The Nebraska Legislature’s Revenue Committee has advanced its long-awaited property tax reform plan.
After holding a special hearing on a previous draft amendment to LB289, the committee has brought the bill forward for full legislative debate with a new amendment, AM1572.
The committee clearly took feedback from the hearing into account as it voted out this new version of their plan, though it still contains its pros and cons.
On the upside, AM1572 expands Nebraska’s sales tax base to a wider range of services than previous proposals, creates foundation aid for all public school students, and seeks to restrain school district property tax assessment ratios, levies, and spending growth.
Purchases that would be newly subject to sales tax, but that were not in the previous proposal, include:
- Labor for motor vehicle repair and maintenance
- Lawn care, gardening, and landscaping services
- Hair care, nail services, skin care and hair removal
- Dry cleaning
- Taxi, limo, and ridesharing service
- Maintenance, painting and repair for single family homes
- Interior design services for single family homes
- Parking services
- Swimming pool cleaning and maintenance
- Dating services
- Wedding planning
- Weight loss programs and personal training services
While no one really looks forward to paying sales tax on these services, all the money would be used to offset property taxes, and there are many other services Nebraskans purchase that are already subject to sales tax, often arbitrarily. For instance, why should you pay sales tax to hire an exterminator but not a swimming pool cleaner?
Worse yet, the current tax code is unnecessarily complicated even for some of these impacted businesses, who may already be asked to collect tax on some of their sales, but not others. As it is, salons and landscapers are two types of businesses that collect sales tax on the products they sell, but not their services.
If policymakers want to avoid tax rate increases while making a major dent on the property tax, then the only criticism that can be of these additions would be that they don’t go far enough. Many white-collar service providers (accountants, attorneys, real estate agents, travel agents) would remain exempt under this proposal, as would the sale of most groceries or motor fuel.
Controversial as grocery sales taxes may be—even in states that have them—it can’t be ignored that all but one of those states has significantly lower property taxes than Nebraska. Our neighbors in South Dakota and Kansas tax groceries at their full tax rate, while Missouri imposes a lower rate on groceries.
Another drawback of this version of the proposal is that senators gave in to pressure from other property taxing subdivisions, like cities and counties, and removed a proposal to reduce property tax assessment ratios 10% across the board. It’s too bad that all subdivisions but schools were excluded, since a significant expansion of the sales tax base could enable cities to collect additional revenues and may justify a reduction in their property taxing authority.
Counties are also allowed to levy sales taxes with voter approval, but very few do, since current and upcoming law only allows Gage County to levy a sales tax countywide. Gage County would clearly see more revenue in the coming years if it is given access to a broader sales tax base, in addition to its new taxing authority.
Speaking of taxing authority, that brings us to the main downside. In holding back on expanding the sales tax base even father, AM1572 still leans heavily on several attempts at state tax rate increases. The committee’s state sales tax hike has been whittled down to half a cent instead of three-quarters of a cent thanks to the additional sales tax base broadening. It would give Nebraska a 6% state sales tax rate, not including local taxes.
AM1572 would also increase the cigarette tax by 36 cents a pack and hike the documentary stamp tax on real property. Those tax increases might only be immediately noticed by smokers and those purchasing real property, but senators would be depending on those sources to fund long-term reductions in local property taxes.
The proposal would possibly offset some costs from the tax increases for low- and moderate-income workers who are eligible for the federal and Nebraska Earned Income Tax Credit (EITC).
For example, an Omaha family spending $10,000 a year on taxable goods and services today would pay $700 in state and local sales tax. Under the sales tax increase, they would pay $750.
Currently, however, Nebraska provides a refundable tax credit equal to 10% of the credit provided by the federal government. In 2019, the federal EITC ranged from a low of $529, to a high of $6,557, depending on family size and income. AM1527 would increase the state’s credit to 13% of that amount.
Not including property tax changes, whether a taxpayer eligible for EITC would come out better or worse after AM1527 would depend on the size of their tax credit, as well as how much they choose to spend on taxable goods and services.
Using 2019 numbers, the smallest tax credit increase would be $15.87 and the largest would be $196.71.
These are just a few of the questions policymakers will grapple with in the final month of the session as the main event of full legislative debate on tax reform begins.