Nebraska Property Tax Assessment Limits

Chair Von Gillern and Members of the Income Committee:

My title is Nicole Fox, and I’m a Coverage Analyst on the Tax Basis. The Tax Basis is a nonprofit, nonpartisan group that analyzes tax coverage points on the state, federal, and worldwide ranges. Thanks for the chance to debate the potential financial implications the laws earlier than you could possibly have on Nebraska.

States’ property taxA property tax is primarily levied on immovable property like land and buildings, in addition to on tangible private property that’s movable, like autos and gear. Property taxes are the only largest supply of state and native income within the U.S. and assist fund faculties, roads, police, and different companies. limitation strategies fluctuate enormously by design and have a tendency to fall into one in all three classes: levy limits, price limits, and evaluation limits. Some states additionally make use of homestead exemptions or circuit breakers, amongst different focused aid efforts.

Levy limits signify essentially the most impartial tax aid device as they constrain complete income collections in a given tax yr, with sure changes for inflationInflation is when the overall value of products and companies will increase throughout the financial system, decreasing the buying energy of a forex and the worth of sure belongings. The identical paycheck covers much less items, companies, and payments. It is typically known as a “hidden tax,” because it leaves taxpayers much less well-off attributable to greater prices and “bracket creep,” whereas growing the federal government’s spendin and/or inhabitants development. Price limits set the quantity by which a levy price will be raised in a given tax yr, however they do nothing to counter the surging property valuations we have now seen across the nation in recent times.

Evaluation limits mandate the quantity by which property values can enhance yearly, with the intent of limiting publicity to sharp will increase in taxation ensuing from valuation will increase. Proponents typically level to the idea that evaluation limits profit present property house owners, can present a way of predictability when it comes to future property tax burdens, and are sometimes supposed to forestall these with fastened incomes from being priced out of their houses. Whereas these intentions could also be noble, we warning towards their imposition as a result of distortions they create.

In our annual State Tax Competitiveness Index, Nebraska presently ranks close to the underside on the property tax element at quantity 46. In actual fact, as a result of market distortions that evaluation limits create, we penalize states that impose them. Adopting an evaluation restrict in Nebraska would additional scale back its tax competitiveness.

LR292CA seeks to create an evaluation restrict by establishing a baseline taxable market worth separate from a property’s present truthful market worth. Annual will increase in a property’s taxable market worth could be restricted to will increase within the Client Worth Index (CPI), and the baseline wouldn’t change till a property is bought.

The evaluation restrict in LR292CA picks winners and losers, violating the precept of tax neutrality. It’s a tax shift from present property house owners to new entrants to the market and imposes extremely unequal tax burdens throughout equally located properties. Two property house owners, regardless of proudly owning parcels on the identical road with an identical truthful market values, might wind up with very totally different property tax payments primarily based solely on date of buy. This may occur if one have been a long-term proprietor whose taxable market worth is protected by the evaluation restrict, whereas the opposite proprietor has seen their taxable market worth reset as a result of sale of property.

This proposal offers extra favorable tax therapy to long-term house owners as a result of it permits them to make property enhancements with out affecting their property’s taxable market worth. As an alternative, the tax burden could be borne by the brand new proprietor upon the sale of the property. This implies an proprietor might triple the scale of a house with no tax implications. Conversely, any new development—even constructing a shed—might reset your entire property to present market worth.

Whereas decrease efficient tax charges and lowered tax burdens for long-term property house owners are realized below evaluation limits, an erosion of the present property tax baseThe tax base is the overall quantity of earnings, property, belongings, consumption, transactions, or different financial exercise topic to taxation by a tax authority. A slim tax base is non-neutral and inefficient. A broad tax base reduces tax administration prices and permits extra income to be raised at decrease charges. ultimately outcomes. To compensate, the rest of the tax burden is shifted to new property house owners. New property house owners, then, are paying for themselves and the long-term property house owners who get all of the native advantages whereas paying little or no in taxes. First-time homebuyers could have fewer monetary sources, and because the tax burden shifts to them, house possession can develop into out of attain. This tax shift could deter younger professionals from staying in Nebraska.

Evaluation limits not solely shift tax burdens, however additionally they intrude with typical housing market exercise and create inefficiencies in housing allocation.

The evaluation restrict regime creates what is called a lock-in impact. Older owners who could profit from downsizing for security causes could not have the ability to afford to take action if it means a pointy enhance of their property tax invoice. Empty nesters may keep in a bigger house as a substitute of downsizing to keep away from a tax enhance. These bigger houses could also be desired by rising households who, below LR292CA, would have fewer choices.

Similar to their impacts on downsizing, evaluation limits also can have an effect on the choice to upscale. A better-priced house paired with a considerably greater taxable market worth and elevated property tax burden might deter a would-be house purchaser. Lock-in results stop housing inventory from changing into out there to consumers with particular life-stage wants.

States like Florida enable owners to switch a portion of their “protected” assessed worth from an present house to a brand new house. Whereas this portability possibility acknowledges the lock-in impact created by the evaluation restrict, the coverage stays flawed, because it additional enhances the shift from present to first-time owners.

Florida’s evaluation restrict went into impact in 1995, and 30 years later, the governor and state legislators, like these in Nebraska, are searching for methods to deal with the state’s property tax disaster.
Moreover, as a result of evaluation limits typically lead to newly constructed housing being taxed extra closely than present housing, as is the case with LR292CA, it disincentivizes new development. Much less housing development results in a lowered housing provide, and once more, makes the dream of house possession out of attain.

Evaluation limits are usually not sound tax coverage. Whereas well-intended, with hopes of stopping house owners from being “taxed out of their houses,” the tax shifts, lock-in results, and housing provide points created by evaluation limits make housing affordability worse.

LR292CA wouldn’t shield property house owners from the coverage selections of native taxing officers or future legislative periods. For instance, the proposed evaluation restrict wouldn’t stop native taxing jurisdictions from growing their levy charges, and it might not stop future state legislators from altering the tax base in different methods, resembling by altering numerous exemptions, credit, and refunds.

There may be little or no financial justification for establishing a nonneutral tax coverage just like the one being mentioned immediately. LR292CA will not be primarily based on the advantages accruing to the house owner when it comes to native companies obtained, however reasonably, it’s primarily based on one thing as arbitrary as how lengthy a selected property has been owned.

The appreciation of property values is fascinating, particularly when viewing property possession from an funding standpoint. Whereas property values have risen considerably in recent times, the accompanying property tax will increase are a lot much less fascinating.

Whereas it’s cheap for taxpayers to wish to stop their property tax payments from skyrocketing, one of the simplest ways to maintain property taxes in examine is to regulate property tax collections. To handle Nebraska’s property tax disaster, the legislature ought to as a substitute search to strengthen its presently weak levy limitation.