Building a Better Tax Base
What should be the concrete goal for tax reform in Nebraska? People would probably say getting to keep more of their money. Before the Legislature recently advanced a $20 million property tax credit on Ag land, debate broke out on the need for comprehensive reforms including Nebraska’s other taxpayers.
That’s easier said than done. As taxpayers want more zeroes on the end of their tax savings, they also want someone else to keep paying for programs they like. Of course, there is no one else to pay your taxes for you. Paring back undesirable taxes for all Nebraskans requires spending restraint, different taxes, or both. This differs notably from special interest exemptions, for which the costs are dispersed among current taxpayers.
Maybe the better question to start with is what the overall goal for taxation in Nebraska should be.
It sounds obvious that any tax is meant to raise money for the government. Taxes, after all, are the price of government spending and come in many forms: on real estate, sales, income, personal property, inheritances, vehicles, occupations, telecommunications, fuel, and cigarettes, to name a few.
Though all of these taxes have the capacity to raise revenue, not all have the same fiscal or economic impact. Some are less stable by virtue of the activity taxed. Others burden economic growth more by adding compliance costs, or reducing rewards for work, investment, or savings.
Personal property tax, for example, is more economically harmful than real estate property tax. The tax places a higher price on productive business equipment. Farmers and landowners with no love for real estate tax can agree that without inputs and equipment, little income or tax value can be realized from Ag land alone.
The goal of taxation in Nebraska, then, should be to raise needed revenue in the least economically harmful manner so that our wages, workforce, population, and ultimately our tax base, have the best chance to grow.
Tax policies that are simple, transparent, and neutral between different kinds of taxpayers offer the best way to do this. When levied across a broad base of taxpayers, even low tax rates can produce stable revenues to meet the public’s needs.
Despite collecting no personal or corporate income tax, personal property tax, or inheritance tax, South Dakota boasts the country’s most stable revenue stream thanks to a sales tax on more services than all but three states. Their four percent state sales tax rate is also one of the lowest in the country.
2007 data from the Federation of Tax Administrators show services like storage facilities, limousines, taxis, hair salons, landscaping, investment counseling, massage services, tax preparation, and about 70 others are exempt from sales tax in Nebraska, but taxed in South Dakota.
It’s nice to be the person not paying or collecting taxes, but there is no tax policy justification for different treatment of goods and services. At the same time, there’s little to be gained for the tax base by singling out an item or group of taxpayers.
The Lincoln Journal Star writes that pop and candy should be taxed, arguing they are not food. The USDA disagrees, saying sweets are food items under SNAP (food stamps, which are tax-free). But when it comes to raising revenue, there’s no logic to narrowing the base by only taxing pop and candy, but not chips, doughnuts, ice cream, or Brussels sprouts. Best to go all in, like South Dakota, or just stay away from taxing groceries, like most of the country.
Similarly, tax incentives are less of a concern where taxes are fewer, or provide lower rates. Revisiting Nebraska’s incentives, with an interest toward improving the overall tax climate, should also be part of comprehensive tax reform.
Still, there are exemptions that make good economic sense. Sales taxes on business inputs add unnecessary costs to goods that can be avoided if only taxing final sales. Most states also exempt certain retirement incomes to retain residents sensitive to out-migration.
Absent serious spending restraint, scaling back Nebraska’s counterproductive taxes on income and income-generating business property may require reviewing the scope of the state’s tax base. The key will be using revenues for broad-based, pro-growth forms of relief, rather than increasing spending.