Pillen property tax plan would hike Nebraska sales, cigarette taxes

Gov. Jim Pillen is floating a plan to provide property tax relief by raising the state sales taxes to a nation-leading 7.5 cents and boosting cigarette taxes by $2 a pack.

The plan calls for using the new revenue, estimated at about $1 billion annually, to replace some of the property taxes levied by schools and other local governments.

Together with proposed caps on property tax collections and legislation passed last year, the proposal would reduce the amount of property taxes paid statewide by an estimated $2 billion, according to an outline from the governor's office. 

Laura Strimple, a Pillen spokeswoman, said the governor's plan is aimed at achieving a "historic, 40% reduction" in property taxes.

"With this tax reform solution, Nebraska’s sales tax rate would be in line with other low-tax states such as Texas, Tennessee and Arizona while at the same time significantly reducing our property tax burden from 7th highest in the country to 29th," she said.

"That would put the state’s property taxes lower than comparable neighbor states and on par with low-tax states like Florida."

But Nebraska lawmakers and others interviewed Wednesday responded cautiously as descriptions of the plan started to filter out. 

Jon Cannon, executive director of the Nebraska Association of County Officials, said he liked some pieces of the proposal, such as using a new form of property tax credits to help fund counties and other local governments.

He said he is curious to learn more details, although he questioned the plan's political viability.

"I don't know how he's getting the votes," Cannon said of the governor. 

Bruce Bohrer, a lobbyist for the Lincoln Chamber of Commerce, said the business group will not take a position until leaders have a chance to review actual legislation. 

But he said the Lincoln and state chambers have standing policies against tax shifts, in which one type of tax is used to offset another. As a result, he said, Pillen's plan would create some concerns.

State Sen. Lou Ann Linehan of the Omaha area, the Revenue Committee chairwoman, said she hasn't decided whether Pillen is proposing the right approach to property tax relief. She said she wants to see numbers from the governor's office. 

However, she said she doesn't like the idea that Nebraska would have the highest state sales tax in the nation if the current 5.5-cent tax is boosted by 2 cents. Most cities and counties can charge as much as 2 cents more, which would result in a total sales tax of up to 9.5 cents under the proposal. Lincoln's sales tax is 1.75 cents. 

Linehan said she thinks the state has already done a lot to ease property taxes and local governments now need to do more to hold the line. She said she would not support any plan unless it included a "hard cap" on property taxes, meaning one that could only be exceeded by a vote of the people at a general election.

Sen. Danielle Conrad of Lincoln pledged to keep an open mind about the plan while expressing skepticism about increasing sales taxes, which fall more heavily on low-income Nebraskans, in order to provide tax relief that could benefit some of the state's wealthiest residents. 

"I will not support any reverse Robin Hood scheme," she said. "We shouldn't double down on bad ideas from the past."

On the other hand, Sen. Ben Hansen of Blair said he believes sales taxes are more fair than property taxes. People have some control over purchasing things subject to sales taxes, while property taxes are levied regardless of a person's ability to pay.

But he's not convinced about increasing cigarette taxes, saying that he doesn't like using taxes to change behavior. The proposal would increase state taxes from 64 cents per pack to $2.64. 

Sen. Steve Erdman of Bayard, a leading proponent of replacing almost all Nebraska taxes with a consumption tax, offered the harshest view of the governor's plan. He said it would increase taxes on seniors and people with fixed incomes while simply reducing the increase in property taxes. 

"This is the same smoke and mirrors we've been doing for 50 years," he said.

Pillen, in a year-end interview, said he wanted a "simple, bold, courageous" plan to reduce property taxes. He presented his proposal Tuesday to members of a work group he convened about property taxes. The group included agricultural, business and political leaders.

The plan would boost state revenue by increasing sales taxes 36% and cigarette taxes by more than 400%, taxing so-called games of skill at the same rate as casino gambling and adding a new tax on advertising by companies with $1 billion-plus revenue. 

New restrictions would require cities, counties and other local governments to roll back property tax levies when valuations increase. The plan would cap property tax collections but allow for increases of 2% or the rate of inflation. Local governments would be able to collect more property taxes if the state does not meet its aid obligation.

The new state revenue would be used to replace property taxes, with different programs for schools and for other local governments.

Schools would get state dollars equal to 30% of the property taxes they levy, about $750 million this year. The program would replace what has been called the LB1107 program, in which property owners can claim income tax credits equal to 30% of their school property taxes. The total includes the money allocated for the current credits, plus new revenue. 

Cities, counties and other local governments would divvy up the rest of the new revenue, equal to about $975 million this year.

The changes would be in addition to measures passed in 2023 that increased the state's older property tax credit program, eliminated the community college property tax and boosted state support for schools. The older property tax credit program reduces the tax bill paid by property owners.