Nebraska should have a simple, sustainable tax structure that promotes economic growth. To achieve this goal, tax experts often recommend that states raise the revenues they need through a broad tax base, instead of a patchwork of special tax exemptions. This approach helps states keep tax rates lower.
Based on these principles, raising the state sales tax rate is not the ideal way to fund property tax reform, particularly with the large number of exemptions that remain in the state’s tax code.
Since the creation of the sales tax in Nebraska, the rate has already been raised numerous times, from 2.5 percent in the 1960s, to a combined state and local average of around 7 percent today.
While raising the state sales tax would generate more revenue that could be added to the state’s school funding formula, it may also come at an opportunity cost to other local governments, like cities and counties.
As it is, local sales tax rates and taxes on purchases made in Nebraska vary widely.
Starting this year, for example, anyone buying a meal at a restaurant in the Blackstone District in Omaha may pay 11.45 percent in total taxes on their purchase. The same meal in Aurora, Nebraska, which has no local sales tax, would be taxed at the current state sales tax rate of 5.5 percent.
If the state rate were increased just one percentage point, you can see how the level of sticker shock would be very different in Blackstone than Aurora. But a state tax rate hike creates challenges for both of these communities, whether their goal is flexibility to raise revenue for local needs, or to keep taxes low.
Incoming State Sen. Myron Dorn is proposing one idea that might start a conversation about a possible compromise. Gage County, in his district, would like to levy a new countywide sales tax.
The local option tax that Sen. Dorn is proposing relates exclusively to Gage County’s need to finance payment for a federal legal judgment placed upon the county, and it would not require voter approval as proposed. But there’s no reason the same countywide concept couldn’t be used as a voter-approved alternative to property taxes in other counties.
Counties in Nebraska are already allowed to levy voter-approved sales taxes, but almost none of them do. One reason is because state law currently prohibits counties from collecting sales tax in areas where cities also collect sales tax.
That can put large parts of many counties, including a lot of the commerce in their jurisdiction, off the table for county sales tax collections.
It should be noted that some counties in Nebraska may not benefit much from a countywide sales tax if they don’t have a lot of commerce happening within their borders to begin with. But figures for sales tax collections in each county show that the potential for using a sales tax for property tax reduction could be significant for many counties.
These figures do not include the additional amounts counties could raise if Nebraska’s sales tax base were expanded to include many currently exempt services and goods.
Leaving the debate about raising sales taxes up to local voters would allow each county to decide for itself if a shift to a higher sales tax rate, ideally to reduce property taxes, is in their economic interest. It may also lead to greater collaboration between local taxing entities through interlocal agreements, enabling local officials, rather than the state, to decide the best way to use the dollars raised through the sales tax.