Nebraska Governor Jim Pillen has recently announced a special session of the Nebraska Legislature with the challenge to reduce property taxes. The Governor had campaigned on the goal of eliminating or shifting a total of 40% of the state’s tax burden away from property taxes. That’s about $2 billion of the $5.3 billion collected last year in property taxes across the state.
Pillen has suggested that the State should take over funding of public schools, the entity that collects the largest portion of our property tax. The question becomes, “How will he fund that?”
Recently Governor Pillen held town hall meetings across the state, including one in Alliance which I attended. His plan to reduce property tax relies on broadening the sales tax base. He wants to eliminate sales tax exemptions and plans to tax services. Pillen would also like to raise excise taxes on alcohol and tobacco products, including vaping.
We do not know if the Legislature will agree with the governor. Sales and excise (consumption) taxes are regressive. That means lower income people pay a higher percentage of their household earnings when they pay these taxes. Young people also pay a much higher percentage, since they have to make major purchases when they set up households. Retired people like me have already made those big purchases.
There is also the question of “What would the State have to eliminate?” Our government has certain fiscal responsibilities, things we want our tax money to pay for. When a tax is cut, there has to be a shift. That money must come from somewhere. And we’ve already cut taxes.
The Nebraska Legislature this year approved a $6.4 billion tax relief package. This included additional property tax credits and a credit for child care. The biggest change was a reduction in our state’s income tax rates, lowering them to 3.99% for the two highest brackets by 2027. Previously the Legislature granted multiple tax credits, which different groups would be able to claim and deduct from their total income tax bill.
Nebraska has a progressive income tax system. That means higher income earners pay a larger percentage of their taxable income. First of all, everyone gets a standard deduction. In 2023, that was $13,850 for a single filer; $27,700 for married filing jointly. No income taxes are paid on this amount. There are also different amounts and rates for married filing separately and for head of household.
In 2023, the last income tax year, a single person paid 2.46% of their taxable income (income after subtracting any deductions, including the standard deduction), from zero earnings up to $3700; $7390 for married filing jointly. The rate goes up to 3.51% for the portion of our income that falls between $3700-$22,170 for single; $7390-$44,350 for married filing jointly. The rate is 5.01% for income between $22,170-$35,730 for single; $44,350-$71,460 for married filing jointly. The highest bracket is 6.64% for income over $35,730 for single; $71,460 for married filing jointly.
The Institute on Taxation and Economic Policy (ITEP) has evaluated each state according to who pays the taxes to support state and local governments – all taxes combined. In Nebraska, the lowest 20% and the middle 20% pay over 11% of their total household income to support state and local government. The wealthiest 1%, however, only pays 7.2%. In fact, in 41 states, the highest income families are taxed at lower rates than everyone else. Granted, they pay more total dollars. But it is a much greater burden on the people in other tax brackets.
The key findings of ITEP’s research include the following:
• The vast majority of state and local tax systems are regressive, or upside-down. This requires a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax in many states and a heavy reliance on consumption taxes contribute to this effect.
• The lower one’s income, the higher one’s overall effective state and local tax rate.
• Heavy reliance on sales and excise taxes makes tax systems more regressive.
• States described as “low tax” are often high tax for low-income families.
Will the governor be able to convince the Legislature to shift to more regressive taxes? We will have to wait and see.