Nebraska's property tax plan has lots of moving parts, making benefits hard to predict

LINCOLN — The basic goal is straightforward: Give Nebraskans a bigger break on their local property taxes by shifting money from state revenues, which are at an all-time high.

But the plans advanced by Gov. Jim Pillen and Nebraska lawmakers to fulfill their campaign promises of property tax relief are anything but simple.

Bills working their way through the Nebraska Legislature this spring incorporate a variety of direct and indirect approaches to leave property owners with more money in their pockets.

The resulting plan is a Rube Goldberg-like assembly of legislative levers, wheels, ramps and pulleys — in this case, property tax credits, income tax credits, school aid and changes in local taxing authority.

The complexity of the plan makes it difficult for taxpayers to figure out how those efforts might affect them. Here is a rundown of the various pieces and what they could mean for Nebraskans.

Property tax credit

One of the simpler pieces of the plan is an increase in Nebraska’s long-standing property tax credit program, which uses state money to knock off a portion of property owners’ bills.

How it works: Individual credits are based on the assessed valuation of a property. The credit shows up as a line, often overlooked, on the annual property tax statement.

Each year’s credit rate is calculated by dividing the funds allocated by the assessed property valuation statewide. As valuations rise, the credits shrink because the money has to stretch farther. Since the program began in 2007, lawmakers have periodically added to its funding to keep up with valuation growth.

What could change: Under Legislative Bill 243, the state would boost funding for the program by 78% over six years. The program would grow from $313 million this year to $560 million by tax year 2029, after which it would be required to grow at the same rate as the assessed valuation of property statewide. The growth factor is an attempt to keep credit rates stable in the face of rising valuations.

How you might benefit: If all else remained the same, the increased funding would be enough to bump the credit for a $250,000 home up from $343 this year to $614 in 2029.

The unknowns: But statewide valuation growth, plus valuation changes for that particular home, mean the actual credit in 2029 will likely be less than $614. On the other hand, pieces of the legislative package that cut property tax bills mean the credit could offset a larger chunk of property taxes in the future.

LB 1107 tax credit

A more complicated piece of the plan — at least when it comes to figuring out individual benefits — is a proposed change in Nebraska’s other property tax credit program.

How it works: The LB 1107 tax credit program, often referred to by the bill that created it, provides income tax credits to reimburse a portion of school property taxes paid in the previous year. The credit percentage is determined by the amount allocated for the program each year divided by school property taxes paid statewide, not counting school bond taxes.

In its first year, taxpayers got income tax credits equal to 6% of their school taxes paid in 2020. The 1107 credit applies to taxes actually paid after the other property tax credit has been subtracted from a property owner’s bill. In the second year, they got 25.3% of their 2021 taxes. This year, they can claim 30% of school taxes paid in 2022.

What could change: Current law allocated $560.7 million for the 1107 credits this year, then requires the amount earmarked for the program to grow at the same rate as the assessed valuation of property statewide, up to 5%.

The legislation under consideration now would remove the 5% cap, allowing the dollars dedicated to the program to increase more than under existing law. Statewide property valuation has averaged 5.37% growth over the past decade, with individual years ranging from 1.64% to 11.83% growth.

How you might benefit: How the increase would affect an individual taxpayer depends on several factors, including whether they claim the credit. Between 30% and 40% of the amount allocated for the credits has gone unclaimed each year so far.

Other factors include the actual statewide valuation increase each year, which would affect how the program grows. Changes in school property taxes statewide would affect the credit percentage and changes in local school property taxes would determine the actual dollars available to a specific property owner.

The tax credits are refundable, meaning that taxpayers get the money back regardless of their income tax liability. So the credits would be unaffected by the governor’s plan to reduce income tax rates.

The unknowns: Pieces of the legislative package that aim to restrict school property tax growth could make the 1107 credits go farther. But growth of the original property tax credits could mean paying less in school taxes. In that case, the 1107 percentage would be smaller.

Community colleges

Another piece of the plan would reduce property tax bills by practically eliminating community college property taxes.

