Proposals to lower income tax, increase sales tax considered
The Revenue Committee heard more than 12 hours of testimony Feb. 6 and 7 on two bills that would eliminate all — or a portion of —state income taxes by discontinuing sales tax exemptions. The majority of the testimony was in opposition to the proposals.
Omaha Sen. Beau McCoy introduced LB405 before the committee Feb. 6 on behalf of Gov. Dave Heineman. He said the bill represents the state’s first fundamental tax reform proposal in almost 50 years.
“Tax reform is really about the next generation of Nebraska’s leaders,” he said. “They’re only going to be the leaders of tomorrow if we have the great jobs and low taxes to keep them here. This can help propel our economy well into the 21st century.”
The bill would eliminate income tax on individuals, estates, trusts and corporations. McCoy said the bill addresses income tax, rather than sales tax, because it is a far less stable source of revenue for the state.
Heineman testified in support of the bill, saying the $5 billion in sales tax exemptions currently in state statute creates a complex and unfair system for the average taxpayer.
“Our current tax system favors one industry over another; it picks winners and losers,” Heineman said. “Our goal is a better tax policy environment that will create more high paying jobs and more rewarding careers for our sons and daughters.”
Jim Cada, representing the Nebraska Veterans Council, also testified in support of the bill. He said many retired veterans leave the state for more tax-friendly environments.
“Our elders do not want to leave their home state,” Cada said. “We fought for more than mediocrity and I challenge you to move the state forward.”
OpenSky Institute executive director Renee Fry testified that most scholarly research indicates very little correlation between income taxes and migration from a state.
“Research shows taxes have little influence on where people live,” she said. “When they do move, scholarly research shows that they do so for new jobs, lower-cost housing, a better climate or to be near family.”
To replace the estimated $2.4 billion in lost revenue from the elimination of the income tax, LB405 proposes to eliminate nearly half of the state’s current sales tax exemptions.
Exemptions that would expire under the bill include those on purchases of:
• manufacturing machinery and equipment;
• agricultural machinery and equipment;
• industrial machinery and equipment;
• ingredient or component parts;
• insulin, prescription drugs and durable medical goods;
• rooms used to house students at educational institutions;
• hospital equipment;
• fuel used in irrigation, farming, manufacturing or by hospitals; and
• equipment built in state and sold outside Nebraska.
Agriculture production specialist Dave Bartels opposed the bill. He said it would unfairly target agriculture, which he called the economic engine that drives the state.
“It’s not fair to tax farmers on what they need to produce when they have no control over what they can produce each year,” Bartels said. “The goal of gaining new businesses in the state will fail to offset the economic damage to agriculture and existing businesses.
Farmer Gale Lush also opposed the removal of agricultural sales tax exemptions.
“A tax like the one on inputs would just cause more problems for responsible farmers trying to take care of their debts,” he said.
Sheri Andrews is president and CEO of Lozier Corporation, which is headquartered in Omaha. She testified in opposition to the elimination of exemptions for inputs and components, saying manufacturers would be unable to pass the tax on and would be forced to absorb it.
“Today we compete in a worldwide economy and you’ve now made Nebraska manufacturers uncompetitive,” she testified. “Our roots are in the state; we want to stay here and we want to continue to grow here.”
Representing the University of Nebraska at Lincoln Residence Hall Association, Meg Brannen opposed the elimination of sales tax exemptions for the cost of renting dorm rooms. She said the loss of the exemption would lead to an additional cost of $667 annually for students living in dorms.
“This translates to an additional 92 hours that I have to spend working,” Brannen said. “This would make living on campus out of reach for me. The added costs means commuting to school and giving up the things I really love about it.”
John Cederberg, representing the Lincoln Chamber of Commerce and the Nebraska Chamber of Commerce, opposed the bill. He said he supported the intent of the LB405, but could not support the bill.
“If we can get to a consensus bill that truly moves Nebraska forward and doesn’t jeopardize manufacturing, agriculture and health care, then we should do it,” Cederberg said. “We would like to be part of the conversation to create a usable solution, but this is not it.”
The Greater Omaha Chamber of Commerce testified in a neutral capacity. President and CEO David Brown said the chamber encourages a discussion of tax reform, but could not support the proposal in its current form.
“The negative effects this would have on manufacturers, hospitals, agricultural producers and charitable institutions are significant,” he said. “We believe the elimination of the sales tax exemptions proposed would do more harm than good.”
Jason Hayes, representing the Nebraska State Education Association, also testified in a neutral capacity. He said eliminating the income tax would lead to a loss of $81 million in state funding to schools.
“We believe there is a need to understand a thorough study of Nebraska’s tax policy,” Hayes said, “But we are concerned as to whether the bill will truly be revenue neutral.”
The committee also heard testimony on LB406, presented by McCoy Feb. 7 on behalf of the governor. The bill is an alternative to LB405 that would exempt only a portion of retirement income from income taxes: up to $12,000 for married couples filing jointly and $6,000 for single persons. Social security income would not be exempt under the bill.
McCoy said the proposal would provide needed relief to Nebraska taxpayers.
“This is an illustration of what we can do to help retirees and businesses across our state,” he said.
Heineman thanked the committee and citizens for considering his tax proposals, saying, “This is just the beginning of the conversation and it’s so important we hear from citizens from all parts of the state.”
Under LB406, the state would see a loss of approximately $300 million in revenue from the elimination of the corporation income tax, financial institutions franchise tax and earned income tax credit. To recover the projected loss in revenue, the bill would eliminate sales tax exemptions including:
• mobility enhancing equipment;
• durable medical equipment;
• home medical supplies;
• energy or fuel used in industry, agriculture or by for-profit hospitals;
• molds, dies and patterns used in manufacturing;
• chemicals used in agriculture; and
• seeds and annual plants sold to commercial producers or for exclusively agricultural purposes.
LB406 also would eliminate the refundable Nebraska Advantage Research and Development income tax credit. It would authorize a nonrefundable income tax credit, which could be carried forward for five years.
Steve Wellman, representing the Nebraska Soybean Association, opposed the bill, saying it shifted the tax burden to fewer people and would disproportionately hurt farmers.
“This shift and tax increase comes while state income taxes on unincorporated family farms continues,” he said. “LB406 would remove a minimum of $200 million from the agriculture community and our rural areas.”
Kathy English, executive vice president and COO for Children’s Hospital in Omaha, also opposed the bill. She said the elimination of sales tax exemptions on medical equipment would prove especially detrimental to hospital patients.
“We see thousands of patients with exceptionally complicated cases, requiring medical equipment that goes beyond Band-aids and gauze,” English said. “The last thing families should face is one more barrier to caring for a family member.”
Nebraska Power Association representative Laura Kapustka testified that the removal of the sales tax exemption on fuel used in industry would result in double taxation.
“A tax will be assessed on fuel used in generation of energy and again when it is sold to our customers,” she said. “This bill will create a direct and immediate rate increase to customers.”
The committee took no immediate action on either bill.