Nebraska Property Tax Assessment Limits

Chair Von Gillern and Members of the Revenue Committee:

My name is Nicole Fox, and I am a Policy Analyst at the Tax Foundation. The Tax Foundation is a nonprofit, nonpartisan organization that analyzes tax policy issues at the state, federal, and international levels. Thank you for the opportunity to discuss the potential economic implications the legislation before you could have on Nebraska.

States’ property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. limitation methods vary greatly by design and tend to fall into one of three categories: levy limits, rate limits, and assessment limits. Some states also employ homestead exemptions or circuit breakers, among other targeted relief efforts.

Levy limits represent the most neutral tax relief tool as they constrain total revenue collections in a given tax year, with certain adjustments for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin and/or population growth. Rate limits set the amount by which a levy rate can be raised in a given tax year, but they do nothing to counter the surging property valuations we have seen around the country in recent years.

Assessment limits mandate the amount by which property values can increase annually, with the intent of limiting exposure to sharp increases in taxation resulting from valuation increases. Proponents often point to the belief that assessment limits benefit existing property owners, can provide a sense of predictability in terms of future property tax burdens, and are often intended to prevent those with fixed incomes from being priced out of their homes. While these intentions may be noble, we caution against their imposition due to the distortions they create.

In our annual State Tax Competitiveness Index, Nebraska currently ranks near the bottom on the property tax component at number 46. In fact, due to the market distortions that assessment limits create, we penalize states that impose them. Adopting an assessment limit in Nebraska would further reduce its tax competitiveness.

LR292CA seeks to create an assessment limit by establishing a baseline taxable market value separate from a property’s current fair market value. Annual increases in a property’s taxable market value would be limited to increases in the Consumer Price Index (CPI), and the baseline would not change until a property is sold.

The assessment limit in LR292CA picks winners and losers, violating the principle of tax neutrality. It is a tax shift from current property owners to new entrants to the market and imposes highly unequal tax burdens across similarly situated properties. Two property owners, despite owning parcels on the same street with identical fair market values, could wind up with very different property tax bills based solely on date of purchase. This would happen if one were a long-term owner whose taxable market value is protected by the assessment limit, while the other owner has seen their taxable market value reset due to the sale of property.

This proposal gives additional favorable tax treatment to long-term owners because it allows them to make property improvements without affecting their property’s taxable market value. Instead, the tax burden would be borne by the new owner upon the sale of the property. This means an owner could triple the size of a home with no tax implications. Conversely, any new construction—even building a shed—could reset the entire property to current market value.

While lower effective tax rates and reduced tax burdens for long-term property owners are realized under assessment limits, an erosion of the current property tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. eventually results. To compensate, the remainder of the tax burden is shifted to new property owners. New property owners, then, are paying for themselves and the long-term property owners who get all the local benefits while paying very little in taxes. First-time homebuyers may have fewer financial resources, and as the tax burden shifts to them, home ownership can become out of reach. This tax shift may deter young professionals from staying in Nebraska.

Assessment limits not only shift tax burdens, but they also interfere with typical housing market activity and create inefficiencies in housing allocation.

The assessment limit regime creates what is known as a lock-in effect. Older homeowners who may benefit from downsizing for safety reasons may not be able to afford to do so if it means a sharp increase in their property tax bill. Empty nesters may also stay in a larger home instead of downsizing to avoid a tax increase. These larger homes may be desired by growing families who, under LR292CA, would have fewer options.

Just like their impacts on downsizing, assessment limits can also affect the decision to upscale. A higher-priced home paired with a significantly higher taxable market value and increased property tax burden could deter a would-be home buyer. Lock-in effects prevent housing stock from becoming available to buyers with specific life-stage needs.

States like Florida allow homeowners to transfer a portion of their “protected” assessed value from an existing home to a new home. While this portability option acknowledges the lock-in effect created by the assessment limit, the policy remains flawed, as it further enhances the shift from existing to first-time homeowners.

Florida’s assessment limit went into effect in 1995, and 30 years later, the governor and state legislators, like those in Nebraska, are looking for ways to address the state’s property tax crisis.Additionally, because assessment limits often result in newly built housing being taxed more heavily than existing housing, as is the case with LR292CA, it disincentivizes new construction. Less housing construction leads to a reduced housing supply, and again, makes the dream of home ownership out of reach.

Assessment limits are not sound tax policy. While well-intended, with hopes of preventing owners from being “taxed out of their homes,” the tax shifts, lock-in effects, and housing supply issues created by assessment limits make housing affordability worse.

LR292CA would not protect property owners from the policy choices of local taxing officials or future legislative sessions. For example, the proposed assessment limit would not prevent local taxing jurisdictions from increasing their levy rates, and it would not prevent future state legislators from altering the tax base in other ways, such as by changing various exemptions, credits, and refunds.

There is very little economic justification for establishing a nonneutral tax policy like the one being discussed today. LR292CA is not based on the benefits accruing to the homeowner in terms of local services received, but rather, it is based on something as arbitrary as how long a particular property has been owned.

The appreciation of property values is desirable, especially when viewing property ownership from an investment standpoint. While property values have risen substantially in recent years, the accompanying property tax increases are much less desirable.

While it is reasonable for taxpayers to want to prevent their property tax bills from skyrocketing, the best way to keep property taxes in check is to control property tax collections. To address Nebraska’s property tax crisis, the legislature should instead seek to strengthen its currently weak levy limitation.