LINCOLN — With two years left in office, Gov. Dave Heineman is crafting a bold package of tax reforms for the 2013 legislative session.
The proposals could include lower income and corporate taxes, but also new taxes on hospitals and farmers.
Heineman, in an interview last week, repeated his often-voiced goal that Nebraska must improve its tax climate for businesses and individuals. While Nebraska has made progress in that regard, there's more work to be done if the state wants to continue to grow and keep young people from moving away.
“We're 31st out of 50 states in business tax climate. We're not in the top half. I know we can do better,” Heineman said. “This is about true job and career opportunities for our sons and daughters.”
The conservative Republican, who's as keen on such tax rankings as he is on luring new businesses, would not comment on the details of his tax plan, saying they're still being refined. He will announce his plan during his State of the State address on Jan. 15.
Heineman rejected an idea raised by some lawmakers: a comprehensive study of state tax policy that would focus on determining which tax breaks are fairest, and which ones should go away.
“I don't think we need another study. We need the courage to act,” Heineman said.
The governor has apparently backed off his most ambitious idea, which was to join states like Texas, Wyoming and South Dakota by eliminating the state income tax.
But last month, he offered sweeping proposals during a meeting with business and lobbying interests. They included eliminating the state's corporate income tax and lowering the state income tax to a flat rate of 2.9 percent. That would be a significant cut in income tax rates, which are as high as 6.84 percent for married couples with taxable incomes above $54,000.
To offset the loss of revenue, new taxes were discussed. Among the ideas: eliminating some sales tax exemptions for agriculture and hospitals, and imposing a flat fee on stays in hospitals and college dormitories.
If Heineman sticks to those ideas, it would set up a battle with farm groups, health care organizations and even parents of college freshmen over the fairness of such a tax shift.
Barry Kennedy, who heads the Nebraska Chamber of Commerce and Industry, said his group generally supports simpler, flat taxes but would need to see a final proposal before blessing or cursing it.
“I commend him on trying to find a way to reduce the tax burden,” Kennedy said. “But the devils are always in the details.”
Kennedy mentioned yet another possibility he's heard — eliminating a tax exemption for equipment purchased by manufacturers. His group would oppose that idea.
“We spent about 20 years to get that,” Kennedy said. “We were one of the last states to get it.”
State senators said they were eager to see Heineman's plan, though some wondered if the state's still-recovering economy could shoulder a major tax cut.
Last year lawmakers, voicing concerns about revenue, pushed the caution button and trimmed the governor's tax-cut proposal to $56 million, phased in over three years. His original proposal was a $130 million cut.
State Sen. Greg Adams of York, expected to be elected speaker of the Legislature when the 2013 session begins Wednesday, said the fiscal climate of the state has improved. However, he remains concerned about bolstering cash reserve funds.
“We have to live within a different environment,” Adams said.
Sen. Steve Lathrop of Omaha said he would want to ensure that any plan by Heineman does not harm current state obligations, such as services for the developmentally disabled and adequate funding for K-12 education.
Lathrop said eliminating some tax exemptions, such as the tax break on farm equipment purchases, might put Nebraska equipment dealers at a competitive disadvantage with neighboring states.
“We'd have to look at the impact of those exemptions on those businesses,” he said.
Not all companies pay state corporate income taxes. In fact, about 80 percent to 90 percent of small businesses pay individual income taxes instead. Heineman said that's one reason he's committed to cutting those tax rates.
When weighed against sales and income taxes, the state corporate income tax is relatively small, realizing only about $234 million a year.
Bruce Rieker, who represents the Nebraska Hospital Association, said his organization was not surprised Heineman was looking at proposals to end the sales tax exemptions for equipment and medicine purchases by hospitals. A study by the University of Nebraska-Lincoln Bureau of Business Research last fall suggested such a move.
Rieker, as well as some senators, said ending such breaks would only add to ever-rising bills for health care at a time when patients and hospitals are already struggling.
“Our charity care and bad debt are going up rather rapidly in these hard times,” he said.
Representatives of two major agriculture groups, the Nebraska Cattlemen and the Nebraska Farm Bureau, said reducing property taxes remains their top tax goal, not lower income taxes.
Fear of property tax hikes prompted both groups recently to oppose one of Heineman's other tax goals in 2013: eliminating the state inheritance tax that goes to counties.
Michael Kelsey of Nebraska Cattlemen said that while his organization philosophically opposes taxes on inheritance, the practical result of eliminating the tax likely would be property tax increases.
Sen. Lydia Brasch of Bancroft is preparing a bill to cut property taxes on farmland. Sen. Bob Krist of Omaha said he'll bring a proposal to provide income tax breaks on Social Security checks and military pensions.
Military retirees, Krist noted, are typically younger. Giving them a tax break to stay in Nebraska would enhance the economy, keeping their families here and generating new tax revenue from new jobs taken by such retirees.
Heineman agreed that Nebraska needs to treat its retirees better. While balancing the budget has to be his priority, he said, there's “a lot of work” to be done on the tax system.
“I'm trying to look at every possibility, at every option right now,” Heineman said. “So at the end of the day, we're trying to figure out a better tax climate that creates more jobs in the future.”
Sen. Kathy Campbell of Lincoln was among the lawmakers who said the Legislature needs to get a better handle on which tax breaks are appropriate and which are not. Some kind of comprehensive study is needed, she said.
“At some point, we need to take a comprehensive review of the entire tax structure,” she said. “It's like a stretched piece of cloth: You pull on one corner, you affect the other corner, you affect the entire fabric.”
Contact the writer: 402-473-9584, firstname.lastname@example.org
What to watch
The 2013 session of the Nebraska Legislature begins Wednesday. Here are some things to keep an eye on:
» The impact of the return of Sen. Ernie Chambers of Omaha, who can block the movement of legislation like a football linebacker.
» Who emerges as the new leaders of the Legislature after the departure of several key senators and committee chairmen due to term limits.
» Whether Gov. Dave Heineman, with two years left in his term, can get more traction for his ideas after losing some battles with lawmakers last year.
» Whether Sen. Brad Ashford of Omaha can balance an ambitious legislative agenda and lead the Judiciary Committee while making a run for Omaha mayor.
» How cautious senators will be with new spending proposals, given the current economic climate.
— Paul Hammel and Martha Stoddard