Members of the Revenue, Education, and Retirement Committees, I am here today to testify in a neutral capacity on AM1381 to LB289.
The Platte Institute supports the education funding components of this amendment which lower property taxes through valuation and levy rate changes. Polling has shown Nebraskans strongly support additional property tax limitations such as the ones included in AM1381.
And while we agree on the education and property tax components, we disagree with how the revenue is generated. Lifelong Nebraskans will remember the many times the state has increased the sales tax to offset the high property tax, but it has never materialized for lasting tax reform. (see chart below)
In addition, the increase in the cigarette tax is a poor revenue source to replace funding for something as important as our schools. There is no need to increase this tax when sales taxes have been proven as a more stable source of revenue for government. Failing to scale back sales tax exemptions in the current proposal creates a heavy dependence on tax rate increases, which is not what our state needs.
There is no need for the state to increase its sales tax rate when there are millions of dollars left on the table in current sales tax exemptions. Nebraska only taxes 1 in 3 consumer purchases today. We understand this issue generates a lot of opposition, but eliminating exemptions is the most stable, the fairest, and the least economically harmful way to raise enough revenue to significantly reduce property taxes. It is also the recommendation of the Tax Foundation and a prudent method of tax reform in other states.
Under current law, motor vehicle cleaning is subject to sales tax, but motor vehicle repair is not. The installation of landscaping materials and live plants is subject to sales tax, but other lawn care and landscaping services are not. This is not only confusing to consumers, but is also a burden for businesses that provide both services and must charge customers differently. If repealed, the motor vehicle repair exemption alone would generate an additional $18 million.
Personal care services are also a concern. In totality, there is $11 million in exemptions for personal care services including tanning, tattooing, weight loss services, and other beauty services. The Revenue Committee has already stated that it does not want to tax haircuts, but why not the other services? While not ideal, the state could only exclude haircuts, which would still be better than increasing the sales tax rate.
Only removing exemptions on pop, candy, plumbing and moving service doesn’t move the needle enough for overall tax reform, and it makes Nebraska’s tax system appear even more arbitrary than if the committee sought to expand the sales tax base more broadly.
And finally, an increase in our state sales tax rate will change our national ranking for the worse. I asked the Tax Foundation to run a ‘hypothetical’ sales tax ranking for Nebraska under the proposed increase. Under our current system Nebraska is ranked with the 27th highest combined state and local sales tax rate in the nation. Under the proposed rate, our ranking would jump to 17th for a combined rate of 7.60 percent (see map). Keep in mind this will put us less than 2 cents away from the highest sales tax rate in the nation which is in Tennessee; however, Tennessee has no income tax and also has some of the lowest property taxes to offset their high sales tax rate.
This is important to consider, because Nebraska is already ranked high in other taxes. When asking the Tax Foundation how this would impact our State Business Tax Climate Index ranking, the property tax rank would only decrease from 40th worst to 38th worst while the sales tax ranking would increase by 6 points.
If passed, this tax legislation will cause an overall decrease in our Business Tax Climate Index Ranking. On the other hand, if no tax rates were increased, but the sales tax base were to be broadened, Nebraska would improve its ranking. It is for this reason we ask the committee to please consider removing additional sales tax exemptions before increasing the cigarette tax and the sales tax rate.
Thank you and I’m happy to take any questions.