Opinion ID: 2016681
Heading Depth: 1
Heading Rank: 5

Heading: Erosion of the Property Tax Base

Text: In 1977, the Legislature amended the property tax statutes. The amended provisions called for the complete exemption by 1980 of the categories of property partially exempted in 1972. 1977 Neb. Laws, L.B. 518, §§ 2, 4, and 6. More importantly, the amendments placed a ceiling on the amount of money available to counties for reimbursement of revenues lost due to the exemptions. The Legislature set this ceiling amount at $58.6 million, $62.2 million, and $70 million for the 1978, 1979, and 1980 tax years respectively. 1977 Neb. Laws, L.B. 518, §§ 3, 5, and 7. After 1980, the Legislature discontinued the policy of using moneys collected from the sales tax and the income tax to reimburse counties for revenues lost due to exemptions from the personal property tax. 1980 Neb. Laws, L.B. 882, § 9. The Legislature's decision to place a cap on, and then to completely eliminate, the availability of sales tax and income tax revenues as replacement funds for moneys lost due to the exemptions changed significantly the nature of the property tax distribution. Because the level of funding necessary for the State's local subdivisions continued to increase after 1980, owners of real property and nonexempt personal property inherited the burden of not only replacing revenues lost due to the exemptions, but of paying for a proportionate share of this increased funding as well. Revenue Committee Hearing, L.B. 299 and 829, 92d Leg., 1st Sess. 3 (March 20, 1991). A combination of events resulted in the plight of property owners becoming even more grim during the remainder of the decade. The Legislature further reduced the property tax base by granting exemptions for certain earthmoving equipment, see 1980 Neb. Laws, L.B. 882, § 7 (codified as amended at Neb.Rev.Stat. § 77-202.46 (Reissue 1988)), and for jet airplanes, mainframe computers, and agricultural processing equipment used by businesses qualifying for incentives under Nebraska's Employment and Investment Growth Act. See 1987 Neb. Laws, L.B. 775, § 5 (codified at Neb.Rev.Stat. § 77-202(10) (Supp.1991)). The situation was exacerbated as the courts were called upon to protect the rights of those adversely affected by the Legislature's catalog of exemptions. In Trailer Train Co. v. Leuenberger, 885 F.2d 415 (8th Cir.1988), cert. denied 490 U.S. 1066, 109 S.Ct. 2065, 104 L.Ed.2d 630 (1989), the U.S. Court of Appeals for the Eighth Circuit upheld a lower court decision enjoining the Nebraska Tax Commissioner from collecting a personal property tax on the plaintiff's railcars. The court based its decision on a finding that Nebraska's system of exempting 75.75 percent of the state's commercial and industrial personal property discriminated against railroads in violation of section 306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976, Pub.L. 94-210, 90 Stat. 31, 54 (codified as amended at 49 U.S.C. § 11503(b)(4) (1988)) (the 4-R Act). Following the decision in Trailer Train Co., owners of centrally assessed gas and hydrocarbon pipeline systems began seeking declarations that their pipelines were personal property and that they were entitled to equalization of the assessed value of those pipelines with the personal property of the railroads. In Northern Natural Gas Co. v. State Bd. of Equal., 232 Neb. 806, 443 N.W.2d 249 (1989), cert. denied 493 U.S. 1078, 110 S.Ct. 1130, 107 L.Ed.2d 1036 (1990), this court held that the plaintiffs were entitled to such relief. The court noted that the proper remedy when the board or the Legislature arbitrarily undervalues a particular class of property, thereby valuing another class of property at a disproportionately higher rate, is to lower the latter's valuation to such an extent as to equalize it with the former. Northern Natural Gas Co., supra, citing Kearney Convention Center v. Board of Equal., 216 Neb. 292, 344 N.W.2d 620 (1984) (where use of different methods to determine the assessed value of different classes of property results in systematic undervaluation of one class, owners of property taxed at actual value are entitled to a proportionate reduction). Thus, the court reasoned, no logical reason exists why the same requirement of valuation reduction should not be imposed when the disproportionality is brought about by a final judgment of the federal court exempting the personal property of the railroads and car companies from the imposition of a state tax. Northern Natural Gas Co., 232 Neb. at 815, 443 N.W.2d at 256. Natural Gas Pipeline Co. v. State Bd. of Equal., 237 Neb. 357, 466 N.W.2d 461 (1991), involved another suit by owners of centrally assessed gas transmission pipelines seeking equalization of their personal property with that of the railroads and carline companies, this time for the 1988 and 1989 tax years. The board of equalization denied the requests, and the plaintiffs appealed. Subsequently to perfection of the appeals, the Legislature passed two bills which the State claimed mooted the case. One modified the definition of real property to include pipelines. 