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Property tax segment ruled unconstitutional in water bill PDF Print E-mail

Supreme Court says local property tax in water bill is for a state purpose

■ NRD board plans another special meeting to discuss water transfer proposals.


By Russ Pankonin
The Imperial Republican

    Friday’s ruling by the Nebraska Supreme Court sent ripples across the state as the high court declared the additional property tax levy for natural resources districts (NRDs) in LB 701 unconstitutional.
     For the parties that initially challenged the property tax, the ruling validated their belief that the state is responsible for compact compliance with Kansas.
    For the state, the Department of Natural Resources and the NRDs in the Republican Basin, the ruling came somewhat as a shock.
    Senator Mark Christensen of Imperial represents the 44th District which encompasses much of the Republican Basin.
    He introduced and carried LB 701 in the 2007 Legislative session. The bill was designed to allow NRDs in the basin to collect an additional tax levy of 10 cents per $100 of valuation, along with an occupation tax on irrigated acres of up to $10 per acre.
    These monies would be used to pay off bonds sold for the activities necessary to get the NRDs and the state in compliance with a 2002 settlement with Kansas over water flows in the Republican Basin.
    “Everybody’s pretty much in shock,” Christensen said from the capitol city Monday night.
    Christensen said the Supreme Court’s ruling could have far-reaching effects regarding other state responsibilities.
    In response to Friday’s ruling, Christensen plans to amend his bill, LB 651, to address the situation.
    LB 651 was introduced by Christensen this session to keep the $9 million loaned by the state to NRDs last year in a revolving loan fund.
    After LB 701 was challenged in court, the state loaned the money to pay for surface water purchased by the NRDs in 2007 as part of compliance efforts with the 2002 compact settlement.
    He plans to amend the bill to strike the property tax portion of LB 701, and remove a requirement that limits which NRD can use the occupation tax, opening it up instead to all NRDs in basins that the state has deemed fully- or over-appropriated.
    He also wants property taxes already collected to be refunded in the form of a credit on next year’s tax statements.
Court says compliance up to state
    When the case was originally filed by a McCook-based group called Friends of the River (FOTR), they maintained that compliance with the compact settlement was a state responsibility. They also contended the class of NRDs that could benefit from LB 701 was limited to the Republican Basin NRDs.
    The Lancaster County District Court found the property tax portion of LB 701 unconstitutional because the judge determined it was indeed a closed class.
    Both the FOTR and Department of Natural Resources (DNR) and NRDs appealed the decision to the Nebraska Supreme Court on different grounds.
    DNR and the NRDs appealed saying the bill did not apply to a closed class.
    FOTR also appealed, asking the high court to determine whether or not the bill created a local property tax to pay for a state purpose.
    Ironically, the high court did not even address the closed class issue.
    Rather it honed in on FOTR’s claim that compliance was a state responsibility.
    In their opinion, the justices said, “When state and local purposes are intermingled in a statute, the critical issue is whether ‘the controlling and predominant purposes
. . . are state purposes or local purposes.’”
    When looking at the history and intent of the law, the court noted Christensen’s statement of intent for the bill said it provided a way for the state to stay in compliance with Kansas and was designed to address water problems in the Republican Basin.
    The opinion also cited testimony at the bill’s public hearing by NRD managers in the basin and the former head of DNR, Ann Bleed, which indicated the purpose was to insure that Nebraska stay in compliance with the compact settlement with Kansas.
    The justices also cited that the property taxes could not be used for general operation of the NRDs, limiting them to compliance activities.
    In addition, the state also entered into agreements with surface water irrigation districts to lease or purchase water for compliance purposes.
    Since neither the DNR nor NRDs were parties to the compact settlement, the justices ruled that compact compliance is a state obligation. As a result, the local tax was collected for a state purpose, which violates the state’s constitution.
Responses to the decision
    Angus Garey of McCook, a member and spokesman for FOTR, said their group was obviously happy with the high court’s decision.
    All along, his group emphasized that compact compliance was a state responsibility, not just a basin issue.
    He said he hoped the decision will spur the legislative and executive branches of state government to look in a different direction than LB 701 to find solutions to the problems that still exist.
    Attorney Leroy Sievers of Lincoln was among the attorneys who represented FOTR.
    He said he hopes the real consequence of this decision is that when the state enters into an agreement, all citizens of the state share in that state obligation.
    That was a motivating factor in this suit.
    Attorney General Jon Bruning told The Imperial Republican Tuesday that his office respectfully disagrees with the court’s ruling.
    “The nature of the partnership is what’s at issue here,” he said.
    He noted compact compliance will always require a partnership between local managers, users and the state.
    “We remain committed to defending the tools currently available to the natural resource districts to manage water use,” he concluded.
    Governor Dave Heineman said Tuesday that he hasn’t had sufficient time to review the ruling with the attorney general yet.
    However, he noted he’s “very concerned about the long-term implications of the ruling.”
    Jasper Fanning, manager of the Upper Republican NRD, said there was always a possibility the court could declare the property tax unconstitutional.
    “But I don’t know that anyone expected the Supreme Court would rule on a different issue than the district court,” he said.
    The court didn’t seem to recognize the compelling local benefits of what we are doing, he added.
    Attorney Don Blankenau of Lincoln, who represented the NRDs, said they were a little blindsided when the high court didn’t address the issue of the closed class and looked at the taxing issue instead.
    Like Fanning, he said the local involvement in compliance efforts is a key factor for both the region and the state.
    While the state can’t levy a property tax, he said it can empower local governments to do so for local purposes, similar to what it does for funding schools.
    Fanning said this ruling has the potential to bring about some unplanned tax reform in the state and could ultimately erode local control.
    Christensen’s proposed change to open up the occupation tax to all NRDs in fully- or over-appropriated areas for specific water projects could help ensure more control at the local level.
Occupation tax next challenge
    FOTR didn’t stop with their challenge of the property tax in LB 701. They also filed suit in Lancaster County District Court claiming that the occupation tax is also unconstitutional.
    The suit had been stayed until the Supreme Court ruled on the property tax issue.
    Sievers said they now plan to proceed with that suit right away. Nearly 100 defendants from throughout Southwest Nebraska joined in this suit.
    The occupation tax is the only available tool the NRDs have left to participate in compliance projects, Fanning said, since no property taxes of any kind can be used.
    He said some of the Platte NRDs have projects they need to complete to comply with a state agreement between Wyoming and Nebraska on Platte River water use.
    Fanning indicated they had planned to use property tax authority to pay for those projects. That won’t be possible now.
    As a result, legislation to open the occupation tax to fully- or over-appropriated basins should avoid the closed class issue previously declared unconstitutional by the District Court.
    However, FOTR contends that the occupation tax is nothing more than another local property tax assessed to pay for a state responsibility.
    If the occupation tax is ruled unconstitutional, much of the local control NRDs have to help meet compliance efforts will evaporate. Instead, funds would have to be appropriated by the Legislature.
    People need to realize, Fanning said, that more state funding means less local control.
    Christensen also fears that if the occupation tax is struck down, the funding mechanism for NRDs is virtually gone.
    He fears that rather than fund state compliance projects, his colleagues may just mandate lower allocations in the Republican Basin to achieve compliance.
    That will be the death knell to the basin’s economy, he said.
    If compact compliance is a state obligation, what does that mean for state school aid?
    The state constitution requires the state to provide for K-12 education. When asked if this ruling could jeopardize local property tax funding for school districts, Christensen said he believes it could.
    It falls along the same lines as a local tax being collected for a state obligation, he noted.