In the coming days, the Nebraska Unicameral may convene in a special session to consider the most significant overhaul of the state tax code since 1967. The plan, spurred by legitimate discontent over rising property tax burdens, is being spearheaded by Governor Jim Pillen. However, the proposal, which reportedly involves a two-tiered sales tax and the state’s assumption of most school funding responsibility, could have profound implications that even those most convinced of the urgency of property tax relief may find unworkable and unpalatable.
Based on documents circulated to members of the governor’s property tax working group, the sales tax base would expand to cover an additional $28 billion in currently exempt transactions. The expansion functions mainly as a tax on production, not consumption, resulting in higher prices for consumers, higher production costs for farms and businesses, and an incentive structure that drives jobs and economic activity out of state.
The plan would entail using the revenue from an expanded sales tax to fund K-12 operating expenses at the state level, thus eliminating local property taxes for school operating costs over the course of a three-year phasedown. The proposal also calls for a hard cap on city and county property tax collections, limiting revenue growth to the rate of inflation under most circumstances.
However, the proposed sales tax pay-fors may be too economically damaging. The governor’s plan would apply sales tax to barber shops and salons, pet care, e-books and digital music downloads, parking garages, tennis lessons, zoo admission, and burial services, for instance. Unfortunately, when the goal is to raise an additional $1.3 billion from a sales tax that currently generates $2.6 billion, taxing e-books and haircuts barely makes a dent. Most of the additional revenue, therefore, has to come from taxing business inputs.
Roughly 76 percent of the revenue from sales tax base broadening would be generated from businesses. This proposed expansion would lead to a majority (55 percent) of all Nebraska sales tax revenue coming from taxes on business inputs. The sales tax, intended as a consumption tax, would have more than half of its base functioning as a production tax.
Taxing business inputs also transforms the sales tax from a tax on consumption to, at least in part, a tax on capital. It takes a tax that is generally neutral with regard to in-state investment and turns it into a discriminatory tax on a state’s own businesses, disproportionately affecting smaller firms with less capacity to vertically integrate services.
As Nebraska’s tax overhaul proposal continues to take shape, it’s clear that the implications are far-reaching and complex. The state’s lawmakers will have to grapple with these issues and more as they consider whether this bold move is the right solution for Nebraska’s tax woes. For more information on this topic, visit https://taxfoundation.org/blog/nebraska-property-tax-relief-plan/.