Transfers to Property Tax Credit don’t address needed systemic reform

Transfers to Property Tax Credit don’t address needed systemic reform

Today the Appropriations Committee will hear testimony on LB 309, LB 364 and LB 442, which would transfer funds from the General Fund into the Property Tax Credit program. The committee also will consider LB 387 – which would transfer cash reserve money into the Property Tax Credit program.

Our research shows that our state’s three-legged stool is out of balance and that we rely more heavily on property taxes. So we greatly appreciate the intent of these bills to provide reductions in property taxes. However, we would advocate, instead, for more systemic property tax reform, as opposed to injections of funding into the Property Tax Credit program.

Low state support of schools at heart of property tax challenges

Every major study of Nebraska taxes since 1962 has noted our state’s high reliance on property taxes to fund schools. That reliance is largely a result of historically low state support for our schools.

Presently, about 48 percent of Nebraska K-12 education funding comes from property taxes, compared to a national average of 29 percent. In FY13, we hit a historic low in state support for K-12 education as a share of the economy since the implementation of TEEOSA. While that funding has bounced back slightly, the appropriations preliminary budget would again take a downward turn, just above that historically low level.

The top property tax recommendation of the Tax Modernization Committee was to “increase the state aid commitment to schools to offset property tax use and reduce property taxes as a share of total state and local taxes.” At a time when school funding for K-12 education is at a historic low, we fear that diverting dollars from the General Fund will only move us further from our goal of sustainably addressing our systemic imbalance.

A strong cash reserve is vital

OpenSky Policy Institute has been a strong advocate for building and protecting our state’s cash reserve. Earlier this week we testified before the Appropriations Committee to discuss the impact of revenue volatility on our state budget and the best practices we can implement to guard against these uncertainties – the most effective safeguard being a strong cash reserve.

The Government Finance Officers Association recommends that governments maintain a cash reserve of two months — or 16.7 percent of the General Fund.  The Legislative Fiscal Office recommends maintaining 16 percent in the cash reserve when our economy is strong.

Nebraska’s cash reserve is projected to reach $769 million at the end of FY17 – which would equal 16.6 percent of the General Fund. Taking $60 million out of the cash reserve, as proposed in LB 387, would reduce it to 15.3 percent.

Rainy day fund not meant for ongoing expenditures 

While we appreciate the intent of LB 387, we believe the state’s rainy day fund should be reserved for economic downturns or one-time spending needs. However, contributing to the Property Tax Credit essentially creates an ongoing obligation, as any reduction in the level of funds allocated will functionally act as a property tax increase

We think it is vitally important that we maintain a cash reserve of at least 16 percent of our General Fund while our economy is strong. Our cash reserve needs to be at least that size to deal with the rainy days that are sure to come.

More comprehensive approaches preferred

All of these proposals are a well-intentioned, but we fear that if we continue to transfer funds to the Property Tax Credit program, we may remove the political will needed to meaningfully address our systemic imbalances. For this reason, we would support other proposals that would provide greater systemic property tax relief such as:

• LB 186, which creates a property tax circuit breaker;
• LB 280 and LB 523, which significantly change how we fund education; and
• LB 182 and LB 323, which call for a review of school finance.

Forecasting board meeting coincides with committee hearing

The Appropriations Committee hearings start at 1:30 p.m. in the State Capitol, Room 1003. At that same, the Nebraska Economic Forecasting Advisory Board will meet in the State Capitol, Room 2102. The board’s projections play a key role in the cash reserve balance as well as decisions such as transfers into the Property Tax Credit program.

NET Nebraska will stream the Appropriations Committee hearing online and OpenSky will provide updates from both the committee hearing and the forecasting board meeting on our Twitter page.