Special Session Changes Property Tax Credit Program

This summer's special session of the Nebraska Legislature resulted in a change to one of the two credit programs used to reduce property taxes. The first program, started in 2007 and known as the Property Tax Credit (Tier 1) program, provides credits directly against property taxes levied on real property. The second, started in 2020 and known as the School District Property Tax Credit (Tier 2) program, provided income tax credits against taxes paid to schools on real property. However, as a result of the special session, beginning with this tax year, credits under the Tier 2 program will be "front-loaded" and credited directly against property taxes owed to schools, just like the Tier 1 program. Taxpayers will no longer need to claim the Tier 2 credits when filing income taxes.

Yet while both programs now apply directly against taxes levied, they still differ in how credits for individual parcels are calculated. The Tier 1 credit is based on the ratio of the parcel's assessed value to the assessed value of all real property in the state. The Tier 2 credit is based on the ratio of school property taxes levied on the parcel to the total school property taxes levied in the county. The credit programs also differ in how agricultural land is treated. Agricultural land is given extra weight, 120 percent, in the Tier 1 program but not in the Tier 2 program.

Combined, the two programs will provide nearly $1.2 billion in credits in tax year 2024. The Tier 1 program will provide $437 million while $750 million will be provided through the Tier 2 program. One way to measure the effectiveness of the programs in reducing taxes is to calculate the ratio of 2024 credits distributed to each county to the total taxes levied in the county in 2023 (2023 taxes are used because data for 2024 is not available). Figure 1 shows the results for each county. As Figure 1 shows, credits as a share of total taxes range from 18.1% in Sarpy County to 34.4% in Keya Paha County. In general, tax reductions, at least as a percentage of taxes levied, tend to be greater in rural counties compared to more populated ones. It should also be noted, though, that the per capita taxes levied in rural counties tend to be higher too.

FIGURE 1. PROPERTY TAX CREDITS IN 2024 AS A PERCENTAGE OF 2023 PROPERTY TAXES LEVIED

Source: Rolling Prairie Economics estimates based on data from the Nebraska Department of Revenue.

The $1.2 billion in property tax reductions provided through the Tier 1 and Tier 2 credit programs amounts to roughly 22 % of the property taxes levied in 2023 statewide. The different approaches taken to calculate the credits and the variability in circumstances in terms of assessed values, taxes levied, and location mean the reductions are not uniform across taxpayers. Yet while not perfectly uniform, the programs do a decent job of providing property tax reductions. The lack of uniformity points to the difficulty of designing property tax reduction policies given the diversity of taxpayer circumstances.