Property Tax Solution? Put A Lid on It? Not So Fast!

Two words guaranteed to start a discussion anywhere in Nebraska: property tax. Two words guaranteed to escalate that into an argument: local control.

A proposed constitutional amendment, promoted by the governor in his State of the State address and recently presented to a legislative committee, seems simple enough. It says the total amount of property tax revenue raised by a political subdivision in any fiscal year shall not be more than three percent greater than the amount raised in the prior fiscal year. Except for amounts approved by voters, amounts needed to pay bonded indebtedness, and amounts raised on real growth value.

That’s a lid. Lids have been touted for years, been debated and defeated. Those implemented were often pried loose. The track record is sketchy. One of the reasons, according to the Open Sky Policy Institute and other think tanks, lids pose harmful threats to local government and the principle of local control.

Property taxes are the chief revenue source for funding Nebraska’s public school system. In the school funding formula, a district’s resources are determined by its property valuations. When property valuations go up, a school is determined under the formula to have increased resources, which decreases the amount of state aid they will receive. The proposed lid before lawmakers would create a distortion in that mechanism, and would likely have the effect of limiting spending growth for many school districts well below 3%, according to an analysis by Open Sky.

Analysts looked at the Millard Public School District’s average spending growth of 2.1 percent over the past decade. From Fiscal Year 2017 to Fiscal Year 2018, the district had a 12% increase in property tax revenue and an 11.2% decrease in state revenue, for a total revenue decrease of 1.5%. With the proposed lid in place, Millard’s property tax revenue increase would have been held to 3%, but the district’s increase in valuation still would have triggered an 11.2% decrease in state aid, resulting in a 5% decrease in total revenue.

The cumulative effect on Millard and other schools similarly situated would force local districts to ask for a vote of the people to override the lid. That would be time consuming and expensive. If not approved, cuts in programs and services would be the only alternative.

Other political subdivisions could also be impacted, depending on their revenue streams. Community colleges rely on property taxes, state aid and tuition. If property taxes are capped and state aid is flat, tuition would have to increase. Some cities might be able to make up for the loss of property tax revenues by increasing local option sales taxes, occupation taxes or fines and fees. But such tax measures are regressive and shift the tax load increasingly onto low- and middle-income Nebraskans.

The proposed lid could hinder locally elected officials from making needed policy choices in response to natural disasters like floods or tornadoes. The cap also could prevent smaller local entities from being able to purchase needed construction equipment or make investments their constituents find necessary.

Lynn Rex, executive director of the League of Nebraska Municipalities, said putting the measure in the state constitution through a ballot measure would make it difficult to tweak if changes are needed later. Rex, who represents Nebraska city governments, said it could also raise borrowing costs for local governments, which might ultimately cost taxpayers more.

Property taxes in Nebraska have increased by nearly 52% over the last decade, outpacing the state income growth of 48% and 18% inflation, according to the state Department of Revenue. The issue has repeatedly surfaced in the Legislature, with many farmers and homeowners lobbying lawmakers, although opponents argue that the higher rates are driven by inadequate state funding.

The governor cautions that if the Legislature fails to enact spending constraints, the people of Nebraska will take matters into their own hands and strip local governments of their property tax authority. It happened in the 196os, when the voters stripped the state of its authority to levy a property tax. Property taxes are now imposed only by local government, while the state relies primarily on income and sales taxes.

Property taxes are just one piece of a much larger puzzle. Failing to consider the big picture when trying to address Nebraska’s long-running overreliance on property taxes is likely to create more problems than it solves. Nebraska’s tax code has hundreds of exemptions, but lawmakers have struggled to get rid of any in favor of a simpler tax system.

Go ahead Legislature. Tackle the whole puzzle and stop putting band-aids on an open wound.