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Tax reform in Nebraska. Has the improbable become impossible?

In the waning days of the session, a classic battle between the Executive and Legislative branches looms large. The Governor wants property tax relief but no increases in other taxes or tax shifts. The Legislature says it needs increases or shifts to fund property tax relief.

In a promising -- albeit fleeting -- development, the Legislature’s Revenue Committee drafted a plan to reduce property taxes by increasing state aid to K-12 education. That was the top recommendation of the Legislature’s 2013 Tax Modernization Committee to reduce property taxes. But the search for new revenue to fund the increase and the tweaking of the legendary state school aid formula remain problematic.

If the Governor’s campaign to rally opposition to the plan and a seven-hour hearing on the proposal are an indication, anything beyond the usual Band-Aid approach may not happen this session, or anytime soon. Only four proponents spoke for, while another 36 spoke against it, or in a carefully crafted neutral capacity.

Opposition came from cities, urban schools, chambers of commerce, the Nebraska State Education Association, policy think tanks, retailers, real estate agents and contractors. Even the Nebraska Farm Bureau and allied ag organizations – by far the biggest proponents of property tax relief – told lawmakers while they approved of an increase in the state sales tax rate and broadening of the base, they want the state to maintain the current property tax credit fund.

Critics say that an increase in the state sales tax rate by three-quarters of a cent, taking it from 5.5 cents to 6.25 cents, is regressive and puts more of a load on low- and middle-income residents who pay more of their income in sales taxes than do wealthier residents. Some suggest pairing it with an increase in the state’s Earned Income Tax Credit.

The proposal would also tie school district spending growth to the Consumer Price Index, but would not allow spending to exceed a 2.5 percent cap even if the district actually needs more funding to serve its students. The cap limits how much a district’s needs will grow and reduces the amount of equalization aid a district gets. Districts at or near their levy limits that can’t offset reduced state funding with higher property taxes will need to cut services. That impacts mostly large urban school districts.

Some say that removing sales tax exemptions and expanding the sales tax base to more services is sound tax policy in Nebraska where only 81 services are taxed compared to 176 services taxed in other states. The Governor has taken issue with proposed elimination of sales tax exemptions for plumbing, barbering and certain veterinary services as well as for soda, bottled water and candy.

The proposal calls for reducing the value of agricultural land for property tax purposes from 75% to 65% of assessed value, and residential and commercial property from 100% to 90% of assessed value for local taxing authorities such as schools, cities, counties and community colleges. This could result in levy increases by governments that are under their limits. Others would be forced to cut services. Looking for alternative revenue streams could be particularly difficult for growing localities and those rebuilding from recent flooding.

Proponents say the state will benefit from an estimated $51 million from out-of-state internet retailers to go toward property tax relief. The funds have been so allocated in the Appropriations Committee preliminary budget, but that could depend on revenue forecasts and possible other needs. That same budget also calls for $38.5 million less in school funding than the Governor proposes.

The Open Sky Policy Institute suggested that the proposed three-fourths cent increase in the state sales tax rate is too high. The Platte Institute said the funding source for increased school aid should be elimination of sales tax exemptions, not increased tax rates. The Governor said the state needs to focus on budget control.

In his budget request to the Legislature, the Governor proposed a $51 million increase in the state's property tax credit fund during each year of the upcoming fiscal biennium, along with a constitutional amendment that would limit property tax increases to 3 percent a year. The Appropriations Committee cut that to $26 million and earmarked the rest to help replenish the state’s cash reserve.

While I can’t say what the final plan will look like, the committee has enough proposals and ideas before it to find an equitable and sustainable solution. It is possible.

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J.L. Schmidt has been covering Nebraska government and politics since 1979. He has been a registered Independent for 20 years.

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