LINCOLN — Nebraska cities could see a windfall as a result of Gov. Dave Heineman's plan to shift from a reliance on state income taxes to sales taxes.
The new revenue could total tens of millions of dollars, according to various sources, enough to allow for a dramatic cut in local property taxes.
The governor and others acknowledged that it's difficult, and too early, to estimate the exact increase in local sales tax revenues that could result.
If cities do benefit, Heineman said he would expect a good share of the money to go toward property tax relief. But he also would explore whether some could be “recaptured” by the state to help finance his proposed $2.4 billion tax shift.
“It's an issue we want to study more, review more, make sure we understand,” the governor said Monday. “The intent was not to create a windfall (for cities).”
Last week, Heineman unveiled two plans to make the state more attractive to business. The most ambitious plan would eliminate state personal and corporate income taxes, and replace that tax revenue by eliminating about half the state's $5 billion worth of sales tax exemptions.
The governor said his goal was not to increase or decrease state taxes but to shift the tax load onto sales taxes and create a simpler, more modern state tax system.
Under his plan, businesses wouldn't have to pay corporate income taxes, but they would pay new sales taxes on the equipment and component parts they use to create products. Farmers would escape individual income taxes, but they would be subject to new taxes on seed, fertilizer and machinery.
The Nebraska sales tax of 5.5 percent would apply to those purchases, as would any local sales tax levied by a city. In the case of Omaha and Lincoln, the local sales tax is 1.5 percent.
If more things are taxed, the same levy would generate more money, potentially a whole lot more.
State Sen. Brad Ashford of Omaha said that one of the reasons he agreed to co-sponsor the governor's tax-shift plan was his belief that the state should expand its sales tax base and reduce income and property taxes. But Ashford said he was stunned to learn that one rough estimate put Omaha's potential new sales tax revenue at up to $191 million a year.
That would be much more than what the city now collects in sales taxes (about $131 million a year), and more than enough to replace all the property taxes now levied by the city (about $77 million a year) and all the funds generated by the city's occupation tax on restaurants and bars ($24 million).
Ashford, a registered independent who's a candidate for Omaha mayor, said that if cities do get a windfall, he'd like to see it aimed at property tax relief and at establishing a “rainy-day” fund of cash reserves to help the city weather tough times.
“To me, this is good policy,” he said, of shifting more of the tax load onto sales rather than property or income taxes. “The governor has done a great service here by pointing out how many (sales tax) exemptions we have.”
A spokeswoman for Omaha Mayor Jim Suttle said it was premature to comment on a potential tax windfall until the city can analyze the implications of the governor's proposal. City Council President Tom Mulligan agreed.
“We shouldn't be counting our chickens before they're hatched,” he said.
The governor's bills will be introduced today. It may be weeks before it's known which sales tax exemptions could be eliminated, or if the plan has a chance of passage.
Heineman pointed out that it's also difficult to know if any new sales tax revenue that results would be generated within the city limits or in a rural area. For instance, if the plan results in new taxes on farm tractors and fertilizer, that new tax revenue would likely come from rural areas without a city sales tax.
Lynn Rex, executive director of the League of Nebraska Municipalities, said her organization, which represents cities and towns across the state, has made “a very rough guess” that cities could realize between $300 million and $500 million in new sales tax revenue under the governor's proposal. Omaha, she said, might get $40 million to $50 million more.
But that assumes a lot, Rex said, including that the Legislature embraces the governor's plan.
“It's hard to know now,” she said.
One critic of the governor's plan, Sen. Jeremy Nordquist of Omaha, said the possibility of a tax windfall indicates that Heineman's proposal is not “revenue neutral” and risks taking more money out of the economy and taxpayers' pockets.
But Jim Vokal, executive director of the Platte Institute, an Omaha-based policy think tank, said a big sales tax boost for cities like Omaha would create a huge opportunity to cut property taxes and eliminate the restaurant tax.
Vokal, a former City Council member, said that a more detailed analysis of the impact of the governor's plan needs to be done but that he thinks Omaha would see more than $100 million in additional sales tax revenue.
“This will lead to a discussion of using the extra money to reduce property taxes. Overall, that would make us a more competitive state,” he said.
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