Making Cents: Why Nebraska Should Modernize the Sales Tax, Pt. 2

In our last episode, we discussed some of the practical and economic reasons why Nebraska should eliminate more of its sales tax exemptions. Now, let’s talk about crafting a vision for a better tax system, and how modernizing the sales tax fits into any plan to make bold changes in our state.

You can watch the video on YouTube or listen to the podcast episode on Apple Podcasts or Spotify.

Here’s five reasons why modernizing the sales tax is a key for tax reform in Nebraska.

1. Reforming the sales tax can make Nebraska more economically competitive.
2. Ending exemptions is a far better alternative than raising tax rates.
3. Modernization helps overcome penny pinching in the Unicameral.
4. Nebraska will have multiple tax reform options.
5. Local governments will directly benefit from a modernized sales tax base.

#1. Reforming the sales tax can make Nebraska more economically competitive.

Almost everyone in academic circles agrees with collecting sales taxes on goods and services alike, but where the disagreement begins is what to do with the money raised.

Our position at the Platte Institute is that the revenues should be used as much as possible to bring down the state’s high tax rates. These revenues will reform or eliminate taxes that make us uncompetitive with other states. That will put Nebraska in a better position to attract workforce talent, create new businesses, and help families put down roots in our state.

On the other hand, there are those who believe tax reform is either not urgent, or not as urgent as using these dollars primarily to raise government spending.

Modernization can help balance these two concerns because the sales tax is a significant and stable way to tie together our economic growth and the growth of government.

Most taxpayers in Nebraska want to contribute to the state and the community, but there is also a growing sense that the present system is not reasonable compared to most other states. This undermines the sense of economic security in Nebraska.

Nebraskans feel demoralized when they see consecutive years where incomes might go up 2%, but some government budgets get a raise of 5, 6, or 7%.

If we look at states that have had this continue for a long time, many are having a serious problem retaining or attracting people and opportunities. Illinois may be the most populous state in the Midwest today, but it shrank in population over the past decade.  

Tax modernization can help make a stronger case for why people should choose Nebraska and feel confident about the state’s future. By relying more on sales taxes over property or income taxes, Nebraskans can pay taxes they feel more comfortable with, in more reasonable increments than they do now.

Many states have even made a long-term commitment to tax reform by using tax triggers, which continue to reduce tax rates over the years as state revenues grow. 

Back in 2013, North Carolina had a higher personal income tax than Nebraska and a corporate income tax that was not much lower. Through incremental efforts, lawmakers reduced the tax rates to among the lowest in their region. Before the end of this decade, North Carolina may eliminate its corporate tax entirely, and levy one of the country’s lowest personal income taxes, all while maintaining lower property taxes and comparable sales tax rates to Nebraska. 

To make sure states are also paying their bills, triggers like this can be tied to a required increase in state government tax receipts, as well as how much cash the state has saved in its rainy-day fund.   

These are not new ideas. Senators in Lincoln have even debated them in the past. But as the years have gone by, states all over the country have shown us ways to have broad stable funding for the services Nebraskans expect. This would create a tax system that is welcoming to everyone who wants the opportunity to succeed in our state.

With a growing sense of urgency to deliver on tax changes, especially on property taxes, there has always been the risk that Nebraska would adopt brazen tax increases that don’t solve the basic problem. 

#2. Ending exemptions is a far better alternative than raising tax rates.

At first glance, a lot of taxpayers might think having to pay sales tax on a haircut, calling an Uber, or taking their pet to the veterinarian would be a rotten deal for them. However, it can also enable Nebraska to have the tax system most Nebraskans say they really want.  

Taxpayers are right to be skeptical of any tax they’re not paying now. Historically, the entire reason Nebraska even has income and sales taxes is because people were once promised it would help in the fight against property taxes. Getting the details of reform right is critically important.

However, given what Nebraskans prioritize—meaningfully lower property taxes, no income taxes on their retirement incomes, or lower income taxes in general—the sales tax is really the only place where you’ll be able to get enough stable revenue to make up the difference and make Nebraska a better place to get a good job or a run a business at the same time.

You can do both these things without raising the sales tax rate, or any other tax rate. This is a benefit to Nebraska because we won’t be adversely impacted relative to other states. 

Why? 

To begin with, services are often consumed close to home. But if you visit Nebraska’s neighboring states, you’ll find that plenty of goods and services that we don’t tax in Nebraska are already taxed in states nearby, sometimes at higher rates. This means people aren’t going to pick up and leave Nebraska very frequently to make these purchases.

Since revenues from a broader sales tax will increase as the economy grows, lawmakers will have an alternative to frequent demands for higher tax rates in Lincoln.

Also, the more we can do to end outdated exemptions in the sales tax, the bigger and bolder tax reforms in Nebraska can be. We have a lot of other taxes Nebraskans care about, and several that create extra red tape for Nebraska businesses and entrepreneurs. 

