Nebraska lawmakers are looking for ways to replace the revenue that counties would lose if the state's inheritance tax was repealed.
LINCOLN, Neb. (AP) - Nebraska lawmakers are looking for ways to replace the revenue that counties would lose if the state's inheritance tax was repealed.
The push comes amid pressure from Gov. Dave Heineman to eliminate the tax, which counties use to pay for road maintenance and other services. The Republican governor claims the inheritance tax makes Nebraska less attractive to businesses and residents. He proposed a measure to repeal it during this year's legislative session, but it was stripped from a larger tax cut package after counties protested the loss of revenue.
Bellevue Sen. Abbie Cornett said Friday that legislative staffers and county officials have discussed a variety of options, including direct funding from the state and the use of Nebraska's motor vehicle tax to make up the difference. But the motor vehicle tax currently goes to cities, counties and schools, and giving more to counties would likely require lawmakers to take money from schools. That in turn would trigger an increase in state aid under the school-funding formula.
"It is a very delicate balance," Cornett said. "A finite amount of money is needed to run a state, a city, a county. The question is, how do we finance those?"
Cornett said having the state send money directly to counties would be "the most direct, simple solution." But such a proposal could make counties nervous, as Nebraska cut funding last year to local governments.
The Revenue Committee chairwoman said lawmakers could also eliminate the limits on counties' ability to levy taxes, although such an idea would not likely pass.
Nebraska is one of seven states that impose an inheritance tax. Anyone who inherits money or property from a Nebraska resident pays the tax, and the rates and exemptions vary based on how they're related. Parents, grandparents, siblings and children pay nothing on the first $40,000 of value, but are then subject to a 1 percent tax.
More distant relatives, such as nephews and nieces, receive a $15,000 exemption and then must pay 13 percent. Other beneficiaries qualify for a $10,000 exemption and are then taxed at 18 percent.
Spouses pay nothing. Nor do churches, charities and other tax-exempt groups.
The Open Sky Policy Institute, a Nebraska tax policy think tank, said in a report Friday that eliminating the inheritance tax would force counties to cut services, raise property taxes or drain their reserves. Renee Fry, the group's executive director, said Nebraska should keep the inheritance tax while looking at its broader tax structure, which she described as outdated.
Nebraska counties have collected an average of $43 million annually over the past three years, according to the report. Counties use the revenue differently, with some spending it on roads, administering elections and emergency services. Others place the money in rainy day funds or use it to keep property taxes down.
Fry said eliminating the inheritance tax would put an additional strain on counties that have lost state and federal financial support in recent years. Hall County, for instance, has turned some of its roads from paved to gravel, which are cheaper to maintain.
Larry Dix, executive director of the Nebraska Association of County Officials, acknowledged that businesses look at inheritance tax rates when deciding where to locate. But he said businesses also consider other factors, such as a property tax rates, the available workforce, school quality and the state's infrastructure.
"I seriously doubt anybody with a straight face can tell me that a major corporation comes to Nebraska and leads with the statement, 'Tell me what your inheritance tax is,"' Dix said. "It's not going to happen. We all know that."
The Open Sky report says 26 Nebraska counties have low cash reserves and can't raise property taxes without exceeding their property tax lids. Without the inheritance tax, they would most likely have to cut services or ask local taxpayers to raise property taxes beyond the current limits.
Another 36 counties could make up the loss of inheritance tax revenue by tapping their reserves for at least three years, before they fall into the same bind.
Eight counties, including Douglas and Lancaster, the state's two largest population centers, have low reserves but have not reached their property tax limits. They could either raise property taxes or cut services.
The remaining 23 counties are in better shape, with both large reserves and room to raise property taxes. The report said those counties might be saving for large projects or unexpected expenses, and they would gradually have to adjust if they lost the revenue.
Banner County Commissioner Robert Post said his rural county in far western Nebraska relies on inheritance tax revenue to maintain 500 miles of road. The county had about 700 residents in 2010 and five employees and is "pretty much strapped," Post said. It raised property taxes to the legal limit this year, amid fears the inheritance tax would be repealed.
"We could see that if we lost the inheritance tax, we didn't have enough reserves to get us through much of anything - a snow storm, a lawsuit, a murder trial," Post said. "We would be in serious trouble. We might be faced with bankruptcy. So we bit the bullet."
(Copyright 2012 by The Associated Press. All Rights Reserved.)
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