Gov. Pillen clarifies property tax relief plan as special session nears

Gov. Jim Pillen officially unviles his property tax plan as a summer-long attempt to find a path to reduce local property taxes. July 18, 2024. (Zach Wendling/Nebraska Examiner)

LINCOLN — Nebraska Gov. Jim Pillen and his staff clarified key concepts of his property tax relief plan Monday ahead of this week’s special session.

Pillen outlined seven values in a “statement of principles” that he wants lawmakers to consider regarding sales taxes. That comes as lawmakers will approach a list of likely more than 100 sales and use tax exemptions on various goods and services , which the governor has proposed removing by Oct. 1 .

In total, the new sales taxes would generate more than $928 million in the first full year they come onto sales tax rolls, which would be used for property tax relief. Sales taxes were projected to increase on the new goods and services by about 3% into the next fiscal year.

Pillen has said it will be up to lawmakers to decide which sales tax exemptions ultimately fall to finance his proposal to shift about 80% of property-tax funded K-12 education to the state budget. The shift would occur gradually over three years, reducing maximum general fund school tax rates to 15 cents, 7.5 cents and then 0 cents.

“This legislative process depends on everyone bringing their good faith ideas for the purpose of producing property tax reform for all Nebraskans,” Pillen said in a statement. “It is important that we start from a common place of understanding, especially in the debate over sales tax exemptions.”

Machinery and equipment

Pillen said he is working on the official proclamation for the special session but has not yet finished the outline. The document will specify when lawmakers will return to Lincoln, which is expected to be  this Thursday, and for which topics they will legislate.

The seven principles Pillen will ask lawmakers to abide by are not to enact new sales taxes on:

• Food.
• Medicines used for human treatment.
• Services or goods provided through nonprofits.
• Agricultural inputs or manufacturing materials (the physical economic resources used to create goods to be sold to an end user or consumer).
• Services or items that are exempt in all other states.
• Services or items that are exempt in all six surrounding states (Iowa, Missouri, Kansas, Colorado, Wyoming and South Dakota).

The seventh principle involves no double taxation for  agricultural and manufacturing machinery and equipment. Those goods would be taxed at 4 cents per dollar purchase statewide, with no additional local sales taxes.

The sales tax rate statewide is 5.5 cents. Local sales tax rates are between 0.5 and 2 cents.

Pillen’s proposal will also ask lawmakers to repeal personal property taxes on ag and manufacturing machinery, which brings in about $52 million. Repairs would remain exempt from sales tax.

Together, the taxed equipment would bring in 29% of suggested new sales taxes: $273 million.

The Pillen-led plan calls for the state keeping roughly $137 million in local sales tax collected on the newly taxed sales and service. Those funds would be used for additional property tax relief under the plan.

New ‘sin’ tax rates

Pillen and his staff, for the first time, also outlined proposed increases for various “sin” taxes. Those taxes were estimated to raise more than $216 million in the first full year, if passed:

• Cigarettes — $1.64 per pack, up from 64 cents.
• Spirits — $14.50 per gallon, up from $3.75.
• Vaping — 30% wholesale tax, up from a 5-cent-per-militer excise tax on disposable vape liquids and a 10% wholesale tax on other electronic nicotine products.
• Keno — the state would collect 5% of keno sales.
• Games of skill (cash devices) — 20% tax.
• Consumable hemp — 30% tax.

The sales tax exemption on candy and soft drinks would end. They are grouped with other “sin” taxes but treated as other goods and services.

Software that is used as a service — cloud services or other data services — would also come onto the state’s sales tax rolls. There would be an excise tax on all advertising services, not just digital ads as proposed in the spring .

Education Future Fund

On average, Pillen’s staff said, the state would reduce state revenues by about $400 million over each of the next three years. However, no list of those reductions has been released.

On top of additional decreases in individual income, corporate and miscellaneous taxes, the Governor’s Office expects the state’s budget to decrease by $912 million compared to spending levels in the 2022-23 fiscal year.

Those values encompass an additional $1.972 billion in sales taxes and $2.336 billion in property taxes, by the middle of 2027.

To finance the plan, the state will also find spending cuts in the original $1 billion Education Future Fund, which provided a baseline in student aid to local school districts. By July 1, 2027, funds will only flow to previously approved expenditures, including special education, teacher training in reading literacy and computer science, and menstrual products in select districts.

Voters can approve local overrides

Other main contours of the proposed plan remained unchanged from a news conference last week:

• Placing hard caps on county and municipality property tax collections, either 0% (in times of deflation) or matching the consumer price index, unless voters agree to override the caps. There would be exemptions for growth and public safety needs.
• Retooling existing property tax relief programs, including homestead exemptions and property tax credits, with no cuts to either program.

As previously reported by the Nebraska Examiner, county and municipal governments could vote to override the cap placed on property tax collections by a vote of the people.

Under the “Nebraska Plan,” that would require 60% approval among voters at a statewide general or primary election, which occurs every other calendar year.

School funding would be locked in at 2024-25 funding levels, which school boards are currently in the process of determining.

Pillen and his staff confirmed that the Legislature would not rewrite the state’s funding formula to schools until the 2025 regular session.

Pillen has said the model would be similar to community colleges, where if state funding dropped below that 2024-25 fiscal year level, or if the funding level decreased from year to year, school boards could raise property taxes for the change in funding.

Additional increases in property taxes could come through a vote of the people, also at 60% at a statewide general or primary election.

SUBSCRIBE: GET THE MORNING HEADLINES DELIVERED TO YOUR INBOX

The post Gov. Pillen clarifies property tax relief plan as special session nears appeared first on Nebraska Examiner .