Give Gov. Dave Heineman credit for thinking big.
The governor on Tuesday proposed eliminating the state’s individual and corporate income taxes. To make up that money, he would eliminate about half of the state’s current sales tax exemptions.
It’s a big idea that faces big obstacles. But it’s worth talking about.
Elimination of the income tax would put Nebraska among only a handful of other states where residents don’t pay income taxes. It would eliminate the state’s taxing of military pensions and Social Security income, which many legislators advocate.
The plan, Heineman argues, would position Nebraska as one of the top places in the nation for creating high-paying jobs in the future, give more young Nebraskans career opportunities close to home and keep older Nebraskans from retiring elsewhere.
To pay the bills, he would expand the state’s sales tax to items not now taxed. Many long-standing sales tax exemptions — still to be specified — would be eliminated.
The individual income tax is projected to raise about $2.36 billion a year, and about $270 million with the corporate income tax. The sales tax brings in about $1.55 billion. The state also provides some $5 billion in exemptions from the sales tax — exempting more than it taxes.
Those exemptions include everything from agricultural and manufacturing machinery to dorm room rentals and lottery tickets. Heineman said he wouldn’t expand the tax to include groceries, something that would hit average Nebraskans hard.
Still, shifting the tax burden presents many issues to examine. Among them:
>> The many different exemptions: The list includes numerous exemptions for agriculture, such as farm equipment, ag chemicals, feed and water for animals, seeds, and water for irrigation. Other exemptions include locomotives and railcars; trucks and other motor vehicles used by common carriers; hospital rooms; electricity, coal, gas and other fuels used in agriculture and industry; medicines and medical equipment; data centers; manufacturing machinery and equipment; replacement parts for that equipment; and water used for manufacturing.
>> The arguments for those exemptions: Every item currently exempt from the tax had its champions, and every one found enough support in the Legislature to become law. Arguments can be made in favor of each one. Feed and water for farm animals used as food are exempt, for example, and that helps keep food costs down. Exempting the tax on a new semi to haul goods lowers transportation costs, which can be passed on to consumers.
>> Philosophical debate. There will be those who argue that relying on the sales tax is less fair, particularly to lower-income people, than an income tax with rates that rise along with income levels.
>> An urban-versus-rural split? Many sales tax exemptions involve a key Nebraska industry, agriculture. Would farmers, ranchers and rural lawmakers support eliminating those? Would that be viewed as favoring Nebraska cities, many of which levy their own sales taxes and thus might see a windfall if the sales tax base grows?
>> Might overall taxes go up? Heineman says his plan would be “revenue neutral” — the additional sales tax revenue would equal the amount of the income tax — and that it would not increase the total tax burden. But what happens when lawmakers start looking at which exemptions to eliminate and which to keep? There would be temptations to eliminate an additional exemption or two and spend the extra money on pet projects.
>> Nebraska is different. Seven states have no income tax, while two others tax only certain investment income. Of the seven, some rely on natural resources (Alaska, Texas, Wyoming) and tourism (Nevada, Florida) to raise tax revenue in ways Nebraska cannot.
>> Could we still wind up with both taxes? While the governor called for abolishing the income tax, an option lawmakers may prefer is eliminating fewer sales tax exemptions and keeping income taxes with lower rates.
It has been decades since Nebraska enacted its sales and income taxes. It has been a long time since state leaders thoroughly examined the important questions about the best way to generate government revenues.
Until Nebraskans see the fine print of the governor’s plan, it is too soon to say just what should happen.
Heineman is promising the details soon — and the devil is always in the details. Just which sales tax exemptions does he think should go and which should stay? What is the impact on average taxpayers and consumers? What is the impact on which businesses? Is the end result fair?
“It’s not going to be an easy conversation,” the governor said.
He’s right about that. He’s also right in saying that it’s a conversation worth having.