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Governor shows his hand about ending income tax

By   /   January 18, 2013  /   18 Comments

TAXES: Gov. Dave Heineman laid out the details of how he would bring in more revenue in order to eliminate the state income tax. File photo by Bethany Schmidt

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.

(Click here to see a summary of the goods and services that would begin being taxed under this alternative.)

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.

(Click here to see a summary of the goods and services that would begin being taxed under this alternative.)

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.

Contact Deena Winter at [email protected].

Editor’s note: to subscribe to News Updates from Nebraska Watchdog at no cost, click here.


Deena formerly served as staff reporter for Watchdog.org.

  • Everybody with a section of land now has a 5-10 million dollar net worth and is receiving federal subsidies. Hospitals are an enormous beneficiary of the 30+ million of new insured from Obamacare. I tend to think they can now pay sales tax on their equipment, especially since they will no longer have to pay state income taxes under the new rules.

    I am unclear as to the effect of our manufacuring base in Nebraska. I think it would be wise to think through what kind of ripple affect this might have. Eliminating the income tax will bring businesses here but we dont’ want to drive others away so please think about the net losers of this and whether they will stay or leave as a result of this.

    I appricated that they left the exemption for un prepared food. I know many people that have moved to Texas and Florida because property taxes are lower and they have no state income tax. It’s a quality of life issue for the people that live here.

  • Clay

    This will hurt the ag industry in the state. Wiping out the exemptions for chemicals and ag equipment will just make me not buy equipment but once every 10-15 years and completely change how I purchase chemicals. Dealers will start dissapearing since no one will be buying equipment anymore. I know we need to start somewhere…..

  • Kent Goertzen

    Farmers and the average Nebraskan getting hosed so corporation can get a tax break.

  • Kent Goertzen

    That 5-10 million is so exaggerated, if you look it is much lower for the vast majority of the land. And that is only if they sell it and lose their livelihood, which they can’t afford to do. And most of the average farmer does not receive any significant subsidies. It is only the very large farm operations that really get anything.

    And most are still paying off the debt for that land and equipment which won’t sell for as much as they payed for it, so when you subtract that from the much smaller value than your exaggerated number, that does not leave them anything o survive on now that they no longer have a livelihood.

    Clearly you don’t farm, and do no really know anything about it.

    this would be the final nail in the coffin for smaller family farms, who have had to pay for their farms multiple times over the years because of the inheritance tax.

  • hayseed

    The governor and Senator Ashford want to go back to a more regressive system like we had in the 1960’s. We need to keep the income tax. Sales tax will end up costing most people more but it is spread out over time while the income tax shows up just at filing time. People are easily manipulated.

  • Watching_From_Lincoln

    Put the tax burden on the backs of those who can least afford it – the Middle Class and Working Poor through consumption taxes – while letting Corporations, their upper management and the wealthy get away with paying a pittance of their wealth in consumption taxes and contributing very little to the State’s revenue stream. WONDERFUL PLAN, Governor Koch-lick, NOT! Gee, I wonder which Koch-funded “think tank” put this brilliant idea into your head, er, gave you your marching orders?

    “Our ears are wide open,” HeineyMan said. Yeah, wide open and nothing in between!

  • Watching_From_Lincoln

    Here’s a better plan – How about closing the tax loopholes for Corporations and corporate farms, end these corporate give aways of our tax money you call “incentives” that never apply to REAL small businesses, only mega corporations, close the tax loopholes for the wealthy (and don’t call Ben Nelson’s retirement “cabin” (mansion) a “farm”, for tax purposes, either) and not only give the REAL working people in this state an income tax break, but then actually have the money you’ve magically promised for our Parks, University and state colleges and public schools, oh and also expand Medicaid under the ACA to the 30,000+ eligible people in this state who can’t have/get insurance so they are no longer a drain on the system cause guess what, Governor HeineyMan, a HEALTHY population of people in this state is a MORE PRODUCTIVE work force!!

    Do that and we’d have plenty of money in the State Treasury to do all those things and more – before you and your buffoon predecessor and your band of neo-fascists started gutting this state for Corporate profit and false ideological goals. Nebraska WAS “The Good Life” to live in – up until about fifteen years ago.

  • Jazzee

    heard the Catholic spokesperson say taking away their tax exemption would be sooooooooo bad…well I believe they don’t pay property taxes they are exempt like non profits and oh yes those union halls the police and fire own pay no property taxes…so boo hoo you can afford to pay something can’t you all? the rest of us would pay both property and sales they don’t make special exemptions for us

  • …And when some economic emergency occurs that really cuts into buying the services and products that produce sales taxes, then what?

  • Dave Fall

    This is one of the stupidest ideas the hierarchy of the Nebraska GOP has come up with this last week. They moved into office and there goes my property taxes.
    This pro corporate bunch is showing us what they all want to do to our populist state..

  • Dave Fall

    Please keep working the story Deena. So much is involved here. Like your work.

  • Goblin Shark

    I think it’s worth taking a closer look at.

  • Goblin Shark

    And that’s different from reliance on income tax how?

  • Kent Goertzen

    You think moving the burden to the middle class and poor is worth taking a closer look at?

  • It’s interesting that none of the commenters seem to understand that no state income tax would mean that you get more money with every paycheck. Your company pays you based on pre-tax dollars. That number isn’t going to change based on this. Only the take-home does. You would be charged more money for things, but you would also BRING HOME more money. It’s an economy based on consumption.

    I’m not saying I agree 100% with his selection of which exemptions to drop, and which to keep, etc. But this isn’t a problem for the average Nebraskan. It might be a problem for tiny farmers. But here’s the thing: you have a right to choose your line of work—not to have the people of Nebraska forced to support you financially. I don’t care how “honest” or “hard working” you are. I work a high-productivity/stress desk job interacting with ag people, and I can tell you without batting an eye that I work harder than most every one of them. Supply and demand with some SLIGHT modifications. That’s the system America has always been based on.

  • The poor don’t pay an income tax. If you think they do, you need to look at the ACTUAL IRS REPORTS. Middle class people will pay more in sales tax, but they will also bring home more of their paycheck. You know that salary you negotiate for with your employer? Imagine taking home a number closer to that. It nets out for you as a consumer.

  • Hunyock

    Because Income tax is a much more predictable type of income for the state when they make their budget. Just a few years ago, Heineman had to deal with a huge shortage in what they had budgeted for state income due to much lower sales tax revenue. This was due to our economy at the time. This could very easily happen again and since the state is required to balance its budget, they may very well raise their sales tax to fix it.

  • Goblin Shark