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The 'Stop Over Spending' Initiative and Property Taxes
John Cederberg

The discussion of the "Stop Over Spending Initiativís" effect on property taxes has generated a great deal more heat than light.

On the one hand, every business and farm group which has recommended that its members vote "No" on Initiative 423 has cited a probable increase in property taxes. The Nebraska Farm Bureau Federation said in announcing its opposition to Initiative 423:
"The ëStop Over Spendingí proposal would cause many state–funded services to be shifted to the local level, where the result would be increased property taxes,"
On the other hand, David Nabity wrote in the Omaha World-Herald:
"...there is no scenario under Initiative 423 where costs would be passed down to local governments, causing increases in local property taxes."
How can there be such disagreement over such a fundamental element of Initiative 423?

Part of the appeal of Initiative 423 is that it targets that massive "black hole" called state spending. Voters may have the impression that "It doesnít limit my local schools and my local government services that are important to me." That is incorrect.

The question is not whether state senators will be vindictive and "shift costs to local governments" as Mr. Nabity would frame it. Though certainly possible within the terms of Initiative 423, I view that as unlikely.

State revenue sharing with local governments is ingrained as a part of Nebraskaís public finance. Because revenue sharing is not exempted from the spending limits of Initiative 423, the question is whether Nebraskans are willing to reduce their local school budgets and whether they are willing to forgo the roads, public safety, parks and recreation, and other local government services that are currently funded by state aid.

Historically, Nebraskans have placed a very high value on education. Most levy override votes have been successful, particularly in smaller school districts where reduced state aid is likely to have a greater impact. Also historically, local residents have been unwilling to support significant reductions in local government services in order to reduce property taxes.

Accordingly, unless there is a sea change in the views of Nebraskans toward support of their local schools and toward local government services, property taxes will increase to replace the dollars that are no longer available in state aid.

To understand the effect of Initiative 423 on property taxes, one must understand both (i) the political decision made four decades ago to shift our tax burden from property tax to sales and income taxes, and (ii) the longstanding tradition of local decision–making and control in Nebraska.

In the 1950s, Nebraska had no state income or sales taxes. We paid both state and local property taxes. In the 1960s, through the Legislature and a state–wide vote, Nebraskans made the decision to (i) begin the process of shifting the tax burden from property to sales and income taxes, and (ii) to do so within Nebraskaís tradition of local decision–making and local control. Over the past four decades, this has been accomplished by:
  • Repealing the state property tax through a constitutional Initiative;


  • Adopting the state sales and income taxes;


  • The state sharing an increasing percentage of its sales and income tax revenues with school districts and local subdivisions through "state aid"; and


  • Establishing statutory limits on local property tax levies and spending.
    • The process has served us well. According to Census Bureau statistics, by fiscal year 2003–04 [the most recent year available from the Census Bureau], combined state and local taxes were 31.8% from property, 37.0% from sales, and 22.4% from income taxes. The remaining 8.8% were other miscellaneous state and local taxes.

    In order to achieve this shift within Nebraskaís tradition of local decision–making and local control, the state shared its sales and income tax revenues with schools and local subdivisions as state aid. In fiscal 2003–04, 25% of all state tax revenues – $930 million – was shared with schools and other local subdivisions in state aid. State Revenue Department reports show that by Fiscal Year 2006–07, state aid appropriations are up to $1,059,000, 000 a full one–third of all state spending. The Census Bureau figures show that between 18% and 19% of all local tax resources in Nebraska are state aid. The percentage is much higher for school districts alone.

    How would Initiative 423 affect the use of state funds? There are several very important points to remember.
  • Initiative 423 limits only state spending, not local spending.


  • Initiative 423 includes state aid as a state expense that would be subject to limitation.


  • Initiative 423 would amend the state constitution. By contrast all of the existing limitations on property taxes and local government spending are in statute and can be changed from year to year to accommodate budget realities.
    • According to the Legislative Fiscal Office, Initiative 423 would have allowed a 3.8% increase in total state spending per year during the current budget cycle for fiscal years 2005–06 and 2006–07, which is about $234 million for the two years combined.

    Assuming that state aid were increased by 3.8% annually under the Initiative 423 formula, state aid for the two years combined would have increased by $72 million. However, actual appropriations for state aid to schools and local governments increased by $207 million for these two fiscal years – $135 million more than Initiative 423 would have provided.

    If Initiative 423 was in effect and the Legislature was required to balance state responsibilities with revenue sharing under the strictures of 423, it is likely that state aid would have decreased by even more than $135 million.

    At a 3.8% annual increase under Initiative 423, allowable spending for all state purposes for the period would be limited to an additional $162 million for the two years. The appropriations for Medicaid alone, which is largely a federal mandate, increased $89 million for these two years. This leaves an entire $73 million available for higher education, roads, public safety and all of the other responsibilities of the state.

    The Legislatureís first duty is to the responsibilities of the state government. Within some limits of reasonableness, "state aid" is properly what is left over. There is every reason to believe that under Initiative 423, state aid to local governments would have been reduced for the current two–year budget cycle by more than $135 million.

    Historically, when the Legislature has been unable to fully fund state aid for education, it has adjusted the property tax levy lids to permit school districts to make a local decision, along with their patrons, about whether to reduce spending by the local school district or to collect the state aid shortfall in additional property taxes. Such a levy lid adjustment occurred during the recent recession.

    This is appropriate. Allowing local decisions regarding the scope of local services and spending is entirely consistent with local decision–making and local control. There is no reason to believe that the Legislature would not continue past practice, and also include the counties and cities in lid adjustments.

    To the extent that local school boards, county boards and city councils conclude that the dollars which are no longer available in state aid are important to the quality of schools, to the maintenance of roads, to the public health and safety, and to the availability and quality of local government services, those dollars will be replaced with property taxes. Property taxes will increase, and our four decades–long effort to shift the burden of public finance from property to sales and income taxes will be reversed.