Revenue Committee advances NE property tax relief package, with debate to start Tuesday

State Sen. Lou Ann Linehan of Elkhorn, the Legislature's Revenue Committee chair, center, joins Gov. Jim Pillen and Lt. Gov. Joe Kelly, at right, in announcing a new property tax exemption for public safety spending. Aug. 5, 2024. (Zach Wendling/Nebraska Examiner)

LINCOLN — The Nebraska Legislature’s Revenue Committee officially voted out a property tax relief plan Monday that combined various proposals offered in the state’s special legislative session.

The combined package , which advanced 6-1 , is contained in Legislative Bill 34 . The plan would lower maximum property tax rates for the state’s 244 school districts; shift funding for the 23 natural resources districts to the state; cap annual increases in county and municipal property tax collections; and reimburse counties for jail operating expenses.

Funding would be provided by removing about 70 sales tax exemptions, raising taxes on eight “sin” goods and imposing a 50-cent fee on retail delivery services that include a taxable item. One new sales tax exemption would be added: on residential electricity.

State Sen. Lou Ann Linehan of Elkhorn, the Revenue Committee chair, said she feels good heading into Tuesday’s debate.

“I’m confident we’ve written the bill in a way that nobody’s going to see less, and almost everybody’s going to see more,” Linehan told reporters. “… I think we have a chance now to debate a bill.”

State Sen. George Dungan of Lincoln was the lone “no” vote. State Sen. Eliot Bostar of Lincoln was “present, not voting.”

The rare do-over in the special session is expected to hit the floor for debate Tuesday.

School operational expenses

Linehan introduced the core proposal this session from Gov. Jim Pillen in LB 1, but all eyes will be on LB 34, bipartisan legislation from State Sen. Tom Brewer of north-central Nebraska. As introduced, it was a “ backup plan ” to freeze valuations for four years.

Lawmakers will consider capping maximum general fund school tax rates, which cover operational expenses, at 40 cents per $100 of a property’s valuation beginning next year, down from $1.05. In the next two years, that rate would drop an additional 5 cents before landing at 30 cents.

Tax rates are still being determined for the 2024-25 school year; homeowners would see varying relief based on their district tax rate.

School boards would retain authority over special building funds (at 10 cents per $100, instead of the current ceiling of 14 cents), special abatement and maintenance projects and bonds. Voters could be asked to further increase a school district’s maximum tax rate, too.

Another bill sought to lower school levies similarly: Seward State Sen. Jana Hughes’ original LB 9. It would have decreased the tax rates more slowly, over a decade, beginning at 65 cents and gradually decreasing to 25 cents by the 2033-34 school year.

Hughes’ legislation was the initial target for the committee’s package, based on a draft plan last week, before the committee pivoted to LB 34 on Monday.

If LB 34 passed, Nebraskans would see a tax “credit” on their 2025 tax statements.

Hughes and four other lawmakers had proposed LB 9 as an alternative to the governor’s plan after he pitched having the state take over the school general fund tax rates over a three-year period and cap them at 15 cents, then 7.5 cents, then 0.

The amended LB 34 would also address the state’s main equalization aid formula to schools, using it as the main vehicle to funnel the new state aid to schools. One component of that formula, the “local effort rate” that assumes a hypothetical $1 tax rate, would be set at 2.5 cents below the maximum levy. Currently, it is 5 cents below the max levy.

Another provision in LB 34 would ensure school districts receive, at a minimum, the same state funding year over year.

Local sales taxes

Since discarding LB 1, lawmakers have removed some of the largest possible sources of sales tax revenue, such as on accounting services, legal services, motor vehicle repair and home maintenance or improvement. 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 or equipment to new goods.

Still on the list of goods and services to be newly taxed are hair care services, data centers, single-day admissions to zoos and aquariums, dating services, lobbying services and pet-related veterinary services or animal grooming.

Each of the new goods or services would be taxed at 5.5 cents per dollar, in addition to being subject to local sales taxes, which range from 0.5 cents to 2 cents.

The state intends to retain the local sales taxes on the newly taxed goods and services for property tax relief.

