School tax credits and school aid have helped rural areas … but there’s a ways to go

February 16, 2024 3:00 am

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In 2021, school tax credits were substantially increased to 25% of property taxes paid to your local school district. In addition, in 2023, state aid to schools was increased by providing foundation aid equal to $1,500 per student for the 2023-24 school year.

The tax credits directly lower property taxes, and school aid has the potential to lower property taxes by reducing the amount of local taxes needed to fund school operations. Recently, the Nebraska Department of Revenue and Nebraska Department of Education released data that show the results of these changes.

The reduction or potential reduction in property taxes is substantial. The data show that school tax credits for 2021 (the latest available data) totaled $274.5 million.  Data from the Department of Education shows state aid to schools increased by $108.7 million for the 2023-24 school year. Much of that is likely the result of $1,500 per student new foundation aid. If applied on an annual basis, the combined total, $383.2 million, would represent a potential 7.6% reduction from 2022 property tax levels ($5.02 billion pre-credit).

Being a rural resident and sensing that Nebraska property taxes are particularly burdensome for farmers, I wanted to see if I could measure how much these recent legislative changes have helped those areas. Tax, economic and population data that can help to answer that question are most readily available at the county level. Thus, much of the following analysis categorizes counties as to their rural-urban nature and looks at how they’ve fared with the recent changes.

I have categorized Nebraska’s counties into four groups: counties with populations greater than 10,000 in Metropolitan Statistical Areas (metro), counties with populations greater than 10,000 in Micropolitan Statistical Areas (micro), 74 other counties (rural) and Clay County. Clay County is my county of residence and is typical of rural counties, with substantial irrigable cropland. Metro and micro counties are designated as such by the U.S. Office of Management and Budget in 2020.

Nine metro counties:  Cass (26,248 population), Douglas (571,327), Dakota (20,026), Hall (61,353), Lancaster (319,090), Sarpy (187,196), Seward (17,284), Saunders (21,578), and Washington (20,729).

Nine micro counties:  Adams (31,363), Buffalo (49,659), Dawson (23,595), Dodge (36,565), Gage (21,513), Lincoln (34,914), Madison (35,009), Platte (33,470), and Scotts Bluff (35,618).

Rural counties: Seventy-four remaining counties other than Clay County. Eight of those have populations greater than 10,000: Box Butte (10,783), Colfax (10,709), Custer (10,777), Holt (10,067), Otoe (16,012), Red Willow (10,724), Saline (14,244), and York (13,679).

Clay: Clay County (6,104 population).

Rural Nebraskans have benefited more from the legislative changes thus far. Charts 1 and 2 show the benefits of the tax credits and foundation aid, broken down by metropolitan, micropolitan, rural counties and Clay County, as a percentage of county personal Income and on a per capita basis. The benefits in rural counties and Clay County were roughly double those in the other county groups.

To some extent, this was expected. School tax credits for most farmers are large and, therefore, they have a stronger incentive to apply for the credits. As homeowners and others in urban areas become more aware of the credits, this difference may narrow.

It was also expected that the $1,500 foundation aid would benefit rural schools the most. Many rural schools were receiving little or no equalization aid (the major component of state aid), and it’s those schools that get the full benefit of the new aid under the school funding formula.

Increased state funding for special education will be determined in May 2024. It is expected that this aid will tend to benefit urban schools more and, thus, may offset some of the gains made by rural areas depicted in Charts 1 and 2.

But the ground gained by rural residents due to recent legislation is dwarfed by the large tax gap that has existed for some time. Charts 3 and 4 show combined property and state income taxes as a percentage of county personal income and on a per capita basis broken down by county type going back to 2010. Combined property and state income taxes represented 72% of all Nebraska taxes in 2020-21. Sales taxes are the only other major tax (19% of total taxes), and there is no reason to believe that rural residents pay less in sales taxes than other residents as either a percentage of income or on a per capita basis.

Recent legislation has narrowed the tax gap between rural and urban Nebraskans by roughly $200 per person. But that gain is small compared to the existing difference.  In 2021, residents in rural counties paid, on average, $1,600 more per person in combined property and state income taxes than the average person in other counties. In Clay County, the average person was paying over $2,200 more. And that’s after accounting for the benefits of school tax credits. The tax gap has narrowed, but there’s a ways to go.

The following charts were compiled using data from the Nebraska Department of Revenue, the Nebraska Department of Education, the U.S. Department of Commerce and the Bureau of Economic Analysis, Interactive data. Taxes are expressed in nominal dollars, which probably explains much of the upward slope from 2010 to 2021.

Nejezchleb Chart 1 copy Chart 2 Chart 3 Chart 4

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Lynn Nejezchleb
Lynn Nejezchleb

Lynn Nejezchleb is a veteran and has advanced degrees in economics from the University of Nebraska. He served as an economist and adviser to the vice chairman of the Federal Deposit Insurance Corporation in Washington, D.C., over the course of 20 years and established and operated a small business in rural Nebraska for the last 17 years. He is currently retired.