Property Taxes

Overview

The property tax is levied only by local governments in Nebraska.  State government has been prohibited from levying a property tax since a successful initiative petition in 1966.  The property tax is levied on real estate and most personal property used for the production of income.  The tax on real estate is levied based on the actual or market value of the real estate.  Most is assessed at 100% of actual value, but agricultural land has historically been assessed at 80% of actual value.  Beginning with 2007, agricultural land will be assessed at 75% of actual value.  Agricultural land that has greater value if developed for other uses may be assessed at 75% of its value for agricultural use only under what is generally known as Nebraska's "greenbelt provision."

There are few exemptions from the property tax.  Government property is exempt if used for a public purpose and property owned by not for profit organizations and used for cemetery, educational, religious or charitable purposes may apply for exemption.  There were also limited personal property exemptions available under the upper tier of qualification under the Employment and Investment Growth Act (LB 775 (1987)), and similar exemptions are available under the Nebraska Advantage Act, which replaced the Employment and Investment Growth Act on Jan. 1, 2006.

Tax Policy and the Property Tax

Adequacy - The chief strength of the property tax is its stability and reliability.  Property values do not change much from year to year and the local governments that levy the tax have historically adjusted the levy to the level that is necessary to fund the budget.  This attribute is what makes the property tax the preferred tax for securing bond issues.  The rate can be adjusted every year to satisfy the obligations to the bondholders.

The tax is also suitable for very small units of government.  Property can not move from place to place to avoid local taxes.  The property tax may always be levied, even in locations where there is no retail outlet to collect sales taxes or even residents to pay income tax.

Historically, the property tax base grew more slowly relative to the sales and income tax bases.  The property tax base since 1930 has grown only 70% as fast as the state's economy, measured by Nebraska personal income, compared to 93% for the sales tax base and 118% for the individual income tax as calculated since those taxes came into existence in 1967.  In the past 20 years, however the growth has been 115% of the personal income growth.  This is much faster than every tax base except individual income tax.

Equity - Ask anyone on the street if the property tax is a fair tax and nearly everyone will answer "No."  Unemotional analysis gives a different picture however.

Many will say that the property tax is regressive, but as applied to residential property, the tax is roughly proportional.  Everyone pays the same rate on the value of their property within the same tax district.  Wealthier people also tend to own more expensive homes.  The low-income, elderly homestead exemption program provides some measure of progressivity.  The assessment standard of 100% of market value is identical across the state and differences in rates across the state have been sharply reduced with recent school finance and levy limit legislation.  The tax is therefore relatively sound from the standpoint of horizontal equity.

Finally, the tax reflects the benefits received principal with regard to at least some local governments.  Ownership of property gives rise to the need for law enforcement, legal structures, roads and fire suppression services that are provided by county and city governments.  This principle is not served well by financing education with the property tax.  While businesses do rely on the educational system for the workforce of the future, ownership of property, real and personal, bears little relationship to the need for an educated workforce.

Simplicity - The property tax has some weaknesses as well.  It is very expensive to administer.  Determining actual value is very subjective and our law provides extensive due process and other appeal mechanisms.  Also, because the initial valuation determination is made locally, there is a need for the state to intervene to "equalize" value between counties to assure that our state aid policy works evenly across the state.  It takes a year, from the January 1 assessment date until the Dec. 31 tax due date for the entire assessment, equalization, appeal and levy process to take place.

Accountability - The tax is highly accountable to taxpayers.  The property tax is paid in two installments that are highly visible to taxpayers.  Also, because the tax is paid to many single purpose governments, like school districts, taxpayers are more aware of what the tax goes for than is the case with sales or income taxes.

Economic competitiveness - The property tax is higher in Nebraska than most states, so it could be a factor for the location of property intensive industries.  Many states, however, relieve the burden on residential property through lower assessment ratios and assess agricultural land at a lower ratio than Nebraska.  In many cases, the owners of commercial and industrial property are the only class which is assessed at 100% of actual value.  Also, our high property taxes have been mitigated somewhat by the recent successful efforts to reduce the rate of growth of the property tax.

1. History.  The property tax has been a feature of governmental fiscal programs throughout most of recorded history.  The ancient Greeks were probably among the first to impose the tax.  In 596 B.C., a land tax on gross agricultural produce was levied in Athens.  By 378 B.C., the tax was a general property tax imposed on cattle, furniture, money, land, and houses.  In Europe, early taxes were imposed on land, then buildings, then cattle and, finally, other property.

   As early as the 17th Century, issues regarding the property tax were documented.  Discovering, valuing, and determining what actually constitutes property became focal points in property tax debate.  This is still true today.  Administration of the tax became better by the 19th Century, but also more problems were found.  Intangible and tangible property increased from year to year, but much of it was concealed from taxing authorities.

   The Territorial Legislature of Nebraska adopted a property tax in 1857, and it became the major source of both state and local operating revenue.

