction. For FY2003-04 through FY2007-08 community colleges are allowed to levy the dollar amount necessary to make up the difference between what the state aid formulas indicate should have been appropriated to community colleges and the actual appropriation. This exception expires in FY2008-09. Finally, the Northeast Community College area may levy an additional one-half cent for FY2005-06 and FY2006-07 only to help start up a new site in South Sioux City.

(c) Natural Resources Districts - 4.5 cents, plus any amounts budgeted for groundwater management by an NRD containing a fully-appropriated or over-appropriated basin that is in excess of the 2004-05 amount. This groundwater management levy is not to exceed three cents for 2006-07 and two cents for 2007-08 and 2008-09. There will be no additional levy for later years.

(d) Educational Service Units - 1.5 cents.

(e) Municipalities - 45 cents, except that they may levy up to an additional five cents to provide financing for the municipality's share of the revenue required for a jointly financed service. Miscellaneous districts created by the city, such as city airport authorities, community redevelopment authorities, and railroad transportation safety districts are to seek levy authority from the city and are counted against the city levy cap.

(f) Sanitary and Improvement Districts which have been in existence for more than five years - 40 cents. If the S.I.D. has been in existence for five years or less, there is no limit.

(g) Counties - 50 cents, except that 5 cents may be levied only to provide the county's share of the revenue required for a jointly financed service. From the remaining 45 cents, the county may allocate up to 15 cents to miscellaneous districts. Miscellaneous districts are any political subdivision created by the county authorized by law to levy a property tax. These districts are to develop a budget and request authority to levy a property tax from the county board in which the greatest portion of the valuation is located by August 1. The county board may approve the request, deny it, or approve only a part, but whatever is authorized counts against the overall limits of that county. County boards may not approve requests from different entities which would result in a violation of the overall 45- or 50-cent limit, or which would total more than 15 cents of levy authority for miscellaneous districts on any one parcel in the county, except that the county may allocate its interlocal levy authority to one or more miscellaneous districts to provide its share of the taxes required to provide the joint service.

(h) City or county miscellaneous districts and villages may exceed the levy allocated by the county board by a majority vote of those attending a public meeting of residents at which there is a quorum present of at least 10% of the registered voters in the district. This override authority can be for any amount not to exceed any statutory limit, but will only apply to the fiscal year for which the levy is sought.

(i) The limits provided above may only be exceeded for property tax levies for judgments not covered by insurance, for lease purchase agreements executed prior to July 1, 1998, for bonded indebtedness, or by a majority vote of the registered voters in the subdivision.

The amount that the voters may approve is limited by any statutory limit otherwise in place, and may only be for five years or less.

The following expresses this information in chart form:

LB 1114 Levy Limits - Effective 2000
School Systems (except for contract buyouts and any sinking fund commitment for building commenced prior to 4/1/96)
1.05
Community Colleges
115% of local effort rate
plus .01
Natural Resources Districts
.045
Educational Service Units
.015
Counties (including county hospitals, extension, veterans service committees and fair boards)
.45 plus .05 for
cooperative efforts
Within the 45 cents, counties may allocate up to 15 cents to miscellaneous districts, agricultural societies, and historical societies as are listed below:

Rural and Suburban Fire Districts
Airport Authorities (County, City & Joint)
Libraries and Bookmobiles
Townships
Road Improvement Districts
Railroad Transportation Safety Districts
Cemetery Districts
Drainage Districts
Community Buildings Districts
Agricultural Societies
Hospital Districts
Public Building Commissions
Historical Societies
Reclamation Districts
Ambulance Districts
Metropolitan Transit Authorities
Downtown Improvement Districts
Metropolitan Utilities Districts
Parking Districts
Community Redevelopment Authorities

Total outside incorporated areas:

Sanitary and Improvement Districts
(which are more than five years old)

Grand Total:



.40

$1.60

 

$2.06

OR

Municipalities


Grand Total:

 

.45 plus .05 for cooperative efforts

$2.19

Excluded for all political subdivisions is bonded indebtedness, capital lease contracts approved prior to July 1, 1998, and levies to pay liability judgments.

