LINCOLN — Nebraska Gov. Jim Pillen is facing pushback for some of his property tax reform ideas from some of his closest agricultural allies in the Legislature. He may need their support to pass reforms during a special session expected this month.

Pillen has signaled he will bring lawmakers back to Lincoln beginning July 25 to enact property tax reforms. Among his ideas is the suggestion to remove sales tax exemptions currently in place for agricultural and manufacturing inputs like seeds, fertilizer, chemicals or other materials used in producing final, taxable products. He has discussed taxing both at lower sales tax rates than other goods at 2 cents per dollar purchase, for example, rather than a broader rate of 5.5 cents per dollar on most goods or services.

He’s said doing so could save producers money if the state does as he has also suggested and takes on a majority of local K-12 funding, which could reduce some property tax bills by up to 60%.

But some farmers in the Legislature who supported Pillen’s property tax relief proposals during the spring legislative session said they are opposed to removing sales tax exemptions on ag inputs.

Other senators Pillen could need to get to 33 votes for his property tax ideas have also questioned his “living and breathing” plan for not being finalized or released in writing. Some lawmakers have openly said they’ll craft their own proposals.

Together, the fracturing of Nebraska’s legislative branch could complicate, if not jeopardize, Pillen’s path to find enough support to overcome a likely filibuster from opponents.

A potential ‘double whammy’

One of Pillen’s closest allies, the Nebraska Farm Bureau, is one such force seeking to influence lawmakers with a new email campaign before a special session begins. The email argues that taxing inputs could harm farm families and increase prices for producers and consumers.

The Farm Bureau’s support of Pillen’s 2022 campaign for governor helped propel the veterinarian and hog farmer into the governor’s office.

“Taxing inputs would only put Nebraska farmers at a major competitive disadvantage compared to other states that don’t,” the email states.

State Sen. Teresa Ibach, a farmer and rancher from Sumner, expressed similar concerns that eliminating the exemptions on inputs, even at a lower rate, could raise taxes over time. She said she has been meeting closely with the Farm Bureau to be on the same page of protecting agriculture.

“I think the one thing we all agree on is that property taxes are a burden, and the challenge is going to be finding 33 of us who can agree on a path forward,” Ibach said.

After putting a pencil to how input taxes would impact her operation, Ibach said, she found she’d pay about the same amount of taxes, if not more, in sales taxes instead.

Ibach said all Nebraskans must be considered and benefit when lawmakers consider eventual property tax relief proposals. She pointed to young farmers and ranchers renting farmland who might not benefit from the reductions.

“Once we start taxing inputs and rent doesn’t come down, then they’ve got a double whammy and we’re just discouraging young folks from even returning to the farming operation,” Ibach said.

Rented farmland and border bleed

State Sens. Tom Brandt and Myron Dorn, farmers from Plymouth and Adams, respectively, said the “double whammy” is because most Nebraska farmers, particularly beginning farmers, work on rented ground. Unless savings are passed on, they said, producers might pay more in taxes.

“The father will probably pass it on to the son, but if I’m renting to my neighbor, will I pass that on? Especially if I’m an out-of-state property owner, will I pass that on? That’s a good question,” Dorn said as examples.

“That plan would work very well for older farmers like myself. … That’s the fallacy in that one unique, particular argument,” Brandt said.

Brandt cautioned that some Nebraska consumers might choose to spend their tax dollars in one of Nebraska’s six neighboring states, including taxpayers in his district, which borders Kansas.

Farmers, for example, might choose to travel south to purchase needed but cheaper supplies, like net wrap, the plastic wrap used in baling hay, Brandt said. If exemptions are removed, he argued it should be “meaningful” ones not as easily affected by border crossings. He said that includes memberships or admissions to local nationally accredited zoos, like Omaha’s Henry Doorly Zoo and Aquarium, which currently aren’t taxed.

“What are you going to do?” he asked. “Go across to Council Bluffs?”

Agricultural and manufacturing inputs make up the majority of tax revenue not collected because of sales tax exemptions. In 2022, the Nebraska Department of Revenue estimated the exemptions saved taxpayers about $1.7 billion that would have otherwise been taxed for manufacturing components and another $2.1 billion for a variety of agricultural exemptions. 

In contrast, taxpayers saved about $1.5 million in zoo memberships and admissions in 2022.

State Sen. Julie Slama of Dunbar, who represents southeast Nebraska, said she is also opposed to taxing inputs and passed the 2022 legislation to exempt net wrap from sales taxes.

Local control of K-12 schools

State Sen. Dave Murman, a farmer from Glenvil, said he is “definitely opposed” to taxing “true inputs,” such as seeds, chemicals and fertilizers, but said it’s different for physical property like machinery and equipment.

“It’s something to at least consider,” Murman said.

Murman said his understanding of Pillen’s K-12 funding proposal is that the state would assume spending of operational expenses, which are the majority of local school property taxes. He said school boards would retain taxing authority for bonds or other special tax rates.

