Legislative Testimony for LB314: Adopt the Remote Seller Sales Tax Collection Act and change revenue and taxation provisions

Good afternoon, members of the Revenue Committee.  I am here today to testify in opposition to this bill.

While the Platte Institute supports property tax reform, including the collection of internet sales tax, and an expansion of the sales tax base to purchases which are not business inputs, we do not believe it is wise to fund reforms by increasing other tax rates. Increasing tax rates as a funding mechanism could be especially harmful without including the proper safeguards to assure lasting reforms.

Just as high property tax rates are harming Nebraska taxpayers, LB314’s increase in the cigarette tax, alcohol taxes, the income surtax, and an increase in the sales tax rate are all detrimental to our state’s revenue projections and economic growth.

Cigarette taxes are especially known to be a very unreliable revenue source.  In the last decade, 85 percent of cigarette excise tax increases missed their revenue projections.  There are 23 separate instances where there is state data that shows how far states missed projections, and of those, only 4 experienced more revenue and the remaining experienced less.  Many national organizations also agree with this, even the National Conference of State Legislatures specifically states “Cigarette taxes are not a stable source of revenue.” This means depending on this revenue source to pay for local property taxes will likely result in the state coming up short.

According to research by the Tax Foundation, a high-income surtax is poor policy because it is a narrow, high-rate tax on a highly mobile group of taxpayers who earn less in bad economic times. Enacting such a tax makes state tax revenue more volatile and unpredictable. In addition, an income surtax will put additional pressure on small businesses in Nebraska that file through the individual income tax.

The bill’s overall income tax increases will be extremely high for those small businesses that file as the shareholders of S-Corporations and Limited Liability Companies (LLCs) in Nebraska, not only because of an increase with the surtax, but also the elimination of an exemption for earnings in other states.

It is our view that expansion of the sales tax base has much greater potential for raising significant revenue from higher-earning taxpayers, without harmful economic or revenue stability effects. These taxpayers tend to spend a greater share of their income on services that are largely exempt from sales tax.

Today we have an increasingly service-based economy, and the sales tax base needs to be updated to account for this change. This principle of including services in the sales tax base is agreed to across the philosophical spectrum among tax policy experts. Where the disagreement begins is when deciding what to do with the new revenues.

This bill directs the new revenues towards the property tax credit relief fund. While that choice will subsidize local property tax bills at their current levels, we are concerned that LB314 does not have an appropriate mechanism to assure that local property taxing entities will meaningfully reduce property taxes in response to receiving these new revenues.

The Property Tax Credit Relief Fund was created in 2007 initially at a cost of $105 million.  That fund’s amount has more than doubled since it was created, and yet property taxes are now higher than they have been in decades.  It is clear that the Property Tax Credit Relief Fund policy is not working and does not create lasting reform, only temporary relief.  For this reason, we do not believe that adding additional revenues to the fund, to be distributed to all property-taxing subdivisions, will result in sustainable property tax reform.

In addition, surveys conducted by the Platte Institute find that Nebraskans are open to moving away from the current approach to tax relief in the credit fund and more towards more fundamental tax reform, particularly limitations on the tax rates and valuations allowed from local taxing subdivisions.  

We’ve come to the conclusion through our research that the only way to substantially and sustainably reduce property taxes is to pair an expansion of the state and local tax base with appropriate limitations on property taxing authority at the local level. 

Overall, we see LB314 as a bill with good intent. We would be happy to work with Sen. Briese and any member of the committee with additional recommendations about how an expansion of the sales tax base could be made even more robust to become part of an overall property tax reform package.

Unfortunately, adding to the property tax credit fund by increasing excise, income and sales tax rates is not the answer if our goal is to reduce property taxes while improving Nebraska’s overall tax climate and revenue stability.

I encourage the committee to vote in opposition to LB314, but to take advantage of the bill’s proposals to end sales tax exemptions and codify online sales tax collections. Thank you and I would be happy to take any questions from the committee.