Finance Committee advances Northeast property tax relief package; debate begins Tuesday • Nebraska Examiner
LINCOLN — The Nebraska Legislature’s Finance Committee on Monday formally rejected a property tax relief plan that combines several proposals introduced in a special session of the state legislature.
The Combo packagewhich Advanced 6-1is included in Bill No. 34The plan would reduce maximum property tax rates for the state’s 244 school districts, shift funding for the 23 natural resource districts to the state, limit annual increases in property tax revenues at the county and municipal levels, and reimburse counties for the cost of operating prisons.
Funding would be secured by abolishing about 70 VAT exemptions, increasing taxes on eight “sin goods” and imposing a 50 cent fee on delivery services containing taxable items. A new VAT exemption would be introduced: on electricity for private households.
State Senator George Dungan of Lincoln was the only one to vote “no.” State Senator Eliot Bostar of Lincoln was “present but did not vote.”
This rare item is expected to be up for debate at Tuesday’s special session.
School operating costs
State Senator Lou Ann Linehan of Elkhorn introduced Governor Jim Pillen’s core proposal in LB 1 this session, but all eyes will be on LB 34, a bipartisan bill from State Senator Tom Brewer of north-central Nebraska. As introduced, it was a “Backup plan“ to freeze the ratings 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. Over the next two years, that rate would drop another 5 cents before finally 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 (10 cents per $100 instead of the current 14-cent cap), special tax abatement and maintenance projects, and bonds. Voters could also be asked to further increase a school district’s maximum tax rate.
Another bill sought a similar reduction in school taxes: the original LB 9 bill by Seward State Senator Jana Hughes. It would have reduced tax rates more slowly, over a decade, starting at 65 cents and gradual to 25 cents by the 2033-34 school year.
Hughes’ bill was the original target of the committee’s package of measures and was based on a draft from last week before the committee turned its attention to LB 34 on Monday.
If LB 34 were passed, Nebraska residents would receive a tax credit on their 2025 tax returns.
Hughes and four other lawmakers had proposed LB 9 as an alternative to the governor’s plan after he proposed that the state take over general school fund tax rates over three years, capping them first at 15 cents, then 7.5 cents and finally 0 cents.
The amended LB 34 would also address the state’s main equalization formula for schools, using it as the primary tool for directing the new state aid to schools. One component of that formula, the “Local Effort Rate,” which assumes a hypothetical tax rate of $1, would be set at 2.5 cents below the maximum levy. It is currently 5 cents below the maximum levy.
Another provision in LB 34 would ensure that school districts receive at least the same amount of state funding year after year.
Local sales tax
Since repealing LB 1, lawmakers have eliminated some of the largest potential sources of sales tax revenue, such as accounting services, legal services, automotive repairs and home maintenance or renovation. On Monday, lawmakers also abandoned the hotly contested idea of taxing agricultural or manufacturing machinery and equipment.
A draft amendment last week would have limited the tax on machinery and equipment to new goods.
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.
The state intends to maintain local sales taxes on the newly taxed goods and services to facilitate property taxation.
Currently, the state collects 3% of local sales tax as an administrative fee that goes into a fund to assist municipalities. The bill would increase that state revenue to 15%, with the increase specifically for property tax relief.
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.
Delivery fee and sin tax
State Senator Carol Blood of Bellevue originally proposed a 27-cent retail delivery service fee in LB 26, which the committee adopted, but at a higher rate of 50 cents per delivery. This applies to deliveries of taxable items, so shipments of only food or medicine would 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.
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 sweets – 5.5 cents plus local sales tax up to 2 cents (currently VAT exempt).
- 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 brand – 10 cents per ounce (this was newly added after being the subject of a last-minute hearing last week).
- E-cigarettes (vapes) – 30 cents per millilitre excise tax on disposable vape liquids (currently 5 cents per millilitre) and 30% wholesale tax on other electronic nicotine products (previously 10% wholesale tax).
- Keno (lottery) – 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, or $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%).
Other invoice components
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.
Municipalities, counties and NRDs
The expenditures of local municipalities and counties would be limited to the annual increase in property tax revenues, whichever is higher than the inflation rate at the end of the previous year or 0% in times of deflation. Inflation would be a specific index for state and local government expenditureand not general consumer purchases in the consumer price index.
Local governments may carry over unused property tax authorizations to future years, but not more than 5% from the previous year.
Public safety agencies in general, from police, fire and corrections to prosecutors and public defenders, would be exempt from these caps. LB 28 from Bostar was also included – it would exempt public safety agencies 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 to spur development and jobs in blighted areas, allowing a developer, with local government approval, to use property taxes for such a project.
State 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. Municipalities or counties could also delegate unused powers to levy property taxes. If a majority of voters approve in a regularly scheduled election, more taxes could also be raised.
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.
Although not originally included in LB 1, lawmakers also passed LB 67 by Sen. Justin Wayne of Omaha, which would have the state provide funding for the state’s 23 natural resource districts, totaling about $95 million, through tax credits. In 2025, the credit would be 50% of property taxes, then 75% in 2026 and 100% in 2027 and beyond.
The first of three rounds of debate on LB 34 is scheduled to begin on Tuesday. The first round could last up to eight hours. The support of at least 33 MPs would then be required to continue.
