Legislative Testimony for LB133 & LR11CA: Proposals for a Nebraska consumption tax

Good afternoon, Chairwoman Linehan and members of the Revenue Committee. I’m Sarah Curry, Policy Director at the Platte Institute and I am testifying in a neutral capacity on LB133 and LR11CA. Thank you to Sen. Erdman for proposing these bills, which is prompting a needed discussion about creating a more complete vision for tax reform in Nebraska.

Nebraska’s economic competitiveness and the simplicity of our tax code would improve substantially if state and local government relied more on consumption-based taxes and less on taxing property and income. For nearly a decade, the Platte Institute and the Tax Foundation have recommended that the Legislature remove exemptions in the sales tax and use those revenues to reduce the state’s high tax rates. A key reason is stability.

Last year, during the recession, we saw states primarily funded with sales taxes fare better than those relying more heavily on income taxes, especially corporate. However, while we share the frustration state lawmakers and taxpayers have with property taxes in Nebraska, the pandemic also proved property tax to be a reliable local revenue source, which is one reason no other state in the nation goes entirely without real property tax.

Still, lots of states have much lower property taxes, and if we wanted to do that in Nebraska, then using a consumption tax approach, not necessarily identical to this one, is a good alternative. For example, neighboring South Dakota has no income tax and a broad-based sales tax that includes more goods and services than Nebraska. Their state revenues are ranked one of the most stable.

We also want to acknowledge that Sen. Erdman’s inclusion of language preventing business-to-business transactions and business inputs from being taxed adheres to sound tax policy.

Where we differ with the EPIC tax is in levying the country’s highest sales or consumption tax rate. We support broadening bases to lower rates, and at 10.64%, the EPIC Tax levied is almost 4% higher than our current average state and local sales tax rate. This would also be the highest in the nation with the next closest states being Tennessee (9.53%), Louisiana (9.52%), Arkansas (9.47%), Washington (9.21%), and Alabama (9.22%).

While we would remain neutral on this proposal, it’s been nearly 60 years since Nebraska’s last major tax restructuring, and it’s reasonable to be asking voters about potential ballot measures for tax modernization and what they would be willing to support. Citizen-initiated referendums, while they should always be an option, can be costly, time-consuming, and uncertain. The Legislature has the ability to do its homework on both policy and public sentiments, giving Nebraskans the chance to weigh in on substantive tax reforms that address their concerns, and it’s a tool that senators should consider using in this two-year session to move things forward.