“As long as the local school districts can still tax for those things, I think it’s something to at least look into,” Murman, a former school board member himself, said. “I am a big believer in local control, but with those things still remaining there, there’s still a lot of local control in that way.”

But should Pillen move ahead with the state taking on the entire property-tax funded portion of K-12 funding, as he has said at some events, it could cost him a key moderate vote from State Sen. Lynne Walz of Fremont, a former teacher and past Education Committee chair.

“I am not a fan,” Walz said, suggesting it could erode local control.

Walz supported the Pillen-backed tax proposal in the spring but said Pillen should look toward a longer term plan, such as over three to five years. She said the limitations of the governor’s funding idea could prevent districts from creating opportunities their communities want.

As an example, Fremont Public Schools will soon open a career and technical education center, which Walz said likely wouldn’t have been funded by the state.

“I see more of a cookie-cutter type of school system if we go to the government funding our schools and just no opportunity for local control and the ability to allow communities to grow their schools,” Walz said.

‘The math has to math to me’

Walz and State Sens. Danielle Conrad of Lincoln and Justin Wayne of Omaha, members of the Education Committee, said the “how” of Pillen’s school funding idea is hard to imagine.

The state has 244 school districts, as well as the Learning Community of Douglas and Sarpy Counties, for example, which could require school officials to ask the Legislature’s 49 members each year if they need more state revenue.

“It’s going to be a mess,” Walz said. “I can’t imagine having to figure that out on the floor.”

State Sen. Jana Hughes of Seward, a former school board member, has said finding sustainable funds seems like a big task, but she’s hoping for some progress.

“If we can find an extra $1 billion this special session I will be very pleased,” Hughes said.

Conrad, has the second longest tenure in the Legislature and previously served eight years on the Appropriations Committee. In times of hardship, she noted, the state cut aid to municipalities and counties, so it’s hard to say what would happen to schools under Pillen’s idea.

State Sen. Terrell McKinney of Omaha, a former Education Committee member, said Pillen’s funding idea is interesting, but he also asked what would happen in times of financial crisis.

Wayne, a former school board member, said some rural senators already question how much education funding goes to schools in Omaha and Lincoln, and Pillen’s idea would include sending more state dollars to districts in those cities.

He noted some school districts are also in high poverty and require more resources as a result.

“The math has to math to me, and right now, it doesn’t,” Wayne said. “I’ve been working on this for seven years and still haven’t got the math to work the way it needs to.”

Contingent support

Wayne and McKinney said they will be looking at new revenue streams this summer, including legalizing and taxing recreational and medical marijuana.

McKinney said he’ll look at the state’s criminal justice system, which he argued is leading to negative returns, while Wayne suggested allowing punitive damages in lawsuits could increase school funding. Wayne said he will also look at how the state might be able to again fund county jails.

“There’s things that he could do, but it takes courage and political will, and he’s got to be willing to step up,” Wayne said of Pillen.

But for Wayne “to even come close to consider a property tax plan,” he reiterated that Pillen would need to expand the scope of the special session to allow legislation to permit lawsuits against political subdivisions for negligence in certain cases of child abuse or child sexual assault. Pillen vetoed such a proposal in April.

“I think if we’re going to look out for taxpayers, we also got to look out for the taxpayers who are victims of our government’s negligence, particularly child sexual assault,” Wayne continued.

‘Unserious at best and dangerous at worst’

Conrad said she is deeply concerned that Pillen has employed a strategy that could undercut the likelihood of a productive and successful special session. She said it’s “bewildering” to suggest lawmakers can rewrite the state’s tax code and school funding formula in less than a month with no clear plan or coalition.

Pillen has been meeting with a group of nearly 20 lawmakers regularly through the summer, which includes Murman and Ibach. The governor will ultimately decide the scope of a special session, but that hasn’t stopped groups of lawmakers from beginning to draft their own proposals ahead of a special session.

“At one time I was under the perception that, ‘Oh, hey, we’re going to have a bill from the governor and let’s go vote on that and see,’” Dorn said. “No, we’re going to have a lot of proposals.”

Slama has targeted Pillen’s lack of a concrete plan and said she’ll be drafting her own.

“I’m unapologetically a fiscal conservative,” Slama wrote Friday on X, formerly Twitter. “That’s why I oppose Pillen’s plan to raise taxes on middle-class Nebraskans without real state spending cuts. … I’m going to stand up for what’s right — somebody’s got to.”

Among other ideas for offsetting property taxes, which Pillen has said he’s open to, are to increase taxes on vaping products, from Hughes, and remove many unfunded mandates on local governments, from State Sen. Carol Blood of Bellevue and more.

Conrad said the Legislature marches toward a possibly “perilous” special session, which will come after Pillen used his town halls to “barn storm the state and trumpet his political failures,” while also belittling the Legislature.

“At this juncture, my assessment of the governor’s political strategy is that this is unserious at best and dangerous at worst,” Conrad said. “It is unrealistic and wrong to promise a significant tax cut without a plan.”