Kuehn, 032118 NEAGO, AGO 18-1

• Case Date: March 21, 2018
• Court: Nebraska

Senator John Kuehn AGO 18-1 No. 18-001 Nebraska Attorney General Opinion State of Nebraska Office of the Attorney General March 21, 2018          SUBJECT: Constitutionality of the Refundable Income Tax Credits in LB 829 and LB 947.          REQUESTED BY: Senator John Kuehn, Nebraska Legislature          WRITTEN BY: Douglas J. Peterson, Attorney General, L. Jay Bartel, Assistant Attorney General          INTRODUCTION          You have requested our opinion regarding the constitutionality of two bills which would provide a refundable income tax credit based on a percentage of property taxes paid during the taxable year. The first bill (LB 829) provides "each taxpayer a refundable credit against the income tax imposed by the Nebraska Revenue Act of 1967 in the amount of fifty percent of the school district taxes levied on the taxpayer's property and paid by the taxpayer during such taxable year." LB 829, § 3. The second bill (LB 947) provides "each resident individual who is an owner of a homestead shall be allowed a refundable credit against the income tax imposed by the Nebraska Revenue Act of 1967 equal to a percentage of the property taxes paid during the taxable year on such homestead . . . ." LB 947, § 3(1). "For taxable year 2018, the refundable credit shall be ten percent of the property taxes paid during the taxable year." Id. The amount of the credit is capped at $230 for 2018. LB 947, § 3(2). The bill provides a mechanism for the credit to increase in subsequent years by a percentage not to exceed 30 percent, and for the cap to increase by a maximum of $50 per year, not to exceed $730. LB 947, §§ 3, 5. LB 947 also provides that "each resident individual shall be allowed a refundable credit against the income tax imposed by the Nebraska Revenue Act of 1967 equal to a percentage of the property taxes paid during the taxable year on agricultural land and horticultural land, farm sites, and improvements on farm sites that are agricultural or horticultural in nature." LB 947, § 4. "For taxable year 2018, the refundable credit shall be ten percent of the property taxes paid during the taxable year." Id. A mechanism is provided for the credit to increase in subsequent years by two percentage points a year, not to exceed thirty percent. LB 947, § 5.          You have asked us to address "two issues [raised by these bills] regarding foregoing a state income tax obligation based on property taxes paid." You phrase these questions as follows:

First, does the payment of property taxes to a local government as a means of foregoing a state income tax liability represent a commutation of taxes, which is prohibited by Article VIII Section 4 of the Nebraska Constitution?

Second, the receipt of a refundable income tax credit based on a proportion of property taxes paid favors only those who file a Nebraska income tax return, not all property tax payers. Is this preferential treatment for Nebraska income tax filers over non-resident property tax payers facially discriminatory on the basis of the Commerce Clause and/or Dormant Commerce Clause of the U.S. Constitution?

         ANALYSIS          A. Commutation of Taxes.          Neb. Const, art. VIII, § 4, provides, in pertinent part:

Except as to tax and assessment charges against real property remaining delinquent and unpaid for a period of fifteen years or longer, the Legislature shall have no power to release or discharge any county, city, township, town, or district whatever, or the inhabitants thereof, or any corporation, or the property therein, from their or its proportionate share of taxes to be levied for state purposes, or due any municipal corporation, nor shall commutation for such taxes be authorized in any form whatever....

         "The proscription against commuting a tax prevents the Legislature from releasing either persons or property from contributing a proportionate share of the tax." Sarpy County Farm Bureau v. Learning Community of Douglas and Sarpy Ctys., 283 Neb. 212, 244, 808 N.W.2d 598, 621 (2012). In Steinacher v. Swanson, 131 Neb. 439, 268 N.W. 317 (1936), the Nebraska Supreme Court held an act which allowed delinquent property taxes to be paid in installments violated the prohibition against the commutation of taxes in art. VIII, § 4. The Steinacher court noted the definition of "commutation" expressed in Woodrough v. Douglas County, 71 Neb. 354, 361, 98 N.W. 1092, 1095 (1904):

Commutation is a passing from one state to another; an alteration, a change; the act of substituting one thing for another; a substitution of one sort of payment for another, or of a money payment in lieu of a performance of a compulsory duty or labor or of a single payment in lieu of a number of successive payments, usually at a reduced rate. 131 Neb. at 445-46, 268 N.W. at 321.

         Further addressing the meaning of the prohibition against the commutation of taxes in art. VIII, § 4, the Court in Steinacher stated:

It is quite apparent that the framers of the Constitution of 1875, the one first containing this provision, and the members of all subsequent constitutional conventions, have been imbued with the idea that all taxpayers are entitled to the same treatment by the government they support. For this reason they have expressly written into our Constitution that the legislature not only shall have no power to release or discharge any one from the payment of his share of taxes, but a commutation for taxes in any form whatever is prohibited. From an examination of the definitions of the word "commutation" herein before set out, and the use of the words "in any form whatever," contained in our constitutional provision, it is quite apparent that the legislature is prohibited by the Constitution from changing the method of payment of any tax once levied. Clearly, under this constitutional provision, the legislature cannot reduce the amount of the tax, extend the time for payment, or in any manner change the method of payment. 131 Neb. at 446, 268 N.W. at 321 (emphasis in original).

         Thus, the prohibition against "commutation" means that the "legislature is prohibited by the Constitution from changing the method of payment of any tax once levied." Steinacher v. Swanson, 131 Neb. at 446, 268 N.W. at 321. See also Woodrough v. Douglas County (Act which allowed delinquent taxpayers to pay in installments violated the prohibition against commutation for taxes).          In Banks v. Heineman, 286 Neb. 390, 837 N.W.2d 70 (2013), the Court addressed for the first time the issue of whether the prohibition against the "commutation" of taxes applied to taxes other than property taxes. At issue was whether the "nameplate capacity tax," an excise tax measured by the production capacity of wind generation facilities, operated to commute taxes in violation of art. VIII, § 4. The Court noted that "[t]he language of article VIII, § 4, does not prohibit the release, discharge, or commutation of 'taxes,' but, rather, a taxpayer's 'proportionate share' of taxes . . . ." This language "correlates with the requirement of Neb. Const. Art. VIII, § 1, that taxes be levied by valuation uniformly and...