LINCOLN — Replacing income tax revenue with sales tax revenue could leave Nebraska short of money for schools, health care and other critical services, according to a new report.
The OpenSky Policy Institute released the report Thursday, a week before the public hearings on Gov. Dave Heineman's proposal to make such a shift.
The governor wants to eliminate all Nebraska corporate and individual income taxes, including those levied on retirees — a revenue stream that now brings in $2.4 billion.
He promised to keep the plan revenue-neutral by ending 27 sales-tax exemptions worth an equal amount of money.
But OpenSky, a Lincoln-based think tank focused on tax and budget issues, questioned that promise, based on historical trends.
“Even though this bill is being touted as revenue-neutral, there's a real risk that it is not,” said OpenSky director Renee Fry.
The institute called for a comprehensive study of the state's tax code before any major change.
“The stakes for Nebraska are simply too high for a hasty gamble on estimates and an unbalanced tax system,” the report said.
The Governor's Office and Nebraska Department of Revenue did not respond to requests for comment on the report.
State Sen. Beau McCoy of Omaha, who introduced the bills on behalf of the governor, said he could not comment until he has a chance to study the report.
Heineman based his plan on the State Department of Revenue's estimates of the value of sales tax exemptions in 2012. By those estimates, he says, his plan would simply swap one tax for another.
But looking at the department's estimates from 1998 through 2010 shows a different story, the institute's report said. In each of those previous years, the amount of income tax revenue received by the state exceeded the estimated value of the sales tax exemptions for that year.
The gap averaged $426 million a year — enough of a difference to wipe out the state's cash reserve fund in one year.
Fry said the historical growth rates for sales tax and income tax revenues also give cause for concern.
From 1995 through 2012, sales tax revenues grew an average of 4.4 percent annually, the report said. But income tax revenues outpaced them at 5.2 percent.
The state's economy, meanwhile, grew at 4.9 percent.
The OpenSky report attributed the difference to a sales tax that “has failed to keep up with the modern economy.”
Nebraska's sales tax does not apply to most services, which make up a growing proportion of consumer spending, it said.
Even if sales tax revenue from the exemptions equaled the income tax revenue lost, there would be less money for the state general fund because of a state law earmarking a quarter-cent of the sales tax for road-building.
Higher sales tax revenue under the governor's plan would mean a $109 million windfall for roads but much less for other state needs, the report said.
OpenSky said the tax plan could have two other consequences with budget impacts.
Ending sales tax exemptions for hospitals, prescription drugs and other medical costs, as the governor proposes, could help drive up the cost of health care, which would put pressure on state Medicaid costs.
The report said Nebraska also could run into difficulties paying tax credits owed to businesses under the state's business incentive programs. Credits now claimed against corporate income taxes instead would have to come out of sales taxes alone.
A less ambitious version of the governor's plan would end corporate income taxes and lower income taxes on Social Security and other retirement income. It would require a tax shift of about $395 million.
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