Currently, the state captures 3% of local sales taxes as an administrative fee that is put into a fund for aid to municipalities. The bill would increase that state capture to 15%, with the increase collected specifically for property tax relief.

Cities or villages would receive at least the amount of local sales tax revenue that was returned to them in 2023-24, plus 1% more in each successive year. Local governments raised a total of $655 million in sales taxes that year, so an annual 1% increase would be $6.55 million.

Bostar said he would work on language to ensure the state collects the local sales taxes on new items only, not on the whole tax base.

Delivery fee and ‘sin’ taxes

State Sen. Carol Blood of Bellevue originally proposed a 27-cent retail delivery service fee in LB 26, which the committee included but at a higher, 50-cent rate per delivery. That applies to deliveries for taxable items, so shipments with only groceries or medicine would not include the service fee.

New businesses within their first year or businesses with fewer than $500,000 in annual retail sales would be exempt from the fee.

A new tax that was in LB 1 that isn’t part of LB 34 is on cloud or data storage or on advertising services. Opponents had argued in part that the ad tax would get caught up in litigation.

The following “sin” goods would also see bumps in their tax rates, though smaller than proposed in the Pillen-backed LB 1:

• Soft drinks and candy — 5.5 cents plus local sales taxes up to 2 cents (currently sales tax exempt).
• Consumable hemp — 30% wholesale (up from 5.5%, plus local sales taxes).
• Cigarettes — $1.36 per pack of 20, same as Iowa (up from 64 cents; Pillen proposed $1.64).
• “Alternative nicotine products,” including oral nicotine pouches like the brand Zyn — 10 cents per ounce (this was newly added after being the subject of a last-minute hearing last week).
• E-cigarettes (vapes) — 30-cent-per-milliliter excise tax on disposable vape liquids (currently 5-cents per milliliter) and 30% wholesale on other electronic nicotine products (up from 10% wholesale tax).
• Keno (lottery) — 5% of gross proceeds (up from 2%).
• Spirits (not including beer or wine) — a two-tiered tax of $2.75 per gallon for companies that produce fewer 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 for each cash device (up from 5%).

Other bill components

LB 44, from Bostar, which was also included in the package, would double the amount of earned income tax credits from 10% of the federal credit to 20%.

LB 39, from State Sen. Kathleen Kauth of Omaha, was also included. It would restore homestead exemption eligibility to some homesteads that qualified in the past three years but, because of rising valuations, were kicked off.

Any year-to-year increase in general tax receipts for the state above 3% would be captured for property tax relief.

Municipalities, counties and NRDs

Local municipal and county government spending would be capped at annual increases in property tax collections to the greater of either the previous year end’s inflation or 0%, in times of deflation. Inflation would be a more specific index for state and local government expenses , rather than general consumer purchases in the consumer price index.

Local governments could carry forward unused property tax authority in future years, but no more than 5% from the prior year.

Public safety services broadly, ranging from law enforcement, fire and corrections to county attorneys and public defenders, would be exempt from those caps. LB 28, from Bostar, was also included — it would remove public safety services from existing budget restrictions.

The plan would reimburse counties for 25% of operational and maintenance costs for county jails next year and 50% in future years.

The committee also advanced the bill with language to protect tax-increment financing, an economic development tool used to boost development and jobs in blighted areas. It allows a developer, with local government approval, to use property taxes for such a project.

State Sen. Brad von Gillern of Elkhorn, the Revenue Committee vice chair, said existing projects would not be negatively impacted.

Other exemptions for local governments include emergencies and growth. Municipalities or counties could also carry forward unused property tax request authority. More taxes could also be collected if approved by a majority of voters in a regularly scheduled election.

The committee also advanced a change to the state’s occupation tax, for restaurants and hotels, which currently caps populous communities like La Vista to $750,000 in revenue annually.

While not originally included in LB 1, lawmakers also embraced LB 67 from State Sen. Justin Wayne of Omaha to have the state take over funding for the state’s 23 natural resources districts, which is about $95 million, through tax credits. In 2025, the credit would be equal to 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 expected to begin Tuesday. First-round debate can last up to eight hours, at which point it would need support from at least 33 lawmakers to proceed.

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