 

4. State Aid to Local Governments Reform

(a) The passage of LB 806 in 1998 dramatically changed the distribution and increased the aid amount for schools. Currently, state aid to schools totals $900 million of which about $642 million is equalized aid.

Simplified, the equalization part of the formula measures "needs" by counting students and multiplying the number by the average per student cost for similar local systems; and "resources" which are categorical aid programs, aid based on income tax liability of system residents, other local resources like fines and penalties, and revenue that would be derived from a single statewide property tax rate. By statute, that rate is ten cents less than the levy limit (95 cents currently). The local valuation is adjusted to 100% of actual value to eliminate the influence of different assessment statistics between districts.

The state aid formula then pays the difference between "needs" and "resources" for each district. There are three groups of systems whose costs are averaged within the group, sparse, very sparse, and the basic group or tier. The formula assures relatively equal resources per student. However, students are weighted higher if they are high school or middle school rather than elementary school, or if a higher percentage than average qualify for free or reduced school lunches.

(b) Laws 1996, LB 1177 created an equalized aid program for municipalities. The bill provided that beginning in 1998, any qualifying municipality receives aid equal to the average per capita property tax levy times the population of the municipality, minus average property tax levy of all cities times the valuation of the municipality. If the result is negative, the municipality receives no aid. Essentially, this formula allows every city to raise the average amount of per capita revenue by levying the average property tax rate, with the state supplying any shortfall.

(c) Laws 2007, LB 342 enacted a new aid formula for community colleges. As of this writing, aid for community colleges is moving toward an equalization formula which will provide aid equal to the difference between need and resources available to the community college area. Resources mean a state foundational obligation, plus the prior year’s tuition receipts, plus a state distribution based on full-time equivalent weighted students, plus property taxes assuming a local effort rate derived from the total amount of available aid.

Currently “need” is based on historical spending by the particular community college area, up to a maximum amount per weighted full-time equivalent student. Beginning in FY2009-10, “need” will be the average per wieghted full-time equivalent student for all community college areas.

(d) LB 695 of 1998 created a modest new county aid program, for which $5.8 million was budgeted. This program grants capacity equalizing aid calculated by examining valuation per road mile. Aid is equal to the difference between the average property taxes per road mile which can be raised by counties, and the amount raised in the specific county, when a tax rate of 1.7 cents per $100 in valuation is multiplied by the statewide and individual county valuation. Counties with low valuation capacity using this formula receive aid that can be used for any general fund spending purpose. This aid program was suspended for FY2003-04 through FY2006-07, but will be funded again beginning in FY2007-08.

5. Other Property Tax Relief Measures in Nebraska

The previous discussions focused on indirect property tax relief, which is, reducing overall reliance on the tax without considering individual taxpayer circumstances. Many states, including Nebraska, provide direct relief to certain taxpayers. Nebraska does this through the homestead exemption program.

The program eligibility and benefits are as follows:

(a) The maximum benefit allowable is the greater of $40,000 of homestead value, or 100% of the averaged assessed value of single-family residential property in the county. Therefore, the potential benefit is higher in places in Nebraska where the cost of housing is higher, and the benefit amount will increase over time without statutory change. The maximum benefit is reduced due to increasing household income. The exemption benefit amount operates as a subtraction from the assessed value of the homestead. The homeowner pays the property taxes on the difference between the assessed value and the benefit amount. Property taxes on the exempt amount are then reimbursed to local governments from the state General Fund. For example, if the homestead exemption beneficiary is eligible for a $40,000 exemption and lives in a house valued at $50,000, the beneficiary would pay one-fifth of the total property tax bill and the state four-fifths. If the house were valued at $30,000, the state would pay the entire property tax bill.

(b) Household income determines eligibility. Household income is defined as federal adjusted gross income plus Nebraska adjustments for income tax purposes plus tax-free social security and municipal bond income. Claimants may deduct medical expenses, including health insurance premiums, which exceed four% of household income. For purposes of eligibility, the household income is totaled for the claimant, his or her spouse, and any additional owners who are actually living there.

