Unicameral Update - The Rest of the Story

By Korby M. Gilbertson, Radcliffe Gilbertson & Brady

In my last Special Session Update I mentioned that I would provide some additional clarity on the property tax package that was ultimately passed by the Legislature and signed by Governor Pillen.  So, here goes, and I apologize for being the bearer of bad news...

LB 34 has been touted as a major first step in providing property tax relief.  The Governor has stated that all property owners will benefit from new caps on local government spending and "front loading" of property tax credits currently only available to those who have filed for the credits on their income tax return.  

"Zero Caps" has been the Governor's mantra for over a year.  LB34 creates a system that could result in local political subdivisions facing zero budget growth, and perhaps even a reduction.  Although it was not explained as a potential reduction, the final language in LB34 and the way certain factors are counted and then offset by taxing authorities may have some unintended consequences, especially for smaller municipalities.  Further, language that exempted spending on specific first responder and public safety spending from the caps was supposed to provide ample protection for local budgets.  However, the majority of municipalities in Nebraska do not have paid first responders, so the actual impact on their budgets is negligible and the caps will have a much bigger impact.  We will have to wait and see if the Legislature addresses this issue in January.  

Back to property tax relief.  Governor Pillen has stated that taxpayers will enjoy a 2% to 3% reduction in property taxes over the next three years.  In order to understand exactly what this means and how it works, please bear with me while I walk you through how the credits currently work, and how they will work under LB34.  

Currently, there are two forms of property tax credits:

• Direct reduction in property taxes funded by the Property Tax Credit Cash Fund and distributed based on the value of the property.  This program started in 2007 and has grown from $105 million to $350 million per year.   This credit has generated some controversy because all property receives the credit based on the actual value and not the taxable value of the property.  Therefore, agricultural land receives a credit at the same level as residential and commercial land even though it is taxed at 75% of value.  
• Income tax credit for property taxes paid to schools and community colleges through the Property Tax Incentive Act.  This credit was passed in 2020 and requires Nebraska property owners to proactively claim the credit each year on their Nebraska Income Tax return.  Otherwise known as the 1107 credit, it has come under fire because a significant number of property owners fail to claim the credit. 

LB34 specifically deals with the second form of property tax credit.  Since so many property owners have failed to claim the credit on their income tax return, it is true that more Nebraskans will see some relief.  Just not those that have already been claiming the credit.  Further, as I alluded to in my last update,  there is more to the story, and for many property owners, LB34 will actually result in a tax increase.  Yes, you heard that correctly.  

To illustrate the problem, the following is an example of how one year of property tax credits would be claimed under the 1107 credit: 

• In 2023, property owners received a statement informing them of their assessed property tax liability for 2023; 
• In 2024, property owners pay the property taxes assessed in 2023; 
• In 2025, property owners would claim their 1107 credit for 2023 property taxes on their income tax return.  

Now, under LB34, all income tax credits end in 2024.  Thus, no one will be able to claim the credit for their 2023 property taxes on their 2025 income tax return.  This issue was raised during session and those that raised it were summarily told they were wrong and further that the concern was "just semantics."  According to representatives from the Governor's office and the Nebraska Department of Revenue, the fact that property owners won't ever be able to claim the credit for their 2023 property taxes is immaterial because property owners will see a credit on their 2024 tax statements they receive in December, so taxpayer's cash flow won't be impacted.  This might be true if you never claimed the credit.  However, for those that have claimed the credit, it is simply not true, and the impact is already being felt by those that make quarterly income tax payments and are just finding out that their payments need to be increased to cover the loss of the property tax credit.  Another bit of evidence illustrating that this might actually be a tax increase is the fact that to fix the elimination of the 2023 tax credit would cost the state $590 million.   (If I am wrong, I will happily eat my words and enjoy my pending tax reduction!)

I know there are senators that plan to introduce a "fix" in 2025, but how that will be paid for will be the issue.  I have been asked, and can't answer, what happened to the funds that were there to pay for the 1107 credit before LB34 was passed.  

All of this takes me back to my argument that we shouldn't be doing major tax reform on the fly during a special session.  Property taxes have been a concern since before I was born, and the issue isn't going to magically go away.  Successful reform takes time and professional review and the involvement of all stakeholders.  I sincerely hope that everyone can come to the table and work together next year. 

Now, we wait for the election and introduction of a minimum of 15 new senators who will be faced with how to address all of this and more. 

On a lighter note, I hope everyone is enjoying the cooler days my favorite season of the year brings for us to enjoy!  Also, Go Huskers!