LINCOLN (Nebraska Examiner) — The Nebraska Legislature’s Finance Committee on Monday rejected a property tax relief plan that combines several proposals introduced in the special session of the Legislature.
The combined package, which passed 6-1, is contained in House Bill 34.
The plan would reduce the maximum property tax rates for the state’s 244 school districts, shift funding to the state for the state’s 23 natural resource districts, cap annual increases in property tax revenue at the county and municipal levels, and reimburse counties for the cost of operating prisons.
Funding could be secured by abolishing about 70 VAT exemptions, increasing the “sin tax” and imposing a 50 cent fee on delivery services that include taxable items. A new VAT exemption would be introduced for electricity for private households.
State Senator George Dungan of Lincoln was the only one to vote no. Senator Eliot Bostar of Lincoln voted by proxy.
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Senator Lou Ann Linehan of Elkhorn introduced Gov. Jim Pillen’s core proposal in LB 1 this session, but all eyes will be on LB 34, a bipartisan bill from Senator Tom Brewer of north-central Nebraska. As introduced, it was a “backup plan” to freeze assessments for four years.
Lawmakers will consider capping the maximum school tax rates that cover operating costs at 40 cents per $100 of a property’s value starting next year, a decrease of $1.05. That rate would drop another 5 cents each year before eventually settling at 30 cents.
Tax rates for the 2024-25 school year are still being determined. Homeowners would receive different relief depending on their district’s tax rate.
School boards would retain control over special construction funds (at 10 cents per $100 instead of the current cap of 14 cents), as well as special rehabilitation and maintenance projects and bonds.
Voters could also be asked to increase a school district’s maximum tax rate.
If LB 34 were passed, Nebraska residents would receive a tax credit on their 2025 tax returns.
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The amended LB 34 would also address the state’s equalization formula for schools and use it as the primary tool for channeling new state support to schools.
One component of this formula, the local effort rate, which assumes a hypothetical tax rate of one dollar, would be set at 2.5 cents below the maximum tax rate. It is currently set at 5 cents below the maximum tax rate.
Another provision in LB 34 would ensure that school districts receive at least the same amount of state funding year after year.
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Since the repeal of LB 1, lawmakers have eliminated some of the largest sources of sales tax revenue, such as accounting services, legal services, automotive repairs, and home maintenance or renovation.
On Monday, MPs also abandoned the hotly debated idea of taxing agricultural machinery and equipment as well as machinery and equipment for industry.
The list of goods and services to be newly taxed also includes hairdressing services, data centers, day tickets for zoos and aquariums, dating agencies, lobbying services, and veterinary services and animal care related to pets.
Each of the new goods and services would be subject to a tax rate of 5.5 cents per dollar, plus local sales taxes of 0.5 to 2 cents.
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The state intends to maintain local sales taxes on the newly taxed goods and services to facilitate property taxation.
Currently, the state retains 3% of local sales tax as an administrative fee, which goes into a fund to support municipalities.
The bill would increase state revenue to 15%, with the surcharge specifically for property tax relief.
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Cities and villages would receive at least the amount of local sales tax revenue returned to them in 2023-24, plus 1% more in each subsequent year.
Local governments collected a total of $655 million in sales tax this year, so a 1% annual increase would add up to $6.55 million.
Bostar said he will work on language that ensures the state collects local sales tax only on new items and not on the entire tax base.
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Senator Carol Blood of Bellevue originally proposed a 27-cent retail delivery service fee in LB 26. The committee adopted that fee, but at a higher rate of 50 cents per delivery.
This applies to deliveries of taxable items. Shipments containing only food or medicine therefore do not include the service fee.
New businesses in their first year or businesses with annual retail sales of less than $500,000 would be exempt from the fee.
A new tax that was included in LB 1 and is not part of LB 34 affects cloud or data storage or advertising services. Opponents had argued in part that the advertising tax would become embroiled in litigation.
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Tax increases would also be imposed on the following “sin goods”, but to a lesser extent than proposed in the Pillen-supported LB 1:
- Soft drinks and candy – 5.5 cents plus local sales tax of up to 2 cents (currently exempt from sales tax).
- Consumable hemp – 30% wholesale (currently exempt from VAT).
- Cigarettes – $1.36 per pack of 20, the same as in Iowa (previously 64 cents; pills suggested $1.64).
- “Alternative nicotine products,” including oral nicotine pouches such as Zyn – 10 cents per ounce (this was newly added after being the subject of a last-minute hearing last week).
- E-cigarettes – 30 cents per millilitre excise duty on disposable e-liquids (currently 5 cents per millilitre) and 30% wholesale price on other electronic nicotine products (previously 10% wholesale tax).
- Keno – 5% of gross proceeds (previously 2%).
- Liquor (excluding beer and wine) – a two-tier tax of $2.75 per gallon for companies producing less than 100,000 gallons per year and $7 if they produce more than 100,000 gallons (currently $3.75 per gallon; Pillen proposed $14.50 per gallon).
- Games of skill – 20% of net operating revenue per ATM (previously 5%).
Bostar’s LB 44, also included in the package, would double the amount of the earned income tax credit from 10% of the federal credit to 20%.
Also included was bill LB 39, introduced by Senator Kathleen Kauth of Omaha. It would restore property tax exemptions to some properties that were eligible for the past three years but were then disqualified due to rising valuations.
Any annual increase in the state’s general tax revenues above 3% would be used for the property tax reduction.
The annual increases in property tax revenues of local and district administrations would be limited to the rate of inflation or, in times of deflation, to 0%.
Inflation would be measured using a more specific index of state and local government spending rather than the general consumer price index.
These caps would generally exempt public safety agencies, from police departments, fire departments and prisons to district attorneys and public defenders.
Bostar’s LB 28 was also included. It would exempt public safety services from existing budget restrictions.
The plan calls for counties to be reimbursed 25 percent of the operating and maintenance costs of county jails next year and 50 percent in subsequent years.
The committee also added language to the bill to protect tax increment financing, an economic development tool used in troubled areas.
It allows a developer, with the approval of local authorities, to use property taxes for such a project.
Senator Brad von Gillern of Elkhorn, vice chairman of the Finance Committee, said existing projects would not be negatively affected.
Other exceptions for local governments include emergencies and growth.
Local governments may carry over unused property tax authorizations to future years, but not more than 5% from the previous year.
Higher taxes could also be levied if a majority of voters approved it in a regularly scheduled election.
The committee also voted to change the state’s business tax on restaurants and hotels, which currently caps revenue for populous communities like La Vista at $750,000 per year.
Lawmakers also passed bill LB 67 by Senator Justin Wayne of Omaha, which would require the state to provide about $95 million in tax credit funding for the state’s 23 natural resource districts.
In 2025, the credit would correspond to 50% of the property tax, then 75% in 2026 and 100% from 2027.
The first of three rounds of debate on LB 34 is scheduled to begin on Tuesday.
The first round of debates can last up to eight hours. The support of at least 33 MEPs is then required to continue.