There are three different homestead exemption programs benefiting three different classes of claimants. The majority of claimants qualify under the first category, those who were 65 years old or older on January 1st of the year. (Neb. Rev. Stat. Section 77-3507.) The second category is available for individuals who are permanently disabled so as to preclude locomotion without devices or assistance, or have a 75% disability in both arms. (Neb. Rev. Stat. Section 77-3508.) Finally, the third category of claimants are 100% disabled veterans, or un-remarried spouses of veterans killed while on duty, or who died due to a service-connected injury. (Neb. Rev. Stat. Section 77-3509.)

For these latter two categories of claimants, the maximum benefit is greater. The maximum benefit is the greater of 120% of the average assessed value of single-family residential property in the county or $50,000.

(c) Eligible married claimants with household incomes $26,250 or less ($28,801 or less for the second and third categories) qualify for the full benefit. Single claimants have lower thresholds. Higher incomes reduce and eventually eliminate the benefit. The household income eligibility brackets are adjusted annually to reflect inflation.

(d) Homesteads valued at more than a maximum level also reduce and eventually eliminate eligibility for the homestead exemption. The amount of the exemption is reduced 10% for each $2,500 in value by which the homestead value exceeds the maximum amount, except that any homestead valued at more than $20,000 over the maximum amount is ineligible. The maximum value is the greater of $95,000 or 200% of the average assessed value of single-family residential property in the county. For those homestead owners qualifying as disabled, the maximum value is the greater of $110,000 or 225% of the average assessed value of single-family residential property in the county.

Therefore, the cap is higher in counties where housing is more expensive, and the cap will increase over time automatically.

6. The Property Tax Credit Act

LB 367 of 2007 put in place a direct credit against property taxes using excess state funds. For FY2007-08, the amount of relief provided will be $105 million. For FY2008-09, it will be $115 million. In future years, the amounts to be distributed are to be any amounts appropriated or transferred to a special fund created for this purpose. The intent is to transfer excess revenues into the fund for distribution under this mechanism.

The amount in the fund is to be distributed to counties based on each county's share of the total valuation of the state and the county is to credit the full amount of the distribution to each property taxpayer in proportion to the valuation owned by each. In this way, the money is used to reduce the property tax bill of each taxpayer equally from the standpoint of a dollar and cents levy. Since the money is credited to each taxpayer's bill, there is no distribution to each, the amount of the credit simply appears on the property tax statement. For both years in which the transfer is determined the credit is expected to reduce each property taxpayer's bill by about 8 cents per $100 of valuation below what levies would be without the credit.

7. State Financing of the Assessment Function

By 2001, nine counties had opted for state takeover of assessment expecting property tax reductions of more than $1 million. The nine counties were Dakota, Harlan, Dodge, Sherman, Garfield, Hitchcock, Greeley, Keith and Saunders. There have been no more since.

8. Increased local authority for raising revenue

(a) Many states have authorized local governments to use sales and income tax sources in an attempt to lower the overall use of the property tax. In Nebraska, cities have been given the authority to use the local option sales tax. In FY2005-06, cities collected approximately $275 million of local option sales taxes. Also, about 135 of the 535 municipalities in Nebraska levied a local option sales tax.

(b) Schools automatically receive a share of the state individual income tax liability of residents of each district, regardless of state equalization aid needs or level of property tax.

(c) Unrestricted, or in some cases legislatively limited, user fee authority exists for cities, the University, and some other minor political subdivisions.

(d) Laws 1996, LB 1177 allows any county to impose a local sales tax of up to 1½% throughout the county, except that any county tax will not be applicable in any city which has a sales tax. The proceeds of the tax must be used to finance the county share of a public safety commission created to administer joint city-county law enforcement, fire and/or emergency services and any other joint services provided under an interlocal agreement. Currently, only Dakota County has opted to use this authority.

9. LB 1120 (1998) grants state aid to fire districts and cooperative organizations of fire districts that act to levy a uniform rate for fire protection over the majority of any one county. The threshold for eligibility is that 80% of the population of any county must be subject to the uniform levy agreement to be eligible not counting first, primary or metropolitan class cities. Rural population is assumed to be spread throughout the county the same as valuation. If eligible, the fire district or mutual finance organization receives aid equal to $10 times the population, not to exceed $300,000. If the fund that consists of 10% of insurance premium tax receipts is insufficient to pay all the obligations for aid, the aid is prorated.

