Time for a middle class tax cut

Note: The following article was written by economics professor Greg Hayden and accounting professor Linda Ruchala of the University of Nebraska-Lincoln, economics professor Alan Jenkins of the University of Nebraska-Kearney, and economics professor Janet West of the University of Nebraska-Omaha.

We wish to comment on gubernatorial candidate David Hahn’s proposal for property tax reform. His plan to shift finance for K-12 schools away from property taxes and onto statewide revenue sources provides an important contribution to the public discussion of our state’s twin crises of inadequate state funding of public schools and rising property tax burdens. These two crises are inextricably intertwined, and any lasting solution to one must address the other. Consider the following:

• Over three-fifths of all Nebraska property taxes are collected by our K-12 public schools.

• Increases in the school district property tax levies (as state aid to schools was constrained or cut) resulted in sharp increases in the already excessive property tax burden. Taxpayers paid 36 percent more school property taxes in 2004 than three years earlier.

• Public debt to finance school infrastructure—paid entirely by property taxes—more than doubled during the last decade, from $491 million in 1993-94 to $1.26 billion in 2003-04.

These statistics reflect the fact that state support for K-12 education in Nebraska is considerably less than in other states. A Census Bureau study recently ranked Nebraska 44th in the contribution of state revenue sources to total in-state support for general fund educational expenditures. Property taxpayers pick up the slack.

Nebraska's heavy reliance on property taxes to fund public education disproportionately burdens middle income homeowners (particularly those surviving on fixed incomes, such as the retired and elderly), small business owners, farmers and ranchers.

Moreover, the income disparity among property taxpayers is a disadvantage to students in lower-wealth communities. They face reduced educational opportunities as their schools are forced to obtain the lion’s share of their revenues from smaller property tax bases and taxpayers with lower incomes.

Proposals about the need to raise income tax rates are often criticized without evaluating such proposals in the context of the overall tax burden. Instead, politically charged rhetoric about "cutting taxes" is often used to obscure tax-shifting measures that in reality raise taxes on the middle class.

A case in point is LB 968 which was enacted in the last legislative session. It cut state income tax rates by widening the tax brackets so that more income is taxed at lower marginal rates. But it also cancelled the scheduled lowering of the school property tax levy lid from $1.05 to $1.00 per $100 of taxable value. The Budget Office reported that retaining the levy lid at $1.05 will reduce state spending by $59.6 million annually, as property taxes are tapped to cut state aid for education.

Consequently, whether a family receives a tax cut under LB 968 depends on whether the family’s income tax savings exceed the increased property taxes made inevitable by LB 968. A married couple filing jointly with a taxable income of $50,000 and a home valued at $150,000 would see their income tax cut of $71.40 wiped out by $75 in higher property taxes. A married couple filing jointly with a taxable income of $35,000 and a $75,000 home would pay $15.50 less income taxes and $37.50 more property taxes—a total tax increase of $22. Clearly, for most Nebraska homeowners—particularly those with lower incomes—the LB 968 ‘tax cut’ will disappear, replaced by a total tax increase.

Hahn’s proposal to phase in a doubling of state school aid from 2004 levels would shift the revenue source for $634 million of school funding from property taxes to statewide taxes such as income and sales—obviously not a small sum. However, an appropriate combination of adjustments to income tax rates, brackets, credits and deductions, and a broadening of other revenue sources, can provide total tax savings to the majority of Nebraskans, including lower income earners and middle class homeowners. School levies would fall by $0.60, lowering property taxes on a $100,000 home by $600 and providing considerable room to negotiate income tax and other state revenue changes.

In evaluating Hahn’s proposals, Nebraskans should not lose sight of the policy goals of meaningful tax reform—maintain adequate funding of essential public services while providing tangible and enduring tax relief for the majority of taxpayers. Programs that lower taxes for only the highest income earners while shifting the tax burden for essential services onto the majority of taxpayers are inconsistent with both tax equity and economic efficiency. A program which focuses on shifting revenue collections necessary for public education away from property taxes increases equity. Without such a shift, the burden on property taxes will cause the adequacy of K-12 education to decline which will harm economic efficiency as the workforce is inadequate to meet the competitiveness of the global economy.

Click here to read more about David Hahn's property tax cut plan, the Nebraska Tax Fairness Act.