Grand staircases, grand pianos, grandma and grandpa, the Grand Tetons, and now, the “grand compromise.” The grand compromise, LB 1107, advanced to the second stage of debate last week on a strong vote. As such, it appears the package may have the legislative horses to cross the finish line. The package combines elements of property tax relief, business incentives, and potential funding for the NExT project at the University of Nebraska Medical Center—thus, the nickname.
LB 1107 has two components addressing property taxes. First, it establishes a minimum funding level of $275 million in the existing property tax credit fund. This fund was started in 2007 and last year agricultural landowners received credits of $116 million under it. Also, there is a potential the fund balance could grow if voters approve an expanded gambling petition measure on the November ballot.
Second, LB 1107 creates a new refundable income tax credit based on real property taxes paid to schools. The credit would be funded in the first year (fiscal year 2020-21), at $125 million. Eligible taxpayers could receive the credit on income taxes filed in 2021 for property taxes paid in 2020. The credit only applies to taxes on real property (i.e. agricultural land, residences, farm buildings, and farm sites). Taxes paid to repay bonds or paid due to a levy override are not eligible. The credit would equal roughly 5.6 percent of real property taxes paid to schools in the first year of implementation based on 2019 taxes.
The bill also contains a trigger mechanism to supplement the dollars dedicated to the income tax credit on top of the initial $125 million during tax years 2021-2025. To trigger additional dollars, the state’s actual receipts must exceed forecasted receipts by 3.5 percent. For example, for this year, state net receipts are forecast to decline 2.0 percent. Thus, to trigger additional contributions to the credit, actual receipts at the end of the fiscal year must exceed last year’s receipts by 1.5 percent. If triggered, the amount added to the program is dependent on whether the cash reserve balance is above or below $500 million. And the bill stipulates that by tax year 2025 the fund must have a balance of at least $375 million. After 2025, the fund balance will grow based on the percentage change in overall statewide valuations.
The average Nebraska farm paid property taxes to schools on land, buildings, and farm sites of approximately $14,850 in 2019. The average farm, then, would be eligible for a credit of roughly $855 in the program’s first year. By 2025, the credit would grow to around 15 percent of school taxes paid, or $2,227 per average farm. This would be in addition to any credit provided under the property tax credit program.
Solving Nebraska’s property tax problem was once described by Nebraska Farm Bureau President Steve Nelson as like trying to turn a battleship. A battleship can’t turn on a dime. It takes a slow, wide arc to reverse course. With passage of LB 1107, the battleship will begin it’s turn.