10. Property Tax Relief Measures In Other States

Other states have passed spending and property tax limitation measures, which are sometime far more drastic than what is described above, usually through ballot initiative.

(a) Proposition 13 in California was perhaps the first tax limitation measure of the current era. Proposition 13:

i. rolled back property valuations, and limited year to year valuation increases to 2% annually unless:

– the property is sold, or

– the property is substantially improved or rebuilt, and

ii. limited combined tax levies to 1% of assessed value.

iii. In California, this has resulted in sharp differences in assessed values for property owners who have purchased property recently and long-time owners of similar property. These differences were upheld against an equal protection clause challenge in Nordlinger v. Hahn, 112 S. Ct. 2326 (1992). Proposition 13 has also resulted in the state control of property tax levies to assure that the 1% limitation is not violated. In the past, the California Legislature has met conflicting priorities in part by transferring property taxes from one subdivision to another to meet pressing needs, or taking over other obligations.

(b) Another recent trend found in California, Colorado and elsewhere is to prohibit increasing taxes without a vote of the people. Where this limitation has been enacted, disputes typically arise on three bases.

i. What is a tax? Does it include user fees, permits, licenses, parking fines, etc?

ii. What is an increase? Is it just in rate or is repeal of an exemption prohibited? What about revenue that exceeds projections?

iii. How is it enforced? If it is later discovered that the state or a subdivision was in violation, does the increase have to be refunded? If so, how and to whom?

(c) A variation on this theme is limitations on expenditures or taxes to the rate of inflation plus population growth. Again, the major concerns are developing reliable methods of determining whether or not a state or locality is in violation before the violation occurs and a remedy if a violation occurs in any event. Also, some proposals would limit government units individually, thus restricting aid increases designed to produce property tax relief.

(d) These actions are common in states that allow initiative petitions regardless of the level of taxation.

Colorado, for example, was 31st in total state and local revenue per $1,000 of personal income in 1990-91, 21st in property taxes, 28th in sales taxes, and 26th in individual income taxes. Yet in 1992, the voters approved the Taxpayer Bill of Rights (TABOR) that limits budget and revenue growth to the sum of the population growth and inflation absent a vote of the people. A few other states have adopted similar initiatives. A petition to place a constitutional amendment on the ballot for adoption in Nebraska was circulated in 2006.

Initiatives circulated in Nebraska in 1996 proposed eliminating property taxes, freezing both levy authority and budget growth, and enacting levy rate caps similar to LB 1114, only lower. An initiative that qualified for the ballot in 1998 but failed, proposed limiting revenue growth for the state and all local governments to the rate of CPI, population growth, federal unfunded mandates, declared emergencies, and voter approved increases. In 2006, voters rejected a constitutional amendment to limit state government expenditures that is similar to the restrictions in Colorado's TABOR.

(e) Classification or Exemption of Assessed Valuation

Many states have modified assessed valuation policies in an attempt to provide tax relief to certain classes of taxpayers or types of property. Nebraska exempted household goods, business and farm inventories, and farm machinery in an attempt to reduce property tax use, and eliminate the complex and arbitrary valuation practices that were common in some of those areas. Farm machinery has since been returned to the tax rolls at net book value.

For the same reason, agricultural real estate in Nebraska is valued at 75% of market value while other property is valued at 100%. The majority of states have adopted lower levels of value for some property in an attempt to lower taxes for owners of that property type. Kansas, for example, values residential property at a lower percentage of value than commercial and industrial property. States sometimes must modify their state constitutions to pursue this option since many states inserted uniformity in property taxation clauses in their Constitutions at some point in their history. Neb. Const. Art. VIII, Sec. 1 contains Nebraska's uniformity clause.

The latest state efforts in this regard are a combination of exemption or credit mechanisms, in some cases to meet economic development goals. The Nebraska Advantage Act (LB 312 (2005)) provides relief for businesses creating jobs through a combination of state income tax credits, sales tax refunds, and a local personal property tax exemption. Other states create tax reduction zones, where valuation is exempted or property tax liability reduced through a credit mechanism.

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