Gov. Heineman's tax plan would leave many in state paying more - Omaha.com
Published Sunday, February 10, 2013 at 12:30 am / Updated at 7:14 am
Gov. Heineman's tax plan would leave many in state paying more

LINCOLN — Gov. Dave Heineman has pitched his tax overhaul proposal as a way to make Nebraska a winner and help out ordinary taxpayers.

But his proposal wouldn't make all Nebraskans winners.

In fact, the plan to eliminate state income taxes and replace the lost revenue by ending selected sales tax exemptions would leave many people paying more in state taxes than they do now.

Factors affecting how a person comes out under the proposal include income level, ages of children, their need for health care and the type of industry in which the person works.

Estimating the impact of a tax overhaul


Proposal eliminates corporate and personal income taxes; ends selected sales tax exemptions

Kyle Kollmorgen

Lincoln

Married, two young children

Employee-benefits agency

Kollmorgen would be a net winner under the governor's plan. He and his wife would save enough on state income taxes to easily cover likely increases in the prices of electricity and goods they purchase. Their children are too young to worry about college dormitory rooms, which lose tax-exempt status, and the Kollmorgens are relatively healthy, so they would see little impact from the loss of exemptions for health services. His business pays sales taxes on all purchases now, so ending exemptions would not affect him.

Tom Briese

Albion

Married

Farmer

Briese would be a net loser under the governor's plan. He would have to pay about $30 more in sales taxes for every acre of irrigated corn he grows because exemptions for seeds, fertilizer, pesticides, energy and farm equipment would end. Even considering his income tax savings, he estimates the plan would add $33,000 to the taxes he and his wife would owe. He would not be able to pass on the increased costs easily because the market determines crop prices. He likely would pay more for electricity and other goods to cover new sales taxes on manufacturing inputs.

Tom Briese, a corn and soybean farmer from Albion, would be one of the losers, based on his estimates of the plan's effects. So would Chris Ewalt, a recently unemployed mother from Lincoln.

Kyle Kollmorgen, a Lincoln employee-benefits sales consultant, believes he would come out ahead.

“The whole is designed to be revenue-neutral, but not for any one individual,” said Ernie Goss, a Creighton University economics professor.

State administration officials have not analyzed how different groups of Nebraskans would be affected.

Heineman acknowledged that some people might not gain personally from his plan, though he has portrayed it as helpful for working Nebraskans, retirees and small businesses.

An outside analysis indicated that fully 80 percent of Nebraskans could find themselves losers under the plan.

The analysis was done by the Lincoln-based OpenSky Policy Institute that has testified against the governor's plan, working with the Institute on Taxation and Economic Policy, a national nonpartisan research organization.

They used a complex model of how the proposed tax changes would work their way through the economy.

It includes such effects as the higher prices likely to be charged for goods when manufacturers start paying sales taxes on the materials used to manufacture them.

The analysis found that the 20 percent of Nebraska residents who earn $91,000 or more would see their tax obligation shrink under the plan.

Those Nebraskans would save an average of $4,851 per year, while low- and middle-income people would pay more.

State Tax Commissioner Doug Ewald said he couldn't respond to the study without knowing more about the model and the assumptions used to build it.

But he questioned the quality of work done by the national institute.

For example, he doubts the lowest-income Nebraskans would have to pay much more in sales taxes, given their limited incomes.

He also challenged the idea that any significant amount of sales taxes on materials used in manufacturing would be passed on to Nebraska consumers, saying that manufacturers sell most of their products on a national market.

Groups backing the governor's plan have not analyzed its effects on different groups of Nebraskans.

But Brad Stevens, state director for Americans for Prosperity, which has testified in support of the proposal, estimated it would save a typical Nebraska family $1,051 in state income taxes.

His calculation was based on a median family income of $55,616.

It did not look at the effects of sales tax increases or other changes.

Heineman has urged people to look at the bigger picture for the state.

The governor said states with no income taxes are growing faster than Nebraska.

“Isn't it worth it to get a modern, simpler, fairer tax code that creates more jobs in the state for our young people?” he asked. “I think it is.”

Heineman wants to eliminate all Nebraska corporate and individual income taxes, including those levied on retirees.

He would replace the $2.4 billion worth of annual income tax revenue by ending 27 sales tax exemptions worth an equal amount of money.

The governor said he prefers the more sweeping plan over his less ambitious proposal, which would end corporate income taxes and lower income taxes on Social Security and other retirement income.

The modest plan would require the elimination of $395 million worth of sales tax exemptions.

Goss said the governor's bigger plan focuses on growing the economy.

But he said that growth comes at the expense of fairness within the tax system.

“Sales taxes would tend to hurt the lower-income more than the higher-income,” he said.

The specific effects of the plan vary with each person's situation, Goss said.

Chris Ewalt, the unemployed mom, is among the nearly 40 percent of Nebraskans who owe no state income taxes.

Like her, most in this group are workers who earn too little to have a tax liability or who are low-income older adults.

The governor's plan would not save them money.

But they might have to pay more sales taxes because exemptions would be eliminated for prescription drugs, hospital beds and college dormitory rooms.

For many, the tax plan would come at a more direct cost.

Eliminating the income tax also means eliminating the state earned-income tax credit, an extra refund check that goes to low-income workers when they file their tax returns. About 129,000 workers qualified for the credit in 2011.

Ewalt is counting on her $518 credit to help pay her rent this month and keep the bill collectors at bay.

“If he took away that earned-income credit,” she said, “it would be very difficult.”

Farm families such as Briese's also would take a hit. More than 40 percent of the sales tax exemptions targeted for elimination affect agriculture.

Jay Rempe, with the Nebraska Farm Bureau Federation, said the average farmer with between 1,000 and 2,500 acres would see an estimated loss of $25,000.

That's after taking into account the savings from not having to pay state income taxes, Rempe said.

Tom Briese, the Albion farmer, calculated that the plan would raise his costs by $30 an acre on irrigated corn and somewhat less on soybeans.

“To me, it is a very substantial reduction to the bottom line,” he said.

The biggest impact would come from sales taxes on seeds, fertilizer, pesticides and fuel. Sales taxes on agricultural machinery also would add to costs.

Yet many Nebraskans would see a net tax savings under the governor's plan.

Among them could be middle- and upper-income workers, business owners and retirees. Eliminating state income taxes would save them enough money to outweigh potential increases in sales taxes.

Kyle Kollmorgen, the sales consultant from Lincoln, for example, has children too young for college, and a family whose members are all healthy, so he would not be hit by sales taxes on college dorm rooms or on prescription drugs and hospital care.

He would save enough on the income tax side of the ledger that he could afford higher prices on electricity and other goods affected by the loss of sales tax exemptions.

He worries about the plan's possible effects on the businesses that are his customers, but believes his family would benefit under it.

“I think we'd come out all right,” Kollmorgen said.

Contact the writer: 402-473-9583, martha.stoddard@owh.com

Contact the writer: Martha Stoddard

martha.stoddard@owh.com    |   402-473-9583    |  

Martha covers the Nebraska Legislature, the governor, state agencies, and health, education and budget issues out of our Lincoln bureau.

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