Gov. Dave Heineman and Sen. Heath Mello, D-Omaha, shake hands after the governor’s speech. Mello is now chairman of the powerful Appropriations Committee. Photo by Bethany Schmidt/Nebraska Watchdog

By Deena Winter | Nebraska Watchdog

LINCOLN – Gov. Dave Heineman today proposed ending the state income tax – or at least reducing it – in exchange for ending a host of sales tax exemptions on various goods and services.

“Are we willing to be bold and courageous to address our tax system?” he asked.

The governor called Nebraska’s tax climate mediocre and said reforming the tax code to create a better climate would create more high-paying jobs. The Tax Foundation ranks Nebraska’s business tax climate 31st in the nation, and the governor wants to improve that ranking by eliminating or reducing the individual income tax and corporate income tax. Nine states have no income tax.

The governor did not specify which of the $5 billion in sales tax exemptions he would scrap – other than to say he would not lift the sales tax exemption on groceries, saying that idea wouldn’t float. Currently, goods and services such as animal grooming, ag machinery, medicine, newspapers, medical equipment, laundromats, lottery tickets and vehicle repairs are exempt from the state sales tax.

“Nebraska exempts more than we collect,” he said during his State of the State address to lawmakers. “Our tax system shouldn’t favor one industry over another.”

If the state eliminated just half the current exemptions, it wouldn’t have to charge an individual or corporate income tax, he said. The state hasn’t had a serious discussion about its tax system in five decades, Heineman said.

“This is the discussion that our state needs to have,” he said. “The tax system needs to be modernized and transformed.”

Gov. Dave Heineman proposed ending the state income tax today during his State of the State speech to lawmakers. Photo by Bethany Schmidt/Nebraska Watchdog

Sen. Jeremy Nordquist, D-Omaha, called the governor’s tax proposal “dead on arrival.” The state would likely have to end the sales tax exemptions on many necessities to make up the lost revenue from income taxes paid by high-income earners, Nordquist said. He called the proposal a tax shift from high-income earners to a regressive sales tax on things such as medical equipment, pharmaceuticals, ag equipment and even dorm rooms. The two-year tuition freeze enabled by the governor’s increase in higher ed funding would be mostly wiped out if college dorms began being taxed, Nordquist said.

“I think it’s going to have real tough sledding,” he said of the governor’s proposed income tax cut.

Sen. Heath Mello, D-Omaha, who is now chairman of the Appropriations Committee, was more diplomatic, saying it would be “a little premature” for him to react to a proposal he hasn’t seen. But he said he shares the governor’s proposal to increase education funding.

Speaker Greg Adams said he was pleased with the priorities Heineman laid out today and, as former chairman of the Education Committee, particularly his education funding increases. As for the income tax cut, Adams said he agrees in principle that it’s “worthy of looking at.”

Heineman’s two-year budget proposal – which contains no tax increases but increases general fund spending by nearly 5 percent — also would:

• Increase K-12 education and special education funding 5 percent each of the next two years. State aid to schools would increase from the current $852 million to $939 million by fiscal year 2015.

• Increase higher education funding 5 percent each of the two years, allowing public colleges and universities to freeze tuition for two years.

• Continue funding the property tax credit program to Nebraskans, which has provided about $680 million in property tax relief since 2007.

• Not expand Medicaid, as allowed under Obamacare, because the governor says it would cost the state hundreds of millions of dollars, although some lawmakers disagree with that.

• Rebuild the state’s cash reserve fund from its current $384 million to $442 million in fiscal 2016-17.

• Fund a new Central Nebraska Veterans Home.

Contact Deena Winter at deena@nebraskawatchdog.org. Follow Deena on Twitter at @DeenaNEWatchdog

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