1989 Neb. Laws (1st Spec.Sess.), L.B. 1, § 1. The other expressly exempted railroad rolling stock from personal property taxation, pursuant to the authority granted in article VIII, § 2. 1989 Neb. Laws (1st Spec.Sess.), L.B. 7, § 1. Despite the unusual procedure posture of the case, the court proceeded to address the effect of L.B. 1 and L.B. 7 as if they were in existence and relied upon by the board at the time of its decision. The court first rejected the State's claim that L.B. 1 supported the board's decision, holding that application of the statute to the 1989 tax year would result in an impermissible commutation of a tax and in any event was irrelevant to the matter of equalization. Turning to L.B. 7, the court struck down the exemption of railroad rolling stock as unconstitutional. Drawing upon principles of equal protection, the court stated: The rule is well established that the legislature may, for the purpose of legislating, classify persons, places, objects or subjects, but such classification must rest upon some difference in situation or circumstance which, in reason, calls for distinctive legislation for the class. The class must have a substantial quality or attribute which requires legislation appropriate or necessary for those in the class which would be inappropriate or unnecessary for those without the class. Natural Gas Pipeline Co., 237 Neb. at 370, 466 N.W.2d at 470, quoting State, ex rel. Cone v. Bauman, 120 Neb. 77, 231 N.W. 693 (1930). Based upon this standard, the court found no real distinction between railroads and other common carriers which would justify exemption of the former's personal property but not that of the latter. The court therefore declared the statute violative of both the special legislation provision of article III, § 18, and the uniformity clause of article VIII, § 1, and reversed and remanded the cause for imposition of the requested remedy. Though the court in Natural Gas Pipeline Co. expressly relied upon the arbitrary nature of the classification drawn in striking down L.B. 7, implicit in the decision are concerns with the shrinking property tax base. Prior to the first set of exemptions in 1972, real property accounted for 78 percent of the tangible property subject to taxation, and income-producing personal property the remaining 22 percent. Revenue Committee Hearing, L.B. 299 and 829, 92d Leg., 1st Sess. 3 (March 20, 1991). By 1991, additional legislative exemptions and judicial rulings combined to reduce the percentage of the property tax base consisting of nonexempt personal property to 8 percent, while real property increased to 92 percent of the tax base. Id. at 5. These figures indicate that, with the Legislature's refusal since 1980 to reimburse counties for revenues lost due to additional exemptions, the property tax burden between 1972 and 1991 shifted very heavily towards the people remaining on the tax roll.... Id. Unlike the situation in Stahmer, where the exemptions did not affect the property tax burden of the remaining tax base, each additional exemption occurring during the 1980's resulted in a proportionate increase in the tax burden of the remaining property owners. This shifting of the tax burden raised constitutional problems with regard to owners of both types of property still on the tax rolls, real property and nonexempt income-producing personal property. The shifting of virtually the entire burden for funding the State's political subdivisions to owners of these categories of property implicated the chief evil associated by the framers of the uniformity clause with the power to grant exemptions. In a concurring opinion in Natural Gas Pipeline Co., two judges recognized these concerns. They warned that the Legislature's perpetuation of an increasingly discriminatory system of exemptions threatened the entire property tax base for school districts and other local units of government.... Natural Gas Pipeline Co., 237 Neb. at 373, 466 N.W.2d at 471 (White and Fahrnbruch, JJ., concurring). The judges reasoned: When property, regardless of whether it is real or tangible personal property, is classified so that it provides exemption from taxation to all but a small amount of property, the classification and exemption may well be unreasonable and arbitrary and may fall within the prohibition of Neb. Const. art. III, § 18, which is this state's equal protection clause. Id. at 375, 466 N.W.2d at 472.