Good afternoon, Chairwoman Linehan and members of the Revenue Committee. I’m Nicole Fox, Director of Government Relations at the Platte Institute and I am testifying in support of LB1213. This bill represents an approach to tax reform that modestly tackles concerns with property, sales, and income taxes all at once and provides a platform that is worth building upon, which is why we’re going to be offering some constructive feedback in our testimony.
One excellent aspect of LB1213 is that each major tax would be reduced by broadening the sales tax to a select number of currently-exempt goods and services.
Real property tax assessment ratios for all political subdivisions would decline by 10 percentage points and marginal personal income tax rates would be reduced by 20 basis points in each tax bracket.
Nebraska would have a reduced 5% general sales tax rate and a new 3% grocery sales tax rate. Ideally, though, states should have a single sales tax rate on all consumer goods and services. States that do compromise with a lower rate on groceries include Utah, Missouri, Tennessee, Virginia, and Illinois.
However, by holding back on the number of services that would be included in the tax base, charging a lower grocery sales tax rate, and exempting WIC-eligible foods for all consumers, the state and local governments would be forgoing more revenue than is likely necessary, and in a way that is less effective for addressing ability-to-pay concerns or overall tax reform.
Focusing in on the WIC-eligible grocery example, a higher-income grocery shopper in Omaha would pay a combined 6.5% sales tax on paper towels, 4.5% sales tax on a live lobster, 9% sales and restaurant tax on a hot rotisserie chicken, and a 0% tax rate on organic arugula, since fresh fruits and vegetables are on the WIC list. So, these are a lot of different tax rates for items that really should be treated the same way.
Meanwhile, a low-income shopper using WIC or SNAP would already be exempt from sales tax for the unprepared grocery purchases they would make with their benefits. We would suggest, then, that all the sales be taxed at one rate that is as low as possible, and to provide a refundable income tax credit that could hold the low-income shopper harmless (or better off) for the tax on their out-of-pocket purchases.
Furthermore, under this bill, the higher-income taxpayer would still pay 0% tax on personal accounting services, but the lower-income taxpayer would pay 6.5% to call an Uber or purchase other services that are not so-called “professional services.”
This is important to consider because by maintaining arbitrary exemptions, we miss opportunities to reduce tax rates and make taxes less of a factor in economic decisions. While the tax reductions in LB1213 move Nebraska in the right general direction, the bill could still do more to improve the overall tax climate.
For example, under this proposal, Nebraska’s average state and local sales tax may be about the same as South Dakota’s, but that state uses its broader sales tax base to have no personal or corporate income tax and a property tax that is ranked more competitively than Nebraska’s. It’s unlikely the bill in its current form would move Nebraska significantly closer to that model.
Finally, this bill is silent on Nebraska’s high corporate income tax rate or its personal property taxes, which many states we compete with do not have or are working to reduce. If you get on I-80 and head west you wouldn’t find a state with a higher corporate income tax until you reach California, and most Midwestern states now forgo personal property tax or tax personal property less than Nebraska.
As a result, the state currently depends heavily on tax incentive policies to make up for the fact that businesses don’t want to pay the statutory corporate tax rate, and some businesses like data centers have significant personal property tax exemptions, while other businesses don’t receive the same treatment.
Of course, these are all reasons a comprehensive approach to tax reform is needed in Nebraska and LB1213 is another good contribution to the discussion.