Lozier Corp. in Omaha builds store shelves for the Walmarts and Walgreens of the world.
If Nebraska starts charging sales taxes on materials the company buys to make its products, Lozier will keep on fabricating fixtures — in another state.
“I’d be forced to move the plant to Council Bluffs,” said Allan Lozier, whose main factory, corporate headquarters and 1,100 employees are at 6336 Pershing Drive.
As Nebraska business leaders calculate the cost of changing the state’s tax system, some say ending the exemption on materials, or inputs, could prompt an exodus of manufacturing companies and their jobs.
What Gov. Dave Heineman has called his “bold” plan proposes a sales tax on component parts and ingredients as well as the energy and water used to make manufactured goods. Such inputs have been exempt since the state adopted a sales tax in 1967.
In exchange, the governor would abolish corporate and individual income taxes in an effort to encourage new business development and job growth.
But as manufacturers run the numbers, many find that a new sales tax could threaten their ability to remain competitive, said Barry Kennedy, president of the Nebraska Chamber of Commerce & Industry.
“There’s a lot of concern out there,” Kennedy said, explaining that he’s heard from some of the state’s largest manufacturers.
Heineman said Saturday he intended to launch the first serious statewide conversation in five decades on changing Nebraska’s tax system, so he welcomes the views of manufacturers and others. But he didn’t back down from his proposals.
“Why is it a manufacturer gets that exemption, but if you’re with construction, home building, real estate, technology, transportation, financial services and a host of other industries, you don’t? Those are tough conversations,” he said.
Heineman’s preferred plan proposes eliminating state corporate and individual income taxes, which generate $2.4 billion annually. To replace the revenue, he proposes repealing 27 sales-tax exemptions, the largest of which is the $1.2 billion exemption on manufacturing components.
The governor also has offered a backup approach that would reduce income taxes while eliminating a smaller amount of sales-tax exemptions. Under that plan, the exemption for manufacturing inputs would be preserved.
The Legislature’s Revenue Committee will conduct public hearings on the tax proposals Wednesday and Thursday.
State Sen. Brad Ashford of Omaha, who co-sponsored the tax bills on behalf of the governor, said lawmakers need to consider the ramifications on jobs and businesses. But he characterized manufacturers’ threats to leave the state as “that’s what they all say.”
Ashford said the state’s tax problems result from having succumbed “over and over and over” to special interests wanting exemptions. He favors eliminating all sales tax exemptions except those on food and perhaps on prescription drugs. He also favors extending the sales tax to services — a move that Heineman opposed.
Ashford said broadening the sales tax base would make it possible to lower Nebraska’s sales tax rate to between 2 and 3 cents, along with lowering or possibly eliminating income taxes.
If the proposed tax changes eventually affect the state’s manufacturing sector, the impact will be felt throughout the state’s economy.
Based on 2011 statistics from the Nebraska Department of Labor, nearly 2,000 manufacturing companies employed about 94,000 workers. That means about one in 10 working Nebraskans has a job at a manufacturing plant.
Total manufacturing wages added up to $4 billion, making it the second-highest wage sector, behind health care.
Creighton University economist Ernie Goss called it “a little troubling” that one of the proposals would end exemptions for manufacturing inputs.
“When you tax business-to-business sales, you’re counting on the ability of producers to pass on costs,” he said.
When producers pass on costs, a cascade of taxes can result. Sales taxes charged on the parts and energy used to make a product get built into the cost of the product. The consumer then pays sales taxes on the new, higher price.
Goss said sales taxes on manufacturing inputs also encourage businesses to consolidate. Manufacturers can avoid sales taxes by buying out their suppliers.
Vic Sowl, owner of Central Nebraska Wood, is one manufacturer who has been thinking about an escape plan if the Legislature decides to tax his inputs. Sowl employs 25 workers in Sutton who pressure-treat deck lumber that’s distributed to a half-dozen states.
“That would change life for us drastically. We’d be forced to move our operations to Iowa.”
Sowl started his company 25 years ago, and he also owns a plant in Oskaloosa, Iowa. His workers ship in Southern white pine already finished into deck components, which they chemically treat to resist mold and water damage. They sell their product to a wholesaler, which in turn sells it to retailers.
The sales tax he would pay on lumber and chemicals would cost him between $700,000 and $1 million per year, he estimated. In comparison, he said, his annual corporate income tax bill tops out at about $50,000.
“We compete with people outside of the state,” Sowl said. “When you give us a disadvantage like this, it’s pretty hard to overcome.”
Lozier recently celebrated his 60th year with the company founded by his father in the 1930s. Under Heineman’s preferred plan, Lozier said, the money he would save in corporate income taxes wouldn’t come close to offsetting the increased sales taxes he would pay.
By his calculations, the tax shift would cost him 100 times more.
His company relies heavily on inputs such as steel, machinery and energy to manufacture store shelving units and other fixtures at plants in Nebraska, Alabama, Missouri and Pennsylvania. The company’s customer base of national retailers simply won’t pay higher prices to help Lozier cover an increased tax bill, he said.
So if Nebraska lawmakers follow through with the tax shift, they will decide Lozier’s next move.
“I would adapt almost instantly,” he said. “I can’t afford to lose those customers.”
Lozier said he’s sure the tax shift would hit other manufacturers as well, but he acknowledged it may not have as dramatic an impact on the service industry.
Regardless, he argued, it’s in the state’s best interest to keep as many manufacturing jobs as possible.
“I’m assuming it will just go away,” Lozier said of the tax proposal, “because someone wasn’t thinking very clearly when they came up with this.”
World-Herald staff writer Martha Stoddard contributed to this report.
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