Death & Taxes: Nebraska’s property taxes affect land sales
December 7, 2017
"Another difference between death and taxes is that death doesn't get worse every time the legislature meets," Robert Quillen is quoted as saying in the Lincoln (Neb.) Star in 1931.
When the legislature met in 2017, a lot of landowners were hoping that quote wouldn't hold true 86 years later, and their property taxes would get better. Now they’re hoping that for 2018.
Unlike its neighbors to the north and south, Nebraska's property taxes are based on a three-year average of market value, not productivity. South Dakota uses a productivity formula based on soil ratings, and in Kansas, ag land values are set by the state for each soil type. As land values skyrocketed several years ago, property taxes in Nebraska followed suit.
Property taxes vary across Nebraska, depending on market value, but a quick study shows them, for irrigated farm ground, ranging from $96 to $27 per acre in Madison County (the northeastern part of the state), from $105 to $43 in Seward County (east central Nebraska), from $47-$32 per acre in Frontier County (southwest Nebraska), and from $48-$22 in Box Butte County (in Nebraska's Panhandle.)
Added to the problem is that public education in Nebraska is over-reliant on property taxes. According to the website for the York, Neb. public school, Nebraska K-12 schools receive 49 percent of their funding from local property taxes while the national average is 29 percent. Dr. Mike Lucas, superintendent of York Public School, said that many school districts the same size as York (with a K-12 student population of 1,350) receive over 70 percent of their revenue from local property taxes. Property tax revenue for York Public School is at 74 percent.
That overreliance is part of the property tax quagmire that might discourage the sale of Nebraska farm and ranch land to outsiders. There is no data to quantify the effects, says Travis Augustin, broker, auctioneer and co-owner of Ruhter Auction and Realty in Hastings, Neb., but "the main thing we're seeing is investors outside the state of Nebraska, in our experience, shy away" from buying property in the state. "When there's an investor looking to buy good farm land, with our (property) taxes so high, they don't buy here."
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For real estate agent Al Hughes of Jim Hughes Real Estate and Al Hughes Auction Service, in Glenwood, Iowa, twenty miles southeast of Omaha, high property taxes in Nebraska are a boon to his business. "We see a lot of Nebraskans coming to Iowa to buy ground. It's a selling point," he said. "We've done a lot of business with Nebraska investors and even retired farmers who want to invest in Iowa, and their main reason is they don't want to pay the high Nebraska property taxes."
Hughes does some of the figuring: "If you own a farm in Nebraska, your property taxes are between $70 and $90 an acre. You can come to Iowa and rent the farm for the same amount, with property taxes between $28 and $38 (per acre). It's just a no brainer."
A few months ago, he had a piece of Nebraska property that was the perfect example of how property taxes differ from Nebraska to its neighboring states. McKissick Island is 5,000 acres that at one time was part of Nebraska, along the Missouri River in Nemaha County. But in July of 1867, four months after Nebraska became a state, a flood avulsion made that area into an island, separating McKissick Island (also known as McKissick's Island) from Nebraska and making it accessible only from the Missouri side. "It's on the east side of the Missouri River," Hughes said, "and (Nebraska) taxes are between $68-$75 an acre. But when you cross the gravel road, you're back in Missouri, where taxes are between $5 and $10 an acre. It's Nebraska ground, within the state of Missouri, and within three miles of the state of Iowa. It's not prime real estate, but the tax scenario on it is similar. And the same piece of property will raise the identical amount of corn or soybeans."
Hughes' wife Korrina grew up around the Utica, Neb. area, where her dad and brothers farm. "Personally, I'd have an interest in owning ground where Korrina's from," Hughes said. "But the tax rate has kept me from wanting to invest there." He owns farm ground in Iowa, where his taxes are $17 an acre. "I can't go to Nebraska, at $80 or $90 (taxes per acre)." The high property taxes "affect land values in Nebraska, for sure, especially the counties along the (Missouri) river. Because when (buyers) can cross the river, (property taxes) will be half-price."
In his experiences, Hughes says high property taxes affect the sale of land to the tune of between $1,000 and $1,500 an acre.
A bill was introduced during the 2017 legislative year in Nebraska for property tax relief, but it did not pass. It would not have provided the relief, said Mark Haynes, a farmer in Dawes Co., Nebraska. "It was more smoke and mirrors because it wasn't totally tied to production." It would have used capitalization rates, but the rates weren't going to be competitive, Haynes said.
"It was something the legislature does: try to fix a huge problem with a band-aid," Haynes said.
Changes in the way property taxes are assessed in Nebraska won't come easily. In the 1930s, about 75 percent of Nebraskans lived on farms and 25 percent were city dwellers. Now that has switched, and as the population has changed from rural to city, the tax code has not changed. "It would make sense that the tax code keeps up with the demographics of the state," Haynes said. Figures show that about 5.5 to 6 percent of the population is ag landowners, but they carry 33 percent of the tax load.
As Augustin of Hastings pointed out, "the minority of people are paying the majority of the taxes, so why would the majority want to change it? That's a great challenge in our area."
Frustration with property taxes and K-12 public education funding has caused concerned citizens to form an organization to look into the problem and recommend changes. Nebraskans United for Property Tax Reform and Education was formed about a year ago and involves about eighteen groups, from the Center for Rural Affairs to the state wide organizations for corn growers, pork producers, cattlemen, wheat growers, and even education organizations like the Nebraska State Education Association and the Nebraska Rural Community Schools Association. It's made up of both ag and education groups, not always common bedfellows, but united to create change. "The best way to get property tax relief is to alter the way you fund it. Getting support from Omaha and Lincoln and other urban areas is the key to getting something done in the Unicameral," Haynes said.
Dr. Lucas, superintendent of York Public Schools, was one of the founding members of Nebraskans United. A fifteen-year superintendent, he grew tired of K-12 public education being blamed for the high property taxes in Nebraska.
"I've used the word "addicted" before," Lucas said. "The state of Nebraska is simply addicted to property taxes." The goal of Nebraskans United is public education of the dilemmas faced by property taxes and public education, and legislative prescriptions, to make property taxes more equitable.
Nebraska Farm Bureau was one of the first organizations to join Nebraskans United, and Bruce Rieker, vice-president of governmental relations, says the legislative prescriptions Nebraskans United will work towards is expanding the tax base, not increasing taxes, so the responsibility is spread out over more people, with the intent to reduce the burden on property owners.
But with the state of Nebraska closing out its 2016 fiscal year with $34 million less in tax revenue than expected, changes won't come easily. Several senators were quick to say there was no political will in the legislature to make relief for property taxes, Rieker said.
That's a problem, Rieker believes, and he sees one of three things happening: change happening legislatively, putting it on a ballot measure, or a lawsuit. Nebraskans United hopes change will come through the legislature. A ballot measure would be very expensive and would involve a "huge educational component that has to be able to rise above whatever the fear campaign is," Rieker said. And a lawsuit is not ideal; if a lawsuit is brought to the courts, the court system does not have the authority to make changes, "it only has the ability to say you're doing it wrong. That's why we want it to be legislatively," Rieker said.
"I think the pressure is growing," Rieker said.