#3. Modernization helps overcome penny pinching in the Unicameral.

The 2021 Nebraska Legislature is a great case study for how relying only on current tax revenues ties the hands of tax reformers. 2021 was one of the best years for tax-cutting in Nebraska, and many other states, in a long time. 

Revenues came in strong following the recovery from the COVID-19 pandemic. Here at home, lawmakers were able to stash away more money for property tax relief programs, top off the state’s emergency cash reserve, cut the corporate income tax, and commit to ending state income taxes on military retirement pay and Social Security.

But to accomplish any of these things with currently available revenue, the Legislature had to stretch out the implementation of their proposals. The corporate income tax rate is slated to drop just one percentage point over four years, while the end of the tax on Social Security may take up to a decade to fully realize.

Even in its best revenue situation in a long time, lawmakers in Lincoln were only able to do so much to change the course of our tax system with their current tax receipts. 

Now, gradual change is not automatically a bad thing. It’s good to make plans to reform the tax code as the economy grows, and as we fund essential public services. 

However, other states are making more ambitious tax reforms today and the world could be a very different place 10 or 15 years from now. Taxpayers and policymakers may not be well-served by waiting so long in every case, and a broader sales tax can speed up the process in a responsible way.

#4. Nebraska will have multiple tax reform options.

If taxpayers in Nebraska really find paying sales taxes to be more objectionable than property taxes or income taxes, there is an off-ramp that could work. We could just take the money from ending exemptions and cut the sales tax as low as we can, or at least reduce sales taxes as part of a larger package.

From an economic standpoint, low rates for any tax can be good, not just because we pay less tax, but because those taxes become less likely to influence our economic decision-making in a harmful or counterproductive way. 

When we’ve surveyed Nebraskans about their tax priorities, the sales tax is almost always seen as the favored alternative to our current taxes. It’s low on the list of taxes that worry taxpayers.

That’s understandable because Nebraska’s sales tax rate is already competitive nationally. The state and local average sales tax rate in Nebraska is about 7%, which is the 29th highest, so it compares more favorably than our other taxes.

All over the country, states have used a broader sales tax to facilitate pro-growth tax reforms. But it’s important to remember that it’s not just the state budget and economy that can benefit.

#5. Local governments will directly benefit from a modernized sales tax base.

Sales that are taxable at the state level are also taxable in cities and counties with local sales tax authority.

When I drive out to Kearney or Grand Island, I always make my first pit stop in York. The City of York has a 2% local sales tax. But as I discussed on our previous episode, plenty of things we buy passing through a town like York can be tax-free with current sales tax exemptions. 

If I stop at a gas station and fill up, I do pay gas tax for my use of the roads, but I don’t pay any sales tax on the gas. In some states, there is sales tax on gasoline. 

That’s just the start. If I walk inside the gas station and buy a bottle of pop and a candy bar, those sales are exempt, too. 

If we modernize the sales tax, a city like York would also get a share of the sales that we added to the tax base. I predict expanding the sales tax to gasoline would be a tough fight, but I would guess a city situated on the interstate like York would like to be able to collect 2% of the sales of soft drinks and candy bars, and so would their property taxpayers.

Furthermore, under Nebraska’s current tax laws, county governments are not allowed to collect sales taxes within any area where cities also collect a sales tax. That means York County doesn’t have the ability to collect a share of the revenue from sales in its most populated area. 

It would take an act of the Legislature to change this situation. However, we see no reason why county voters shouldn’t be able to decide if they would rather pay a local sales tax throughout the county to reduce county property tax or other harmful taxes. 

Once again, there is more than one way for local governments to use this revenue. Maybe voters in your city or county think area property taxes are okay, and you’d like to just have a lower sales tax instead. 

Maybe some cities or counties would want to try an experiment and operate their subdivision with sales taxes instead of property taxes. Modernizing the sales tax in a major way could open the door to those options.

Once again, here are the five reasons why sales tax modernization makes sense.

1. Reforming the sales tax can make Nebraska more economically competitive.
2. Ending exemptions is a far better alternative than raising tax rates.
3. Modernization helps overcome penny pinching in the Unicameral.
4. Nebraska will have multiple tax reform options.
5. Local governments will directly benefit from a modernized sales tax base.

Of course, this is not an exhaustive list, and we welcome your questions or comments. But changing the way we pay for government in Nebraska will allow our state to compete with fast-growing states that have more attractive tax policies, while maintaining our commitment to the public services Nebraskans value.

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If you want more economic freedom in Nebraska, please visit www.PlatteInstitute.org to make a donation to help fund our research and advocacy. Or you can subscribe to our newsletter and learn about today’s most important issues facing Nebraskans.

It’s time to stop the status quo. Let’s remove economic barriers and make Nebraskans proud.