Sales Tax Bill Offers Different Approach to Reform

With as many different taxes and high tax rates as Nebraska has, there’s more than one path to creating a tax system that is simpler and sustainable.

We can debate which approaches are “better” on economic or philosophical grounds, but it’s good to have an open mind to the many possibilities that might meet our state’s needs.

That’s why I was very glad to see Sen. Tom Briese’s LB946 introduced this week. It’s a sales tax reform that is in many ways cut from the same cloth as the paper Sarah Curry and I wrote on Nebraska’s Sales Tax. Here’s a summary of the paper so you can see some of our main points: Download Nebraska’s Sales Tax Summary

Sen. Briese’s bill would involve an enormous change to sales tax policy in Nebraska. It would end virtually any exemptions for services provided in the state unless the Legislature specifically exempts them. That’s pretty much the opposite of what we have now. In fact, the bill language even needs to be tightened up so it doesn’t tax services that are business inputs, but overall it’s pointing in the right general direction.

In exchange for ending these exemptions, Nebraskans would pay a lower sales tax rate on the things they buy. The state sales tax rate would initially drop from 5.5% to 4%. However, over the following four years, the rate could drop even further. Every year, the Tax Commissioner would review the receipts and would reduce the tax if more receipts were coming in.

Without a doubt, this would give Nebraska one of the country’s lowest sales tax rates, if not the lowest among states that have sales taxes, over time.

These numbers do not include local sales taxes, of course, which taxpayers in your city or county can vote on. Some cities have sales taxes up to 2%, while others choose not to have them. Only a couple of counties have sales taxes, one of which was authorized by the Legislature and is temporary.

Under LB946, sales taxes would be reduced on everything taxed today. You’d pay less to the state for buying a car, paying a utility bill, eating at a restaurant, and much more.

Like any good tax reform, though, there is tough medicine involved. Nebraskans would have to pay sales taxes on a lot of services they don’t want to pay any more for than they already do. Proposing a tax on some services could really get people thinking twice about whether they want the tax system to change at all.

I don’t doubt that if some people thought it over, there are still those who like the refuge of paying zero tax on some things very dear to them, even if they’re getting hosed on everything else as a result.

Personally, I don’t love the idea of paying more taxes when I take one of my four dogs to the vet, either. But I also know I’ll pay less tax to buy their food and toys, and when I pay the tax, the rate will be pretty low.

Another good bit of news is that LB946’s design is unquestionably on the taxpayer’s side. Any new revenue the state collects from this reform would be used to reduce the sales tax rate further, making it a win-win in the long-term.

There are certainly naysayers who think revenue-neutral tax reform doesn’t matter and that only tax plans that make deep cuts to the overall tax burden are meaningful. I don’t agree. I think there is value in making the individual taxpayer experience better by removing the factor of taxes from our economic decisions as much as possible.

The tax rate an individual pays in a given moment, or the after-tax cost of a purchase, can sometimes inform whether decisions are worth making. By taxing some purchases a lot, and others not at all, we are creating a bias in our tax code for what people should be buying and selling. We’re also taking away choices from taxpayers about how and when they want to spend their money and pay their share of taxes.

Think back to when Nebraska first introduced its sales tax in 1967. While it would have been great if we would have continued to have no sales tax, in the beginning, the sales tax was only 2.5%. That’s the same rate as the restaurant tax Omaha puts on a hamburger today, and most observers say people don’t notice it at all.

Imagine if the sales tax was that unobtrusive again.

Some taxpayers worry that taxing services would put Nebraska at an economic disadvantage, but some services can’t be easily purchased over state lines. I can’t take my lawn over to Iowa to get it mowed.

Iowa already taxes haircuts, but even if they didn’t, I’m not getting in the car and going to Iowa to save 4% on a haircut. LB946 offers a compelling vision for one part of major tax reform in Nebraska. After all, the lower we can make the sales tax rate, the less the tax will be a factor in anyone’s daily life.