Making wise decisions on a tax shift
The Nebraska State Capitol Building. (Rebecca S. Gratz for Nebraska Examiner)
Earlier this year, the governor and the Legislature tried and failed to develop a workable plan to reduce Nebraska property taxes through increases in sales taxes. Now, as decision-makers in Lincoln consider coming together in a special session, the options on the table still focus on using sales taxes to pay for cuts in property taxes. Why? Decisions made in the Legislature in 2023 shape what’s possible now.
In 2023 the Legislature used a historic budget surplus of $1.9 billion to cut income taxes, shaving almost $1 billion annually from state revenues once the income tax cuts take full effect in 2027. That Legislature also made major spending commitments for initiatives that might lower property taxes — such as K-12 education, community colleges and property tax credits — but also on initiatives that definitely would not, like the Perkins County Canal and a new prison.
Instead of using last year’s unprecedented budget surplus to enact transformational property tax reform, the Legislature overcommitted itself financially. Earlier this year, the budget writers in Lincoln had to go digging through the metaphorical couch cushions, sweeping an unprecedented $200 million out of state cash funds to keep the state’s budget in the black. That kind of broad-based cash fund sweep typically only happens when our economy is tanking, but, despite recent inflation and increases in interest rates, all economic indicators show we’re decidedly nowhere near a recession. Instead, Nebraska has low unemployment and strong economic growth.
Now, the Legislature is rumored to be considering yet another plan to lower property taxes using new sales tax revenue – a tax shift. Put another way, after cutting income taxes that will primarily benefit the wealthiest Nebraskans and out-of-state corporations, the Legislature may be asked to raise taxes on middle class families and small businesses to “fix” property taxes.
With a statutory requirement to balance the state budget, the Nebraska Legislature has to live within its means. Proposals for the state to completely take over K-12 funding — something no other state in the nation attempts — and other major property tax proposals all require a consistent and sustainable revenue source at the state level. No amount of establishing revenue or spending caps on cities, counties or schools will achieve the cuts in property taxes that state politicians — who don’t set local government budgets — so desire, without the state doing its part with the tools available to it, which include income taxes along with sales taxes.
Rather than making grand promises on speculative revenue, we could discuss less expensive, more targeted forms of property tax relief. These include expanding the homestead exemption or creating a property tax circuit breaker that triggers relief once a person’s property taxes exceed a certain percentage of their income. Both these options would help those Nebraskans at the greatest risk of being taxed out of their homes.
There’s an old adage that politics requires thick skin and a short memory, but when it comes to the well-being of our state’s finances and the necessity of making measured decisions with the people’s money, some amount of historical perspective is essential. The alternative is robbing Peter to pay Paul.
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