   The burden of property taxes grew as public service needs increased.  In 1966, the voters adopted a constitutional amendment placed on the ballot through initiative petition that abolished property tax as state revenue source (commonly referred to as the Duis amendment).  The tax base for most local units of government has remained primarily property taxes, while state government now must depend mostly upon sales and income for its revenue.

   In 1967, the tax on intangible property and household goods was eliminated.  Then, as now, property taxes were levied mostly on real estate and productive personal property.

   In 1972, a major change in the property tax base took place by the partial exemption of agricultural income-producing machinery and equipment; business inventory; livestock; grain and seed; and poultry, fish and fur-bearing animals.  This exemption was 12.5% for 1973 and an additional 12.5% for each of the succeeding four years.  In 1977, LB 518 provided for the complete exemption of these items of commercial personal property.

   In 1984, Amendment 4 was passed which allowed agricultural and horticultural land to be valued as a separate class.  LB 271 (1985) provided for an income approach to valuing agricultural land.  However, Banner County v. State Board of Equalization and Assessment, 226 Neb. 236, 411 NW 2d. 35 (1987) determined that separate classification as authorized by Amendment 4 did not change the requirement of uniformity and proportionality of assessment as required by NEB. CONST. Art. VIII, Section 1.  The court found that LB 271 was unconstitutional.

   Subsequently, Amendment 1 was placed on the ballot and passed in the 1990 general election.  This amendment provides that agricultural land is a separate class of property that need not be assessed uniformly and proportionately with other classes of property but still must be uniformly and proportionately assessed within the class of agricultural land.  LB 320 (1991) provided that agricultural land be assessed at 80% of actual value.  LB 968 reduced this to 75%, beginning in 2007.

   1998 saw the imposition of overall levy caps designed to provide an absolute maximum property tax levy by LB 1114 (1996).

   The levy caps do not apply to levies to pay off bonds issued by the government or any lease-purchase agreement entered into prior to July 1, 1998.  Voters may override the limits for up to five years.  The totals shown are maximums and recognize that no property can be in a municipality and an SID simultaneously.  Under LB 1114, the county levy and the county allocated levy must total no more than 45 cents per $100 of value.  Likewise, the city levy and city allocated levy must total no more than 45 cents per $100 of value.  The levies of smaller units of government are to be allocated by the county board or city.  County boards are responsible for allocating levy authority of political subdivisions for which the greatest portion of the valuation of the district is in that county.

   Legislation passed in the 2002 and 2003 special sessions and the 2004 regular session allows the levies of schools and community colleges to increase to make up for the loss in state aid for FY2002-03 through FY2007-08.  The FY2008-09 levy limits are to then return to the 2001 levels shown above except for schools, which are to remain at $1.05.

2. Base.  The base for the property tax is assessed value of property located in the taxing jurisdiction.  Assessed value is determined in different ways for each of three basic types of property: personal property, real property, and centrally assessed property.

   Real property is the largest share of the tax base, comprising over 90% of the total.  For assessment purposes, real property is divided into three parts: 1) ag land, sites and improvements, 2) commercial and industrial land and improvements, and 3) residential land and improvements.

   Ag land, sites and improvements make up about 25% of all taxable value of real estate.  Different classifications of agricultural real estate include irrigated cropland, dryland cropland, pastureland, rangeland and meadows, shelterbelts, accretion and wasteland.  Agricultural and horticultural land is to be assessed at 75% of market value.  (NEB. REV. STAT. Sec. 77-201.)

   Commercial and industrial land, improvements, railroad and public service company real property, and mineral interests represent about 21% of the taxable real estate value in the state.  Residential property represents about 54% of all taxable real property.  Commercial and industrial property and residential property are to be assessed at 100% of market value.

   Property tax exemptions

   Exemptions from the tax base for real property are based on use and ownership.  Property must be both owned by an exempt organization and used for an exempt purpose to be exempt.  Exemptions include government, religious, educational, charitable, and cemetery property.  Organizations owning exempt property, except for government entities, must submit applications every four years showing eligibility for exemption to county boards to retain any exemptions.  In other years, the organizations need only file statements stating that the use justifying the exemption has not changed.

   The cost to the state and or local governments of these exemptions is not known because no value is ever placed on exempt property.  There are other exemptions for which we have more information.  The homestead exemption program allows certain low-income elderly, disabled persons and veterans to avoid paying property taxes on that amount of an owner-occupied residence that does not exceed the exempt amount.  The exempt amount is the lesser of $45,000 or 100% of the average home value in the county so that more relief is provided in places where housing costs are higher.  The exempt amount is the greater of $50,000 or 120% of the average home value in the county for the disabled and veteran beneficiaries.  Eligibility is further limited by the household income of all occupants of the home and the total value of the residence.

   The state reimburses local governments for the entire cost of homestead exemptions.  This program costs the state approximately $56.5 million.