What could change: Starting in 2024, the plan would end community colleges’ ability to levy property taxes, with two exceptions. Colleges could levy taxes to cover building needs, and they could levy taxes for operating expenses if the state did not keep up with its funding obligations.

Under the plan, the state would replace the community college property taxes with state aid. The aid would be required to grow by 3.5% annually, with additional money available based on enrollment growth.

How you might benefit: The result would be modest savings for all property owners, with amounts varying by community college area. Across the state, community college property taxes totaled $263.9 million for 2022, about 5.3% of all property taxes.

But state lawmakers already had created an 1107-type income tax credit for community college taxes paid last year. The program started at 30% this year and was slated to grow over four years. That means only part of the taxes paid for community colleges now would count as new relief.

Still, starting in 2024, the new plan would save people the hassle of having to pay community college taxes as part of their property tax bill, and then claim credit on their income tax return months later.

School funding and tax caps

The final pieces of the plan would produce the least predictable property tax relief. One part would increase state funding for Nebraska’s K-12 schools, while the other part attempts to translate that extra state money into lower local property taxes.

The proposed changes build onto an already Rube Goldberg-like machine: the state’s school aid formula.

How it works: Nebraska uses the formula to calculate what a school district needs for educating its students and what local funding it has available to meet those needs. If local funding falls short of needs, the state provides equalization aid to fill the gap.

Property taxes represent the biggest source of school funding statewide and, for growing numbers of school districts, they have become almost the only source. When the formula began, almost all school districts qualified for equalization aid. For next year, out of the state’s 244 districts, just 81 are slated to get equalization aid.

The shift happened as agricultural land valuations shot up, making it possible for some districts to lower their tax levies yet meet all of their needs with property taxes. Those districts get minimal state dollars through other aid programs and the state reimbursement for special education costs.

The school districts that do not qualify for equalization aid are mostly rural. Those that get equalization aid tend to be larger, more urban districts, including most of those in the Omaha metro area.

What could change: The new plan would increase state funding for schools in two ways. One would provide districts with $1,500 per student, at a cost per year of $198 million. The other would boost special education reimbursement up to 80% of expenses, at a cost in the first year of $109 million.

The per-student payments would benefit those largely rural districts that do not qualify for equalization aid. For equalized districts, including most of the metro Omaha districts, the workings of the formula would completely offset the payments and not provide any additional money for the first two years.

The increased special education funding would benefit all districts for the first two years. But, based on the workings of the formula, that benefit would diminish for equalized districts starting in year three. To counter that effect, the plan would start providing 40% of the per-student payments outside of the formula, so all districts would gain.

Under the plan, the increased state funding would be paired with a cap on school revenues, with the goal of forcing schools to reduce property taxes when they get more state aid.

The proposal would limit school districts to 3% annual revenue growth, with additional wiggle room for growing districts. The cap applies to the total of property taxes and other funding sources. If funding from other sources increases, the cap would require districts to reduce their property tax request.

However, the plan also would allow districts to exceed the cap and collect more property taxes with a supermajority vote of the board or a supermajority vote of district residents.

How you might benefit: Trying to figure out the result for an individual taxpayer would be nearly impossible because it would depend on too many factors.

People with property in a rural school district may see a decrease in their school tax bill because those districts generally would get bigger increases in their state funding, which would trigger the revenue cap. People with property in urban districts could wind up with a small reduction — or none at all.

In either case, the effect would depend on whether the school board opted to exceed the revenue cap and by how much. It also would depend on a particular district’s combination of funding sources and students.

By the second year, taxpayers in both types of districts could see their property tax bill start to creep back up as costs rise. And as is currently true, individual tax bills would depend on changes in the property’s valuation.

The unknowns: How the plan works in future years would depend on whether the state continues its commitment to pay for the increased aid. Previous attempts to bolster state aid have been scaled back during years when state revenues falter.

The plan includes setting aside $1 billion in a special fund to prepay the new state aid. But the state would have to continue putting money into the fund to keep up its commitment.