COLUMBUS, Nebraska — The funding route for Gov. Jim Pillen’s property tax reforms ideas will likely continue to focus on sales and “sin” taxes, and he says that “income tax won’t be touched.”

At various town halls around the state, Pillen has asserted that his solution to reducing property taxes lies in a broad sales tax base, which critics have said could raise taxes on poorer Nebraskans. Unlike in the spring, the governor has focused more recently on eliminating certain sales tax exemptions and increasing sin taxes. But he is no longer talking about raising the sales tax rate from 5.5 cents per dollar.

“We have to be competitive [with] income tax, and then we have to get competitive property tax,” Pillen told reporters Wednesday.

‘Keep that massive win’

Last year, lawmakers approved a long-sought reduction in the state’s income tax rates that will lower the top rates to 3.99% by 2027.

Pillen is now pushing ahead with his stated goal that by the end of 2024 — his second year as governor — the state will have eliminated or shifted a total of 40% of the state’s tax burden away from property taxes. That’s about $2 billion, with about half still to go to meet Pillen’s goal.

In an in-house podcast this week, Jim Vokal, CEO of the Omaha-based think tank Platte Institute, joined senior policy adviser Michael Lucci for the Platte Institute in calling to guard the income tax changes — which Lucci called “the best tax reform of any state in 2023.” 

The Platte Institute duo said the state should follow through with that plan unless “some extreme event” comes up that can’t be foreseen.

“Keep that massive win,” Lucci said. “Lock that down and then let’s all work together going forward to figure out what to do on the property tax.”

Future local, state spending

The podcast came in conjunction with the Platte Institute releasing its own property tax reform report, which offers some recommendations that echo those of Pillen. 

One calls for hard caps on local spending increases, which Vokal told the Nebraska Examiner will “stop the bleeding” associated with annual property valuation increases.

Valuations rose $32 billion in 2023, the largest single-year increase in state history, while nearly $300 million more in property taxes were collected across the state. In most cases, when valuations go up, more taxes are collected unless local tax rates go down.

Lucci said that elected officials should have to vote any time property tax rates could go up by $1 or more and that they should ask for a vote of the people for larger tax increases over a “hard cap,” such as an increase higher than the rate of inflation.

“That is the ultimate form of local control,” Lucci said on the podcast. “Soft cap for the first dollar raise, hard cap for dollars raised on whatever threshold folks think is reasonable.”

‘Full range of arrows in the quiver’

But Pillen’s desire to look only at sales taxes for his solution to an identified crisis could make his efforts more difficult, according to Rebecca Firestone, executive director of the OpenSky Policy Institute.

She said the reduced revenues resulting from the income tax cuts would be a “major complication” for a governor who wants to solve an identified crisis but not “look at the full range of arrows in the quiver of state tax policy.”

Firestone said the most recent estimates she’s seen from the phased down income tax rates will lead to about $1 billion in reduced state revenue in 2027. 

If paused, it could mean about $600 million for Pillen to work with for his ideas, which include the state taking over K-12 school funding.

“They made a lot of spending commitments in 2023,” Firestone said of lawmakers, pointing to a new state prison, a $1 billion Education Future Fund and the Perkins County Canal. “If some of those spending commitments were put back on the table, it could potentially free up revenues.”

Firestone said “sin” taxes, such as those on cigarettes, vaping products and alcohol, have shown public health successes when taxes are increased. However, they aren’t the best for general sources of revenue that could be needed for Pillen’s ideas.

Questions around school funding

Many future ramifications need to be considered for Pillen’s “bold plan” for the state to take over the property tax portion of K-12 funding, Vokal said. Among those questions is how to balance the loss of local control and engagement for the state’s 244 school districts.

“I’m not saying that we can’t get there or we shouldn’t go that direction or necessarily support components of it, but you got to figure out how you’re going to allocate the funding [and] if there’s going to be spending oversight,” PIllen said.

Vokal and Lucci joined Pillen in calling for a more level sales tax system between goods and services, but Vokal cautioned that business or agricultural inputs should be off the table.

He said Pillen’s suggestion to remove exemptions on certain inputs and tax them at a lower rate per purchase, such as at 2 cents per dollar, still complicates the policy.

“If you’re going to fund education, broadening the base is fine, and it’s prudent, but you’ve got to have a consistent tax code,” Vokal said.

Firestone said school funding needs to include conversations about student achievement, too.

A different spending future

Firestone added it’s hard to analyze Pillen’s newest ideas without any formal proposals or ideas, “although we are at the ready and tracking this very closely,” but she said the latest tax measure that did not pass in the spring has some clues.

“We’re not seeing any proposals for revenue raisers that are substantially different in their nature at this point,” Firestone said, adding it’s hard to determine who would ultimately benefit.

Pillen told reporters Wednesday that taxpayers likely wouldn’t see impacts of his ideas until the start of 2025, as many budgets for the next fiscal year are already in progress. 

Still, Vokal said local political subdivisions need to plan ahead.

“They’ve got to understand that we are looking to a different future,” Vokal said. “And that future is reining in spending, and it sounds like, potentially, the state taking over education and controlling that spending.”