LINCOLN — Death would become a little less costly in Nebraska under a compromise measure given first-round approval Tuesday.
As advanced, Legislative Bill 310 would help people inheriting property in the state by increasing the amount exempt from inheritance taxes, reducing the tax rates and eliminating the tax on heirs age 21 or younger. The measure cleared first-round consideration on a 41-4 vote.
Sen. Rob Clements of Elmwood, who introduced LB 310, led the push for eliminating or drastically reducing the tax. His original version of the bill would have cut the tax in half. He backed an amendment offered this year that would have phased it out entirely.
Clements argued that the tax, which dates to 1901, is outdated and puts the state at a competitive disadvantage. Nebraska is one of only six states that levy inheritance taxes, and one of the six, Iowa, will phase out its tax by 2025.
“People are finding out that Nebraska is a bad place to die,” he said, adding that, as a community banker, he has seen cases where heirs have to sell their inheritance to pay the taxes on it. “I think we can do better than to treat families this way.”
But the idea of eliminating the tax or reducing it sharply met with strong opposition from county governments, which get the proceeds from inheritance taxes. Opponents said inheritance tax revenues represent the second-largest revenue source for counties and losing that revenue would force counties to turn to their other main source of revenue — property taxes.
“If I could get rid of the inheritance tax, I would,” said State Sen. Curt Friesen of Henderson. “But this is a tax shift. This is going to raise property taxes.”
Nebraska counties have collected about $70 million in inheritance taxes in each of the last six years, although the amount fluctuates from year to year for individual counties. Douglas County collects between $12 million and $13 million annually. Because the amount is unpredictable, most counties put the funds in their cash reserve or put the money to one-time uses.
Clements argued that this is a good time to reduce the tax because counties are getting money from the federal pandemic relief legislation. But others said the federal dollars provide a one-time influx of money and do not replace the inheritance taxes in the future.
Blueprint Nebraska, an economic development initiative launched by Nebraska business and higher education leaders, has called for eliminating the inheritance tax as part of its effort to overhaul the state’s tax system.
Under current law, spouses are exempt from paying inheritance taxes. Immediate family, including children, parents, grandparents and siblings, pay a 1% rate on inherited property, with a $40,000 exemption. More distant relatives, such as nieces, nephews, aunts, uncles and their descendants, pay a 13% rate, with a $15,000 exemption. All others pay 18%, with a $10,000 exemption.
The compromise version of LB 310 would raise the exemption for immediate family to $100,000 but leave the rate unchanged. The exemption for more distant relatives would increase to $40,000 and the rate would drop to 11%, while the exemption for unrelated heirs would increase to $25,000 and the rate would drop to 15%.
Clements said the compromise, which was proposed by the Revenue Committee, would reduce the amount collected by counties to about $60 million annually.