Potential sales tax increase, local taxing authority cap advanced

A proposal to generate state revenue that would be used to provide additional property tax relief advanced to the second round of debate April 2 after a successful cloture motion.

LB388, as introduced by Elkhorn Sen. Lou Ann Linehan, would make a technical change to state law regarding the sales tax rate.

A pending Revenue Committee amendment would replace the bill with a proposal to increase the state sales tax rate, impose sales tax on the purchase of certain items and services and eliminate exemptions for others.

The additional revenue would fund a companion proposal contained in an amendment to LB1331, introduced by Sen. Dave Murman of Glenvil.

The amendment would end the refundable income tax credit against school taxes paid that was created under LB1107 in 2020 and instead “front load” the funds allocated to the credit by increasing foundation aid to public schools.

Linehan said the two proposals — in conjunction with a modified cap on school property taxing authority in the amendment to LB388 — would provide more funding to schools at a time when valuations in some urban and suburban districts are spiking, which reduces their state aid under the school funding formula and forces them to rely more on property taxes.

“If we don’t do this,” she said, “we are going to raise property taxes by significant amounts.”

Beginning Jan. 1, 2025, the committee amendment would increase the state sales tax rate from 5.5% to 6.5% unless actual state General Fund net receipts for fiscal year 2023-24 exceed the most recent forecast of net receipts provided by the Nebraska Economic Forecasting Advisory Board by 3.5%.

If net receipts exceed the forecast by 3.5%, the state tax commissioner then would set a lower rate, from 6.25% to 5.5%, based on how much state revenue exceeds that threshold. The commissioner would determine the applicable rate on or before July 14, 2024.

The amendment also would limit to 3% the amount by which a city, county or village could increase its property tax request from one year to the next with several exceptions, including a percentage based on real property growth.

Lincoln Sen. George Dungan opposed LB388. He said he supports frontloading the LB1107 credit but opposes funding additional school aid with a sales tax increase that disproportionately would affect low- and middle-income Nebraskans.

“We do need property tax relief,” he said, “just not a tax shift.”

Sen. R. Brad von Gillern of Elkhorn said the proposal is not a dollar-for-dollar tax shift and would result in a “net tax reduction” for many Nebraskans. He said the sales tax increase would not have an outsize effect on low-income Nebraskans because they spend most of their income on essentials, such as groceries and rent, that are not subject to sales tax.

The committee amendment would help offset any regressive effects from the sales tax increase by exempting residential utilities from sales tax, von Gillern added.

Linehan said she was open to amending the proposal on select file to remove the sales tax increase. If lawmakers cannot agree on an amendment, Linehan said, she would ask Speaker John Arch of La Vista not to schedule further debate on the bill.

After eight hours of first-round debate over two days, Linehan filed a motion to invoke cloture, which ends debate and forces a vote on the bill and any pending amendments.

The motion succeeded on a vote of 33-6. Thirty-three votes were needed.

Senators then voted 28-12 to advance LB388 to select file.