Evaluating Nebraska Governor’s Plan for Property Tax Relief

While we await the details, early reporting indicates that Nebraska Governor Jim Pillen (R) plans to propose legislation that would deliver property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.
relief via a shift of some revenue collection away from local property taxes toward state-implemented taxes. While the proposal may succeed in reducing property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
bills, some of its broader implications would be undesirable.

The property tax is very familiar to anyone who pays it. Few taxes are more transparent: it is typically paid in large lump sums, not withheld or collected piecemeal throughout the year. As a result, the tax generates strong opinions. However, a well-designed property tax is more neutral—and clearly more transparent—than most other taxes. It also corresponds, albeit imperfectly, with the value of the overall benefits received by the property owner (e.g., police and fire protection, roads, and schools). Consequently, many potential replacements for property tax revenue do more economic harm than the tax they replace.

Below, we will briefly examine some of the potential provisions of Governor Pillen’s plan to reduce property taxes and offer insights into whether they represent sound, pro-growth, and competitive tax policy.

Background

The property tax is often one of the few revenue generators available to local governments, making its reform potentially contentious. In recent years, some states report property valuations rising 40 percent or more. That begs the question: is the taxpayer receiving 40 percent more or better government? Likely not. While inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
has increased the cost of local government, it has certainly not increased it to the extent that taxpayers around the country have seen their property valuations rise.

When property tax valuations rise sharply, the taxpayer is left asking how the same property is somehow worth significantly more in the very next year without any improvements being made. There are, of course, market reasons why this may be the case, but it is also true that any discussion regarding revenue collections should also include meaningful and open dialogue about levels of spending, and whether they need to rise by this much.

There are three primary ways in which states limit property taxes: assessment limits, rate limits, and levy limits. Rate limits do nothing to prevent tax bills from soaring when assessed values rise, and are the most easily circumvented by local governments. Assessment limits create significant market distortions and other inequities. Levy limits restrict revenue collections in the most neutral manner, reducing overall property tax millages (rates) to offset jurisdiction-wide increases in assessed values.

Alternatively, states may choose not to impose direct limits on the growth of property taxes, but instead to defray them by having the state offset some of the costs. That is the approach taken by the governor’s plan.

Spending Limits

Governor Pillen’s proposed property tax relief includes spending limitations on local government. Without such limitations, providing long-term relief would prove difficult, since local governments could simply re-raise their property taxes to prior levels even while benefiting from additional state aid. The plan will likely include “hard” limits on spending growth and, potentially, extend the “soft” caps that were in place previously.

Nebraska currently employs both rate and levy limitations. While the governor’s plan would restrict spending, policymakers should scrutinize the current levy limitation to ensure that it is more effective. The current levy limit dates back to 1998 when it imposed a cap of $2.19 per $100 of property value. However, the limit does not apply to bond issues, meaning taxpayers can pay more than the $2.19 cap. While sustainable spending limits are important, the state should also reform the current levy limit to ensure that it is both transparent and effective.

Increased Sales and Cigarette Taxes

To pay for property tax relief, Governor Pillen proposes expanding the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
base, increasing the sales tax rate by up to $.02, and raising the cigarette tax by $2 per pack. Details about base expansion and exemptions remain sparse but one thing is certain: raising the sales tax rate by $.02 (to $.075) would make Nebraska’s rate the highest state-level rate in the country.

An increased sales tax rate could induce greater amounts of cross-border shopping for those Nebraskans that are close enough to lower tax jurisdictions, leaving those in the interior of the state to bear the brunt of the newly increased tax.

Sound tax policy calls for base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability.
and limiting (or eliminating) exemptions to the tax to reduce the overall tax rate where possible. While sales taxes are a relatively economically efficient tax, this proposal would yield high rates of sales tax without the pro-growth benefits that might come with reducing taxes other than the property tax.

Raising the excise on each pack of cigarettes by $2 presents several policy concerns. First, as we have noted in the past, excise taxes on cigarettes tend to be regressive—i.e., smoking rates increase as incomes decline. According to data published by the United Health Foundation, 27.8 percent of Nebraskans earning less than $25,000 are smokers, but only 8.9 percent of Nebraskans earning $75,000 or more smoke. Imposing a significant per-pack tax would negatively impact Nebraska’s lowest earners.

Moreover, our research demonstrates that excessive excise taxes on cigarettes correspond to increased black and gray market movement of the product from lower-tax states to higher-tax states. Therefore, a sharp rise in the cigarette tax would likely see Nebraska become a net receiver of cigarettes smuggled from out of state. If this were to occur, an increased cigarette tax would prove to be an unstable source of revenue to pay for property tax relief.

Conclusion

Nebraskans need property tax relief and there are sound ways to provide it. However, increasing the sales tax rate to the highest in the country and dramatically increasing cigarette excises is not sound tax policy. The effects of both could be dramatic and would likely punish Nebraska’s lowest earners.

The state should focus on revenue limits to provide property tax relief. If lawmakers wish to broaden the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
, they should do so without an increased rate. Nebraska is well positioned to reduce property taxes, and acting prudently will allow for such reform to yield the competitive and pro-growth outcomes that Governor Pillen and others seek.

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