LINCOLN — Gregg Mitchell has had a front-row seat to Nebraska's attempts at reforming its tax system.
As a teen in 1967, he watched as state lawmakers, including his grandmother, Sen. Florence Reynolds, enacted a state sales tax with the goal of lowering high property taxes.
Later, as a businessman, Mitchell witnessed several other attempts at making Nebraska more tax-friendly, only to see taxes eventually climb again.
But on Tuesday, the 60-year-old said he was glad to see Gov. Dave Heineman talk about eliminating state income taxes on individuals and corporations. If he didn't have to pay those taxes, he might look at hiring more employees. Lower taxes might also keep baby boomers from moving away to lower-tax states.
“I'd be even happier if they were also looking at a comprehensive streamlining of government,” said Mitchell, managing partner of Mitchell & Associates Inc., a property valuation firm with 22 employees in west Omaha.
Mitchell is the kind of businessperson the governor had in mind Tuesday when he called for a “bold and courageous” look at eliminating the state income tax paid by individuals and corporations.
Heineman, a conservative Republican, said Nebraska's current tax system is “mediocre” and discourages small businesses and entrepreneurs from expanding or locating in the state. That, in turn, retards growth in the good-paying jobs that keep young people from moving away.
“This about the future of Nebraska,” Heineman told state lawmakers. “Nebraska has good schools, affordable homes, a strong work ethic and a low unemployment rate, but taxes are too high.”
Heineman's comments came during the annual state of the state speech to the Nebraska Legislature on Tuesday.
He had been promising for weeks to deliver a “bold” tax plan during his address. He outlined a bold vision, to be sure, but didn't include the rest of the story — exactly how the state would shift taxes to offset the $2.4 billion now collected in state income taxes.
Heineman said Nebraska needs to eliminate about half of the $5 billion in sales tax exemptions it now offers, but he declined to outline which exemptions would go away until later this week, when his tax bills will be introduced.
The uncertainty, and the lack of details, left many state senators and lobbyists from agriculture and business groups with little to say. Until it's learned which businesses, farmers or consumers might be paying new sales taxes on previously tax-exempt goods, they said it's hard to decide whether they will support or oppose the governor's tax reform plan.
“We applaud the goal of trying to lessen the tax burden — we just need to know more about it,” said Barry Kennedy of the Nebraska Chamber of Commerce and Industry, the state's major business group. “It all depends on what tax exemptions you're giving up.”
“It's awfully far-reaching. ... The devil's in the details,” said State Sen. Galen Hadley of Kearney, the recently elected chairman of the Legislature's Revenue Committee, which deals with taxes.
The state chamber, for instance, fought for years to obtain a sales tax exemption on the purchases of manufacturing equipment. Nebraska was one of the last states to offer the tax break.
If that goes away, manufacturers would pay an estimated $70 million a year in new taxes, leaving them at a competitive disadvantage, Kennedy said.
Others said that switching the state to a sales-tax-based system would shift the tax burden to the lower and middle class — and away from higher-income individuals and companies that pay the bulk of income taxes.
“Tax relief is one of my highest priorities, but we must focus on the kind of reform that will prioritize the needs of middle-class Nebraska families, not on tax relief for Warren Buffett and Pete Ricketts,” said State Sen. Jeremy Nordquist of Omaha.
Middle-class Nebraskans, Nordquist said, would end up “footing the bill” if, as rumored, taxes are imposed on hospital rooms and room and board in college dormitories.
One conservative group, Americans for Prosperity, applauded the governor's proposal, saying it would boost job creation.
“Gov. Heineman is absolutely right that Nebraska families and small businesses are subsidizing special-interest sales tax exemptions through our burdensome state income tax,” said Brad Stevens of that group.
A state tax research group, the OpenSky Policy Institute, said the plan is missing the mark. It doesn't address property taxes, which are rising faster than inflation, and doesn't look at expanding sales taxes to more services, like auto repair and hair cuts, that have become a bigger part of the economy, according to the group.
“We tax carpet cleaning, but not cleaning a swimming pool. We tax movies, but not a trip to the spa. Those should be part of the discussion,” said Renee Fry of the OpenSky group.
Besides college dorms and hospital bed fees, other rumored targets for new sales taxes have been purchases of farm equipment and veterinary fees. But on Tuesday, sources said that the governor's plan is not yet set in stone, and those plans could be changing.
Heineman, in his 17-minute speech, said that he would not eliminate one of the most popular exemptions — the sales tax break on groceries. And the plan would not change the state sales tax rate, which is 5.5 percent.
He emphasized that his plan seeks to be “revenue neutral” and collect the same amount of taxes as the state does now.
