LB 310 — a bill before the Revenue Committee today that would reduce Nebraska’s inheritance tax — would deprive counties of one of their few revenue sources. This would force many Nebraska counties to choose between cutting vital services that residents rely on or raising property taxes.
In Nebraska, the role of counties is closely tied to state government. Counties are required by the state to provide numerous services and are limited in the revenue sources that they are able to use in order to pay for them. Inheritance tax revenue contributes to keeping roads safe, administering elections, and supporting businesses through zoning and licensing, among many other services. Counties also play critical roles during emergencies, dealing with drought, floods, fires and other natural disasters.
For most counties, alternatives to inheritance tax revenue are few and painful. Without an increase in state aid, they would be forced to enact some combination of reducing services, drawing down their reserves or raising property taxes to counteract the loss of revenue due to LB 310.
There are few services that counties can reduce without violating state mandates. Counties have taken extreme measures in the past to meet state-imposed obligations, such as Hall County converting some paved roads into gravel for cheaper maintenance, but such drastic measures can harm the quality of life and ability to do business in Nebraska communities.
Furthermore, counties are limited in their ability to draw down their reserves to make up for this lost revenue. Reserves are used for large one-time expenses that are planned, such as infrastructure projects, or as “rainy day” funds to help counties weather unexpected events. Counties are advised to maintain reserves equal to at least two months of General Fund expenditures at all times. Failing to do so not only interferes with their ability to provide services, but also their ability to repay debt. Credit rating agencies like Fitch, Moody’s, and Standard and Poor’s consider these reserves when evaluating county creditworthiness and can downgrade credit ratings based on insufficient reserves. This may lead to higher interest rates on borrowing, bringing further trouble for county budgets.
Raising taxes on Nebraska property owners would be unavoidable for many counties and some may not be able to completely replace the lost inheritance tax revenue because of state-imposed levy limitations.
The inheritance tax also helps to create a more racially equitable tax code. The tax only applies to Nebraskans passing on wealth greater than the statutorily exempted amount, a population that is overwhelmingly white. According to data from the Institute on Taxation and Economic Policy (ITEP), white households make up 84% of Nebraska’s overall population, but comprise 92% of the state’s top 20% of earners – those making more than $103,500 annually. One of ITEP’s recommendations to address these racial and ethnic income disparities is to increase the inheritance tax, rather than cut it.
The hearing on LB 310 begins at 9:30 a.m. NET Nebraska will stream the hearing live.