Judge nixes part of water law allowing property taxes

As Nebraska tries to avoid paying millions of dollars in damages to Kansas and curbing irrigation along the Republican River, a judge on Tuesday struck down part of a state law designed to help Nebraska comply with a three-state water compact.

Lancaster County District Judge Paul Merritt ruled that the Legislature was wrong last year when it gave natural resources districts in the heavily irrigated river basin the authority to set property taxes. The money was to be spent on measures to help the state comply with the water agreement, including buying water from farmers to send to Kansas via the Republican River.

“Trying to tax people when it’s some widow in McCook who owns her own home and has no connection to irrigation ... they shouldn’t be obligated to pay,’’ said Angus Garey, a dry-land farmer and rancher in the McCook area who is among nine plaintiffs who sued the state.

Critics of the law have said the taxes unfairly and illegally target a relatively small group of people to pay for solutions to a statewide issue, among other things.

Attorney General Jon Bruning said in a statement that “the ruling effectively bars almost any legislation regarding interstate compacts.’’ He said his office plans to appeal.

The ruling prohibits the property taxes from being levied, but doesn’t award damages. And only those who paid property taxes under protest will receive refunds, according to Lincoln attorney Rod Confer, who represented the plaintiffs.

Merritt ruled that the property taxes authorized by lawmakers violate a portion of the state constitution that bars the Legislature from passing laws that give certain people or groups special privileges. One of the arguments posed by the property owners was that the law created a “closed class’’ of natural resources districts in the basin that were the only ones entitled to use the taxing authority granted by the Legislature.

Merritt said it’s not “reasonably probable’’ that the state would enter into other, multistate water compacts that would qualify for the type of taxing authority that was granted by the Legislature in 2007. He used remarks by an assistant attorney general and a state senator as evidence, quoting them near the time the law was considered that it was unlikely Nebraska would ever enter into another compact of that nature.

Shortly after the ruling was issued Tuesday, state officials maintained that it would not hinder Nebraska’s efforts to get in compliance with the water compact that includes Kansas and Colorado.

Kansas contends Nebraska used about 80,000 acre-feet, or roughly 26 billion gallons, more than it was allowed in 2005 and 2006. It has demanded more than $72 million for the overuse in addition to a shutdown of wells that irrigate nearly half of the 1.2 million acres in Nebraska’s portion of the river basin.

Nebraska has said that those figures are too high and that it has a solid plan to get in compliance with the compact. The two sides have failed to resolve the dispute on their own, and the issue is likely headed to arbitration. If that fails, Kansas officials have said they would take it back to the U.S. Supreme Court, which issued a decree in 2003 that governs use of Republican River water.

The ruling Tuesday does not erase a per-acre tax on irrigated land approved by the Legislature as part of the same water law that includes the property tax.

State officials said that the per-acre tax will be enough to pay for current compliance measures, such as buying water, and possible steps in the future, including pumping groundwater into the Republican River to send to Kansas.

“I don’t think it’s a big blow as long as the (irrigated land tax) is intact,’’ said Sen. Mark Christensen of Imperial, who helped craft the water law last year. He spoke Tuesday from his tractor as he planted corn on land he irrigates in the Republican basin.

“We can go to $10 per acre,’’ with the so-called occupation tax on irrigated land, “and we can bring in enough dollars to pay off the state and then we can start on additional projects as needed’’ for compact compliance, he said.

The property tax was only included in the 2007 water law to make financial institutions comfortable issuing bonds for compact compliance measures, because they had no experience with irrigated-land taxes, Christensen said. Once they became comfortable, he said, that the so-called occupation tax was a reliable backing for the bonds, the property taxes were to be phased out.

The lawsuit challenging the property taxes kept bonds from being issued to pay farmers for water they agreed to sell last year, leaving about 300 of them unpaid for months. Gov. Dave Heineman last month signed a bill allowing the state to borrow $9 million from its cash reserve to pay Republican River irrigators.

Should the ruling on Tuesday stand, the $9 million will likely be repaid with the occupation tax, which could generate roughly $12 million a year if the tax was levied at the highest allowable rate.

But Confer suggested Tuesday that the occupation tax isn’t safe from a lawsuit similar to the one brought against the property tax.

“It wouldn’t be truthful if I said we weren’t talking about it,’’ he said of another lawsuit.