   A personal property tax exemption is provided to business qualifying under the Employment and Investment Growth Act by investing at least $10 million and employing at least 100 new employees.  The exemption is for up to fifteen years and is limited to turbine-powered aircraft, mainframe business computers, and business machinery used to process agricultural products.  For tax year 2005, these exemptions totaled $451,052,208 in exempted value.  Using the $1.96 average property tax rate to measure the value of the exemption, the associated taxes would be $8.8 million.

   Household goods and personal effects, business and agricultural inventories, breeding livestock, and motor vehicles are also exempt from personal property tax, although motor vehicles are subject to a separate, uniform statewide tax described elsewhere.  The cost of these exemptions is unknown.

   Prior to 2001, all property owned by any governmental entity was exempt from property taxes.  However, in November 1998, a constitutional amendment was approved by the voters that limited the exemption for state and local government to property used for a public purpose.  Beginning in 2001, state and local government property not used for a public purpose is to be taxed at its taxable value as if owned privately.  If it is leased to another entity and not used for a public, charitable, or other exempt purpose, the property is to be assessed and taxed to the lessee as if owned by that lessee.  Government owned property not used for any purpose may be assessed an in lieu of tax payment in an amount necessary to pay the cost of fire and police protection, public utilities, and road and street maintenance and repair.  (NEB. REV. STAT. Section 77- 202.11 and 77-202.12.)

   Personal property includes such items as farm and business equipment, portable buildings, boats, motors, and airplanes, and makes up another significant portion of the tax base (7.2% of the entire taxable base, real and personal).  Exemptions include items such as non-depreciable business equipment, intangible property (stocks and bonds, etc.), personal household goods, property qualifying for economic incentives under the Employment and Investment Growth Act or the Nebraska Advantage Act, and motor vehicles.  Government and charitable, religious, educational, and cemetery organizations may also receive exemptions under the same conditions as for real property.

   Income producing personal property is to be assessed at its net book value.  This is its acquisition value less any year to year depreciation attributable to that property according to a state enacted depreciation schedule.  (NEB. REV. STAT. Section 77-120.)

   Centrally assessed properties include the property of public service companies, railroads, pipelines, telephone companies, and other similar entities.  This property is called centrally assessed because it is assessed by the state based on the market value of the business unit.  Centrally assessed real and personal property make up about 3.7% of the real and personal property base.  Personal property of centrally assessed taxpayers is assessed based on net book value while the remaining value of the business is to be assessed as a unit based on its ability to produce income.

3. Rate.  There are nearly 3,000 different political subdivisions in Nebraska which have authority to levy a property tax, and they overlap in a countless number of ways.  The rate the taxpayer pays is the rate set by each of the political subdivisions in which the property is located added together.  Beginning in 1998, LB 1114 changed this additive nature of the tax by allocating a maximum levy among the subdivisions competing for it.

   Through FY2000-01, the levy for K-12 education was limited to no more than $1.10 per $100 of taxable value subject to the levy.  This maximum rate declined to $1.00 per $100 of taxable value beginning in FY2001-02.  Beginning with FY2003-04, school boards may increase the levy by up to 5 cents plus the amount necessary to make up for the school aid cut adopted in 2002-03 with a three-fourths vote of the school board.

   Cities and counties each are limited to $0.50 per $100 and from that amount they may allocate levy rate authority to smaller, special purpose districts like fire protection districts, community development authorities, and airport authorities.  Regional entities are given smaller shares.  Natural Resources Districts may levy no more than 4.5 cents per $100, Educational Service Units, no more than 1.5 cents and community colleges Areas no more than 7 cents plus the amount necessary to make up the reduction in state aid for FY2003-04 through FY2007-08, with a three-fourths vote of the board.  Finally, Sanitary and Improvement Districts which are used in Nebraska to develop residential subdivisions without creating new cities are limited to 40 cents once they have been in existence for five years.  (NEB. REV. STAT. Section 77-3442.)

   Levies from the 2005 certificate of taxes levied shows that average county levies vary some with a statewide average levy of $1.96.  That is 20% lower than it was 10 years earlier.  Average levies range from $1.22 in Sioux County to $2.18 in Douglas County.

4. Administration and Disposition.  The administration of the property tax in Nebraska is unusually complicated due to our populist traditions.  Nearly 3,000 political subdivisions have the authority to levy property taxes to fund services ranging from very specific ones, like maintaining a cemetery or predator control, to very general ones, like cities or counties.  The administration involves the merging of the process of assessing, or placing a value on each parcel of taxable property in Nebraska, and the process of developing a budget for each political subdivision which calls for some contribution from property taxation.  The two processes combine to generate a property tax rate for each political subdivision.  Rates are then combined for each parcel of property and multiplied by the value to determine the tax due, which is then collected mostly during the following calendar year.

   The preceding paragraph presents a thumbnail sketch of the process.  However, the assessment process and the rate-setting process is extremely complex and has multiple steps.  Perhaps the best way to present this is by showing the property tax calendar from beginning to end.