Senator makes another attempt to repeal Nebraska’s inheritance taxes

State one of few who charge a ‘death tax,’ but counties say repeal will mean higher property taxes, cuts in services

By: - February 8, 2024 8:22 pm

State Sen. Rob Clements of Elmwood. Dec. 6, 2023. (Zach Wendling/Nebraska Examiner)

LINCOLN — State Sen. Rob Clements renewed his attempt to repeal the state’s inheritance tax on Thursday, arguing that it was “antiquated, regressive and arbitrary.”

Clements, an Elmwood banker and tax preparer, said he’s had grieving clients who were presented tax bills of up to $50,000 after inheriting a farm.

“They may have to sell the real estate they just inherited to pay the tax they owe, or take out a loan to pay it,” the senator told members of the Legislature’s Revenue Committee.

But several officials from Nebraska counties — the beneficiaries of the inheritance tax revenue — told legislators that while they don’t like paying the tax, either, repealing it would force them to raise property taxes unless the state provides some alternative revenue source.

Those officials said a repeal might force property tax bills up by 8.9% to 14%.

No choice but raise property tax

“If you take this tax away, we’ll have to put it on property taxes — we don’t have other revenue sources,” said Troy Uhlir, a Madison County Board member.

Currently, Nebraska is one of only six states that have an inheritance tax, and one of those, Iowa, will phase out its “death tax” at the end of the year.

Under Legislative Bill 1067, Nebraska’s inheritance taxes would be phased out over five years.

Right now, the most direct relatives, such as children or siblings, pay a 1% tax on inherited property and financial assets. That rate rises to 11% for more distant relatives, such as cousins, and up to 15% for those who are not related.

Spouses are exempt from inheritance tax; for others, a portion is exempt. For instance, the first $40,000 of an inheritance is exempt for direct relatives.

Upwards of $65 million paid

Nearly $65 million was collected by counties in inheritance taxes in 2020, according to Clements, with Douglas County collecting the most that year, $11.7 million, and Sherman County collecting the least, $353.

The senator cited a 2021 poll by the Platte Institute indicating that 78% of those surveyed supported repeal of the tax. He added that it forced a banker friend nearing retirement to move out of the state so that his heirs wouldn’t have to pay the tax.

The bill, which has 24 cosponsors among the 49 state senators, renews an effort to repeal the tax by Clements. In 2022, he won passage of a law to reduce the rates.

“Forty-five states have figured out how to do without the tax and I think it’s possible in Nebraska,” the senator said.

Tax has small effect on migration

A representative of the OpenSky Policy Institute said data indicates that the tax has “a small effect” on decisions to move out of the state,and mostly impacts a small number of wealthy elderly people. Proximity to family, cost of living, health care and climate are the main drivers of relocation by seniors, the organization says.

Craig Beck of OpenSky added that repealing the inheritance tax would do away with a “progressive” aspect of the tax code, in that it taxed wealth. In addition, he said, the tax fell more heavily on white people, who inherit about five times more than African American families.

Kathleen Kauth introduces a bill before a hearing
State Sen. Kathleen Kauth of Omaha. (Zach Wendling/Nebraska Examiner)

That brought a protest from Omaha Sen. Kathleen Kauth, who is on the committee.

“That is socialism,” Kauth said, of taxing the wealthy.

She added that all races ought to be encouraged to accumulate wealth so they can pass it on to their children.

Beck responded that the disparity in who inherits wealth has “existed for a long, long time.”

Jon Cannon of the Nebraska Association of County Officials, which opposes the bill, testified that when the inheritance tax is explained to people, and it’s pointed out that it reduces property taxes, a majority of Nebraskans support it.

‘Reserve fund’

Several county board members explained how their counties spend their inheritance tax revenue. It varied from using it to reduce property taxes and finance a nursing home and other social services, to saving it up as a “reserve fund” to help purchase road graders and police radios.

Clements’ bill does provide some replacement revenue if the inheritance tax was repealed, though county officials said it fell far short of replacing the inheritance tax.

Under LB 1067, a program to pay counties $35 a day for state inmates who are housed in county jails would be revived, with a cap of $3.9 million a year in funds. Counties would also be allowed to tap county lodging taxes, now devoted to promoting local events and attractions, for general expenses such as roads and bridges.

Joe Lorenz, Douglas County’s budget director, said the county would get only $200,000 from the jail reimbursement and $1.2 million in lodging taxes compared to the $16.7 million a year, on average, it gets in inheritance taxes.

Other county officials said they would get nothing from the jail reimbursement because they don’t have a jail.

Buffalo County Sheriff Neil Miller asked the committee to increase the amount the state would reimburse counties to match what the state charges counties to house county inmates, which is $93 a day.

The Revenue Committee took no action on the inheritance tax bill, but Clements said he is open to amending his bill to address some of the concerns.

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Paul Hammel
Paul Hammel

Senior Reporter Paul Hammel has covered the Nebraska state government and the state for decades. Previously with the Omaha World-Herald, Lincoln Journal Star and Omaha Sun, he is a member of the Omaha Press Club's Hall of Fame. He grows hops, brews homemade beer, plays bass guitar and basically loves traveling and writing about the state. A native of Ralston, Nebraska, he is vice president of the John G. Neihardt Foundation.

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