Bill aims to do away with Nebraska inheritance tax

LINCOLN — A Nebraska lawmaker who fell short in his bid to kill the state’s inheritance tax two years ago is trying to finish the job this year.

Toward that end, State Sen. Robert Clements of Elmwood introduced Legislative Bill 1067 and has named it his priority for the year. The measure would phase out the inheritance tax over five years.

At a hearing before the Revenue Committee Thursday, Clements said he wants to eliminate what he called an “antiquated, regressive and arbitrary tax.” He said it is unfair to base a tax on how an heir is related to the person who died and unfair to have a relatively small number of heirs paying a special tax to support services that benefit all Nebraskans.

But county officials raised the same stiff opposition at the Revenue Committee hearing that forced the 2022 compromise which left a modified inheritance tax in place. County governments receive the proceeds from inheritance taxes.

In the fiscal year ended June 30, 2023, counties got a total of $99 million in inheritance taxes. They are projected to get about $120 million in the fiscal year starting July 1, although the amount fluctuates from year to year for individual counties.

Troy Uhlir, a Madison County commissioner, said the inheritance tax provides a small but critical portion of the county’s budget. The county used those revenues to help with recovery from floods five years ago and after a botched bank robbery in 2002 that left five people dead.

He said the county’s only other source of revenue for those needs would have been from property taxes, a theme that other county officials echoed.

Joe Lorenz, representing Douglas County, said the county collects an average of $16 million a year, representing taxes from 1,450 estates. He said the money helps support social services, including the county’s long-term care facility, mental health care, general assistance, public health and veterans services.

Replacing those dollars would require an 8.9% increase in property taxes, he said.

LB 1067 would provide $3.9 million a year to help counties with costs of housing state prisoners and allow more flexibility in using existing funds for visitors promotion and visitors improvement, but county officials said that money would be of little help.

Supporters of the bill said it would help keep retirees in the state and make it easier for heirs to keep the property they inherit.

“This tax punishes wealth creation,” said Doug Kagan with Nebraskans for Tax Freedom, adding that members of his group joke: “Don’t be caught dead in Nebraska.”

John Amick of Doniphan pointed out that most other states have figured out how to manage without inheritance taxes. Currently, 44 states do not have an inheritance tax and Iowa is on track to phase out its tax by 2025. Nebraska is the only state in which counties get the proceeds from the tax.

In the 2022 compromise, the Nebraska Legislature left the inheritance tax in place but increased the amount of property exempt from taxes, reduced some inheritance tax rates and eliminated the tax for heirs 21 or younger.

Under current law, spouses are exempt from paying inheritance taxes. Immediate family, including children, parents, grandparents and siblings, pay a 1% rate on inherited property, after a $100,000 exemption. More distant relatives, such as nieces, nephews, aunts, uncles and their descendants, pay an 11% rate, with a $40,000 exemption. Unrelated heirs pay 15% with a $25,000 exemption.