By Deena Winter | Nebraska Watchdog
LINCOLN – Farmers, hospitals and manufacturers would begin paying more sales taxes under a proposal laid out by Gov. Dave Heineman Friday to end some sales tax exemptions in order to scrap the state income tax.
The state of Nebraska exempts about $5 billion worth of goods and services, and the governor wants to lift some of those exemptions so he can reduce or eliminate the individual and corporate income tax.
He is getting a lot of national attention for what he calls a bold plan, but didn’t release the details of how to pay for it until today.
Senators Brad Ashford and Beau McCoy will introduce two bills next week – basically two options – for accomplishing the governor’s goals. One would eliminate about $2.4 billion in sales tax exemptions – on things such as containers, minerals, aviation fuel, data centers, water for irrigation and manufacturing, biochips, film rentals, animal grooming, college dorms, hospital rooms, medical equipment and ag machinery and chemicals. Left untouched were newspapers, school lunches, hospital meals, Laundromats, sporting events, the state lottery, reservations, nonprofits and sales by religious organizations. This bill would bring in enough new revenue to totally eliminate the state income tax.
The second is a scaled-down bill that would eliminate about $395 million in exemptions – enough to eliminate the corporate income tax and exempt the first $12,000 of retirement income for married couples and $6,000 for single individuals.
Neither of the bills would begin taxing food.
The governor says it’s time to modernize the state tax code and improve the state’s business climate.
Ashford called it groundbreaking legislation.
“This is a big deal,” he said. “In all my years it has not been taken on.”
Heineman said he’s not wedded to the list of goods and services that would have to begin paying sales taxes and wants input from Nebraskans.
“Our ears are wide open,” he said.
Ashford said CEOs tell him the income tax is more important to them and their decision-making about where to locate a business than sales tax. He said eliminating state income taxes would make it easier for them to recruit higher-paid executives and employees. He said this legislation may be more crucial to economic development than the Nebraska Advantage Act, which he helped write in the late 1980s.
Heineman said there were legitimate reasons for the tax exemptions but the state hasn’t had a serious discussion about them for five decades.
“I’m trying to create more jobs and higher paying careers,” he said.
But the governor’s grand plans to reform the state’s income tax code in one legislative session were critiqued by an expert on state tax policy at a symposium hosted by OpenSky Policy Institute, a Lincoln think tank.
Dr. Richard Pomp, a University of Connecticut professor, said tax reform requires considerable research and shouldn’t be rushed.
“The governor seems to be focused on the potential to attract businesses and jobs to Nebraska with the elimination of the state’s income tax,” Pomp said. “But I don’t know that substantial empirical evidence exists to support his stance.”
Omaha Sen. Jeremy Nordquist said last week the governor’s proposal was “dead on arrival” because it is a tax shift that eliminates a progressive tax and institutes a more regressive tax. Heineman said he understands that argument but most Nebraskans believe the sales tax system is fair.
McCoy was optimistic about the chance of passage.
“Sometimes I think the rhetoric gets ratcheted up,” he said. “I don’t think anything’s dead on arrival. Everything gets a fair hearing in our Legislature.”
The governor acknowledged that lifting sales tax exemptions could bring a windfall of revenue to cities that would have to go toward property tax relief, but he said that’s not his intended purpose and efforts would be made to recapture that revenue.
Some of the exemptions were written in recent years to attract biochip companies and data centers, for example.
“That’s part of the conversation that we need to have,” he said.
Heineman said the state would honor all contracts it has. He said his proposal wouldn’t affect the state’s efforts to recruit a $2 billion unnamed company’s data center – “there are other things in play with the company,” he said.
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