LINCOLN — Nebraska was ranked this fall among the 10 worst states in the country for retirees by Kiplinger, a publisher of personal finance advice.
One factor in the ranking: The state is one of only eight that still levies inheritance taxes.
That's made the tax a target for Gov. Dave Heineman, who wants to make Nebraska more attractive, tax-wise, and rank better than the bottom 10.
But county officials in Nebraska and a new study from a Lincoln tax think tank say getting rid of the $48 million in annual inheritance tax revenue will be painful for most of the state's 93 counties, including the two largest, Douglas and Lancaster.
Douglas County, for instance, would have to raise property taxes by 11 percent to offset the $9 million annually it gets from the tax.
Heineman has said that counties can cut spending to offset the loss of inheritance taxes and that Douglas County in particular has some budget fat. Douglas County officials disagree.
Kathleen Kelley, the county's chief administrative officer, said Douglas County is projecting a $4 million to $7 million shortfall for next year between expected tax revenue and expenses. An additional $9 million loss in revenue, she said, would force either deep cuts in services or always-unpopular increases in property taxes.
“It would be disastrous,” Kelley said, “unless the governor and the Legislature decided they want to take over our spending on the justice system, the county jails, or the poor who don't qualify for state and federal benefits.”
Alternatives to the inheritance tax will be explored this morning during a hearing by the Revenue Committee of the Nebraska Legislature.
There aren't many good options, according to county officials and the Open Sky Policy Institute, a Lincoln-based think tank.
“Feeling the Squeeze” is the title of an Open Sky report released Thursday. It concludes that because counties rely so heavily on property taxes — and because spending by counties overall has decreased since 2004, when adjusted for inflation — there would be little room to cut.
The problem, the report says, would be worse in 26 counties, including some major ones like Adams, Hall, Buffalo and Dodge, where officials cannot raise property tax rates because of a levy limit.
Douglas and Lancaster, the two largest counties in the state, are also in a pickle, the report says, because they utilize inheritance taxes to lower property taxes. Many other counties save that money for special one-time projects like a new bridge or jail.
“We're using this money for day-to-day operations. It isn't a rainy-day fund,” said Joe Lorenz, Douglas County finance director.
Lorenz offers one argument for keeping the inheritance tax — it's paid by very few people, unlike property taxes.
Last year, 986 estates were inherited in Douglas County. If one person was inheriting each estate, that would amount to 0.2 percent of the county population, he said.
Lorenz proposed several ways the state could offset the loss of inheritance taxes, including taking over costs for the county courts, jails or youth detention centers.
Heineman was unavailable to comment on whether he would support any of the alternatives.
In the past, he has said Douglas County needs to eliminate wasteful spending such as the $51-an-hour temporary job that was created for former County Board member Bill Green, a job revealed by the World-Herald in February.
More recently, Heineman has said Douglas County's earmarking of $500,000 a year in inheritance taxes to help build a new cancer research tower at the University of Nebraska Medical Center showed that the county had excess money.
Lorenz said the county is at the point of “cutting muscle” out of its budget. Lancaster County has cut its budget 15 percent over the past two years.
State Sen. Abbie Cornett of Bellevue, chairwoman of the Revenue Committee, said the state could shift some motor vehicle tax revenue that now goes to K-12 schools to the counties, but that would disrupt the state's aid formula for schools.
Cornett said she is convinced of two things: The state's tax rankings would improve by eliminating the inheritance tax, but counties need a replacement for the revenue.
The inheritance tax has existed in Nebraska since 1901.
Children who receive inheritances worth more than $40,000 must pay a 1 percent tax, but more distant relatives and nonrelatives pay a much higher rate. The highest is 18 percent for non-relatives.
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