Legislature advances bill reducing inheritance taxes, raising county government fees

When someone dies in Nebraska and leaves behind an inheritance, the beneficiary of that inheritance, regardless of where they live, typically pays a tax to a Nebraska county.

Getting rid of the tax has long been a goal for Sen. Rob Clements. His priority bill for this session, LB468, would reduce the two highest inheritance tax rates to 3%, while increasing the amount exempted for all three classes.

There are currently three classes of relationships that determine which tax rate is paid.

If the beneficiary is the child, sibling, parent or grandparent of the deceased, they pay 1% of their inheritance value after a $100,000 exemption. More distant relatives pay 11% after a $40,000 exemption, while non-relatives pay 15% after a $25,000 exemption.

Nebraska is one of five states that levies an inheritance tax after Iowa phased out its tax at the start of the year.

Sen. Tanya Storer said these taxes end up making it harder for farms and small businesses to be passed down from generation to generation.

“This isn't about the rich aunt or the rich uncle," she said. "What this impacts is the ability for a family business to be passed on and continue to remain a family business.”

Counties use the tax revenue to maintain roads and other infrastructure, but the sporadic nature of inheritance taxes means the amount varies from year-to-year, especially in the state’s smallest counties.

For example, Arthur County, with a population of just over 400 people, collected $26,735 from the inheritance tax in the 2021-2022 fiscal year. The following year, the county only brought in $101, according to analysis from Sen. Clements' office.

LB468 is estimated to reduce the combined inheritance tax revenue for Nebraska counties by more than $34 million annually. To help counties recoup lost revenue, the bill includes increases in county government fees for services like marriage licenses and motor vehicle inspections and increases the share that counties receive from certain taxes.

Sen. Mike Jacobson said those provisions are necessary to keep property taxes from increasing.

“If we think that the counties are just going to cut their spending because they lose the inheritance taxes, we're kidding ourselves," he said. "They will have no choice but to raise property taxes. And I've often said I hate inheritance taxes, but I hate property taxes more.”

Clements’ bill also eliminates sales tax exemptions for data centers, removes the modernization tier of the ImagiNE Act, which provides tax credits to businesses to spur economic growth and reallocates tax revenue from the Site and Building Development Fund to county governments.

Sen. Robert Dover of Norfolk said rural senators should understand that 60% of state economic development money goes to rural Nebraska and he cautioned against cutting its funding.

“For those senators in smaller communities like myself, there just isn't a lot of resources, a lot of funds, to perhaps tear down an old building or level the pad for construction. And the Site and Building Development Fund helps to fill that," he said.

The legislation also increases the nameplate capacity tax, which is a tax on renewable energy projects based on their energy generation potential in lieu of a property tax. That tax has remained the same since 2011, while property taxes have grown 86% in the same timeframe. Clements said that calculation informed his decision to raise the nameplate capacity tax by 86% as well.

That provision also drew opposition from some senators, including Sen. Margo Juarez.

"I would say it's pretty harsh to be doubling on this tax to me, due to the fact that prior legislative bodies have overlooked staying on top of it and making changes," she said.

Altogether, the bill is estimated to cost the state around $3.3 million, while counties would come out close to even in their revenue. Clements said he would work to eliminate the state's deficit on the second round of debate.

Supporters of the bill point out that counties would have more steady and reliable income streams instead of the high year-to-year variation that comes with inheritance tax revenues.

But Sen. Jane Raybould, who previously served as a Lancaster County Commissioner, was one of its most vocal critics. She cited a survey that found most Nebraskans are more concerned with property and income taxes than inheritance taxes.

"Three in five Nebraskan voters say that the inheritance tax is acceptable after hearing the details about it," she said. "Majorities across party lines find the inheritance tax to be acceptable."

Sen. Eliot Bostar introduced an amendment to phase out inheritance taxes entirely over the next ten years without increasing county revenues through other means. He said the timeline would be long enough for counties to offset their losses through economic growth.

"Surely there is an amount of time that we could just phase this out, where we could mitigate a lot of the detrimental impacts that we've been talking about today," he said.

Bostar’s amendment failed on a 4-32 vote, while Clements’ bill advanced to the second round of debate Tuesday afternoon 27-10. However, many supporters say they want to see additional changes before advancing it further.

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