LINCOLN — Roy Christensen, who owns two audiology clinics in the capital city, said his patients are usually surprised to hear that they owe no sales tax when they purchase one of his hearing aids.
His patients, he said, have disposable income and would gladly agree to pay sales taxes on hearing aids in exchange for dropping state income taxes on their monthly Social Security and pension checks.
That would put more money in their pockets and make it less likely that they would move away to no-income-tax states like Texas and Florida, Christensen said.
“We all win. Every small business wins,” he said.
The great tax debate of 2013 formally began Tuesday, when two bills were introduced on behalf of Gov. Dave Heineman to dramatically alter the state's tax system.
The more ambitious proposal, Legislative Bill 405, would eliminate all Nebraska corporate and individual income taxes, including those levied on retirees, and shift about $2.4 billion of taxes onto items now exempted from the sales tax.
That would place Nebraska, which has a reputation for high taxes, in the company of states like Texas, Alaska, Wyoming and South Dakota, which don't levy income taxes.
To accomplish that, Heineman proposes eliminating 27 sales tax exemptions now enjoyed by farmers, businesses, hospitals and even churches.
A second and less sweeping idea, LB 406, would end only the state's corporate income tax but lower income taxes on Social Security checks and other pension income. It would require a tax swap of about $395 million, and the elimination of only nine exemptions.
Two state senators from Omaha, Beau McCoy and Brad Ashford, introduced the bills on Heineman's behalf. They say Nebraska is ready for a debate on changing the state's tax system to make it more attractive for better-paying jobs.
Others said such an ambitious plan may take two years to digest and debate.
The proposals have sent representatives of business, farm and nonprofit groups scrambling to assess the details and the pros and cons.
The bolder of the measures would create new tax bills on sales that have been exempt for years.
Farmers, for instance, would have to pay sales taxes on purchases of tractors and combines, seed and chemicals and energy; manufacturers would lose tax exemptions when they buy new equipment, containers and energy; families would pay taxes on dorm room and hospital room fees; and hospitals would no longer get new equipment sales tax-free.
A representative of the Catholic Church in Nebraska expressed concern about the impact on struggling parishes.
“It would create financial challenges and difficulties. It would hit budgets and would result in payments that we've not had to make,” said Jim Cunningham, who lobbies the Legislature for the Nebraska Catholic Conference.
Churches, which have had a sales tax exemption since Nebraska enacted a sales tax in 1967, would now owe sales taxes when they buy hymnals, pews and candles, or when they buy lumber and flooring for a new social hall or church addition.
Church schools would also pay taxes when they buy books and desks — Cunningham said that raises a question of fairness because public schools, under LB 405, would keep their sales tax-exempt status on purchases.
Heineman, in comments Monday to the Lincoln Independent Business Association, an influential small-business group, predicted that groups that now enjoy tax exemptions would fight hard to keep them.
But he asked the nearly 200 merchants in attendance to consider the positive trade-offs of giving up a tax exemption in exchange for no personal income tax (which 92 percent of small-business owners pay) or no corporate income tax.
“The hard part,” Heineman said, is which exemptions to eliminate.
McCoy, one of the co-sponsors of the tax bills, said Tuesday that this is a “once in a generation” opportunity to change state tax policy to attract better-paying jobs and keep young people from moving away.
The senator said the list of exemptions to be eliminated is not written in stone “like the Ten Commandments.” There may be better ideas out there, he said.
Two state senators said such a complicated tax swap may be too much to accomplish in a single legislative session.
“It's a two-year deal,” said Sen. Colby Coash of Lincoln. “Things this big ought to take that long.”
Sen. Amanda McGill of Lincoln agreed.
“We need to identify what our endgame is. I don't think it should be tax rankings,” McGill said, referring to one of the stated goals of Heineman, to push the state's business climate ranking by the Tax Foundation into the top 10. It now stands at No. 31, which Heineman labels as “mediocre.”
Sen. Tanya Cook of Omaha said she needs to look more deeply at who wins and who loses under the governor's plan. Cook said her goal will be to prevent a tax shift onto working families, the poor and the elderly of her north Omaha district.
One key player, Sen. Galen Hadley of Kearney, chairman of the Revenue Committee, said the eight-member panel wants to look closely at the governor's proposals because they represent a “tremendous shift” in taxes.
“It's a complicated issue,” Hadley said. “The first thing we need to do is understand the role each tax — income, sales and property — should play in the state. We need to start with that.”
Christensen, the audiologist, listened intently as Heineman laid out his ideas during his Monday speech. He said shifting taxes from income to sales makes sense. In fact, Christensen said, he'd favor eliminating all $5 billion of the state's sales tax exemptions.
That way, he said, you could lower sales tax rates on all purchases and even cut property taxes.
“That is a rising tide that raises all boats,” he said.
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