The governor also said retirees would get a break by the elimination of income taxes on Social Security income, military pensions and other pensions.
Heineman said the business executives he's talked to were surprisingly willing to discuss tax changes, even if it meant giving up a coveted tax exemption.
Eliminating the state's corporate and individual income taxes would realize a long-sought goal of the governor. Heineman wants to elevate the state's tax ranking for business to among the top 25 of all states, and perhaps to the top 10.
“I want us to be the best. I want us to be in the top 10,” Heineman told reporters.
Right now, the Tax Foundation, a conservative tax think-tank, ranks Nebraska 31st in overall business tax climate; the state ranks 35th in income taxes.
The state ranks even worse in property taxes, 38th, but Heineman has said the state can have little impact on that because they are levied and collected locally.
State senators mostly welcomed a chance to talk about tax reform but expressed disappointment at the lack of immediate details.
Sen. Beau McCoy of Omaha, the owner of a home-improvement business, said he was excited to hear talk of eliminating individual income taxes, which is how 92 percent of small-business owners pay their taxes.
Speaker of the Legislature Greg Adams of York said he likes that the plan is revenue-neutral.
But he isn't convinced of the wisdom of completely eliminating income taxes. He said some middle ground may be the place to end up.
Heineman did leave the door open for a less ambitious tax plan, one that simply lowers the corporate and individual income tax rates. His plan did not include elimination of the state's inheritance tax, which he tried and failed to enact last year.
World-Herald staff writer Martha Stoddard contributed to this report.
ENDING INCOME TAXES
Gov. Dave Heineman has proposed eliminating state income taxes. Here are estimates of what an Omaha family of three paid in 2011 at various income levels:
|Income||State income tax||State/local sales tax|
Current income tax rates would be lower because of 2012 legislation.
Source: Tax Rates and Tax Burdens, 2011, compiled by the Government of the District of Columbia
ENDING SALES TAX EXEMPTIONS
To pay for his plans, the governor would target sales tax exemptions.
Though he has not specified which ones, here are some examples of potential sales tax on currently exempt items:
» $356, dorm room for a year at University of Nebraska-Lincoln.
» $11,000, typical tractor sold outside of a city.
» $25.20, generic Lipitor, 20 mg pills, 12-month prescription.
» $10.05 to $14, wood and other parts used to make a custom four-shelf bookshelf.
— Martha Stoddard
Examples of the state's 84 sales tax exemptions
List includes their estimated value and when enacted, if known.
Component/ingredient parts: Ingredients, parts used to manufacture products for retail sale.
Value: $1.3 billion
Veterinary medicines for livestock: Medicines for animals used for human consumption or apparel (1996).
Value: $300 million
Motor fuels: Gasoline, diesel and compressed fuels for vehicles, trains and motor boats (1967).
Value: $248 million
Grains: Animal feed for livestock used for human consumption or human apparel (1967).
Value: $167 million
Certain nonprofit purchases: Purchases made by churches, private colleges and universities, hospitals, nursing and assisted living homes, hospices and home health care businesses (1967).
Value: $164 million
Food or food ingredients: Food for home consumption, but not prepared food or vending machine items (1983).
Value: $128 million
Agricultural chemicals: Herbicides, pesticides, fertilizers and additives used in commercial agriculture (1967).
Value: $78 million
Manufacturing machinery: All equipment, machinery used in manufacturing plants (1981 for some machinery; 2005 for all).
Value: $70 million
Certain room rentals: Hospital rooms, college dormitories (1967).
Value: $64 million
Agricultural machinery: Machinery, equipment used in commercial agriculture (1992).
Value: $60 million
Motor vehicle/motor boat trade-ins: Value of vehicles, boats traded in to purchase another (1967).
Value: $56 million
Nebraska lottery: Official state lottery ticket sales. (1993)
Value: $16 million
School lunches: Prepared food served in public and private schools, institutions of higher learning. Includes concession sales at elementary and secondary schools (1967).
Value: $3.5 million
Newspapers: Newspaper sales published at least weekly and their advertising supplements (1967).
Value: $2.2 million
Data centers: Personal property used to create data center products for use outside Nebraska (2012).
Value: $1.7 million
Commercial artificial insemination: Insemination services in ranching, farming, commercial and industrial uses. (1971)
Laundromats: Coin-operated machines for clothes washing. Excludes car washing. (1967)
Fine art purchases: Fine art purchased by museums. (2006)
Event admission: Fees charged by public and private schools to attend athletic events, concerts, plays, etc. (1967).
Tele-floral deliveries: Applies to out-of-state orders delivered by Nebraska florists.
Source: 2012 Nebraska Tax Exemption Report
— Joe Duggan
Heineman's State of the State address
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