Good afternoon, Chairman Smith and members of the Revenue Committee. My name is Nicole Fox, and I am the Director of Government Relations for the Platte Institute. I’d like to thank Senator Friesen for introducing LB 570. I am here today to testify in support of this bill.
Many people are unaware that the tax on tangible personal property even exists because it applies mainly to business equipment. But when it comes to making investments in Nebraska’s economic growth, this tax is one of the most harmful and distortionary.
Of all the options in the tax policy toolkit, the personal property tax is one that creates a lot of economic drag, much like the income tax. This is because both of these taxes impose higher costs on the same types of things.
Personal property tax impacts investments that produce other goods and services. When the cost of acquiring these goods is higher, it can delay investments that grow enterprises, raise wages, and create wealth.
Regionally, many Midwestern states are moving away from the collection of tangible personal property tax. Michigan and Indiana are two states that have recently taken major action to phase out or reduce personal property tax, while Iowa, South Dakota, North Dakota, Illinois, Ohio, and Minnesota exempt all or nearly all personal property.
Though Nebraska’s existing personal property tax credit mitigates this cost somewhat, because personal property tax is levied at the same high tax rates for real property, Nebraskans still pay substantially more for making these capital investments than taxpayers in most states that also collect personal property tax. Beyond the immediate cost of the tax, taxpayers face considerable compliance costs from actively identifying the property to be taxed and their attributes.
The goal in collecting tax revenue should be to provide needed services and to advance policies producing benefits for the public that exceed the costs. But the uniquely harmful characteristics of the tangible personal property tax impose economic costs and barriers that may outweigh any benefits Nebraskans receive from collecting this tax.
Ernie Goss has written that in Nebraska, capital per worker is $78,371, compared to an average of $105,605 in neighboring states and $122,736 nationwide. Our goal with tax reform should be to raise our needed revenue in the least economically harmful manner. This is why reducing Nebraska’s reliance on tangible personal property tax is one of the key recommendations in the Tax Foundation’s report “A 21st Century Tax Code for Nebraska.”
The Platte Institute supports the goal of LB 570 to fully exempt tangible personal property from tax, but we also understand that an immediate repeal may not be practical for local political subdivisions. Fortunately, there are many good options to accommodate the need for a transition.
The Legislature could gradually raise the state’s exemption of tangible personal property so that fewer people are impacted by the tax or have to file a return. One challenge for the Legislature with that approach is that the current personal property tax exemption is funded through a credit. If a phase-out were done very gradually, over 10 or 15 years for example, it may be possible to avoid increasing costs to the state from increasing this credit.
Another option is for the state to repeal personal property tax only on new equipment, which has been done in a few states. That would essentially freeze the personal property tax base. Because the items taxed are depreciable, the revenue losses would begin in the year designated by legislation, but the impact on subdivisions would also be gradual.
A third approach would be to simply allow political subdivisions to make personal property tax a local option tax that they can repeal locally.
For example, if the state enacted an expansion of the sales tax base as part of tax reform, some cities may decide they would rather rely on local option sales tax generated by taxing services instead of having a tax on business equipment that is being used for investments in their area. This wouldn’t necessarily end personal property tax, or the compliance costs associated with it since many subdivisions do not collect sales tax, but it could reduce how many local governments rely on the tax, and the financial cost to taxpayers and the workforce.
The Legislature has tried with limited success to do something meaningful on real property tax reform that would be noticed and appreciated by the public. But the Legislature has a much greater ability to address the personal property tax burden. Eliminating personal property tax might go unnoticed by those who don’t pay it, but the economic impact on the growth of businesses in Nebraska would be far more lasting than just another property tax credit.