Keep prices low and businesses competitive by avoiding taxation on business purchases
A well-structured retail sales tax raises revenue with minimal distortion to economic decision-making. While the income tax creates a disincentivize to work, save, and invest, the sales tax does not create these disincentives. Therefore, the retail sales tax raises revenue with comparably less economic cost than income taxes.
Nebraska’s retail sales tax ranks #9 for most competitive in the country according to Tax Foundation’s competitiveness index, making it the best element of Nebraska’s tax code. But Nebraska will fall in the tax rankings if the sales tax rate is raised, or if the tax is extended to business purchases. The retail sales tax should remain focused on retail sales to consumers rather than sales to businesses. Nebraska should neither raise the sales tax rate nor extend the sales tax to business purchases such as digital advertisements.
Maintain Nebraska’s competitive sales tax rate
As Platte Institute covered earlier this week in our Options and Tradeoffs blog, raising the state sales tax rate would worsen an historical bias in Nebraska’s tax code. That historical bias favors service-producing industries over goods-producing industries. Tax rate hikes always hurt competitiveness, especially when they worsen an existing imbalance in the tax code. The right way to fix the sales tax is to apply it to more retail service consumption, broadening the sales tax base in a way that will allow for general tax rate cuts.
Avoid taxing digital advertisements and farm repair parts to keep consumer costs low
When businesses make purchases, those costs factor into the final cost of consumer goods and services. Businesses can’t sell products for lower than the cost to produce and advertise those products. Therefore, in order to keep consumer prices low, state government should avoid taxing business purchases. Tax economists widely agree that taxes on business purchases get factored into final consumer prices in a non-transparent way that is harmful to both Nebraska businesses and consumers.
After years of soaring inflation caused by the federal government, state and federal officials should be focused on solutions to keep consumer costs low. One way Nebraska lawmakers can keep costs low is to avoid taxing business purchases, because taxing business purchases ultimately raises consumer costs.
One of the most important purchases that business make is the purchase of advertisements. Indeed, businesses would be hard-pressed to sell their products if they weren’t advertising their products. Today, the digital world is the center of advertising world, and so businesses purchase online ads. These ads are sold on platforms like Facebook, Twitter, and Google.
LB 1310 and LB 1354 would impose a 7.5% sales tax on business purchases of advertisements from large companies with U.S. ad revenue over $1 billion. In other words, the newly-proposed tax would be focused on the big platforms where Nebraska businesses of all sizes are likely to find the greatest value from ad purchases.
In addition, LB 1308 as proposed would impose sales tax on repair and replacement parts for agricultural machinery. Taxing farm machine parts is another straightforward example of taxing business inputs. The retail sales tax should be imposed on the final consumption of farm goods such as food, clothing, and other retail materials.
Taxing business advertisements will drive up the cost of customer acquisition for Nebraska businesses. Therefore, taxing business advertisements will result in higher business costs, higher costs for Nebraska consumers, and a less competitive marketplace. Furthermore, Nebraska’s neighbors do not tax business advertisements, so Nebraska businesses will be at a disadvantage compared to neighboring competitors. Taxing farm purchases will increase the cost of production in Nebraska and unnecessarily bias the tax code in favor of purchasing brand new farm equipment rather than fixing old equipment.
If Nebraska taxes digital advertisements, then both Nebraska businesses and consumers will ultimately pay higher prices. And what’s worse is that Nebraska consumers will not realize that the higher prices are in part due to a non-transparent state tax that drives up business costs. Nebraska businesses will also be less competitive.
Sales tax pyramiding drives up costs in a non-transparent way
The harmful layering of taxes upon taxes is called tax pyramiding. Sales tax pyramiding occurs when businesses purchases are taxed again and again before the business finally sells a product to a retail consumer. Even though the consumer only sees the retail sales tax, all those other layers of sales taxation drive up the final cost of the product.
Consumers don’t see all those background levels of taxation, but their pocketbook will ultimately feel the higher costs. If a business pays a tax on something it buys, that cost will ultimately end up in the final product in some way, shape, or form.
Sales tax pyramiding harms economic efficiency and drives up consumer costs. The last thing Nebraska lawmakers should do is drive up consumer costs through new sales tax pyramiding. The federal government is to blame for high prices and inflation. Nebraska’s fiscally prudent state government should not make itself culpable for a problem caused by the Feds.
Ongoing legal challenges
Maryland created the first-in-the-nation digital advertisement tax in early 2021. Since then, the tax has been under constant legal challenge. Even now, a Maryland state court is considering a legal objection based upon the argument that the tax is illegally being imposed on digital advertisements but not other ads. And a federal court is considering an argument that the tax is illegal because it violates the First Amendment. While it is uncertain how these legal issues will resolve, it is imprudent for Nebraska to create an economically harmful tax that could lead to substantial litigation.
Nebraska lawmakers have made great strides to improve the state tax code in recent years. And even though Nebraska has not yet reformed its sales tax, the sales tax remains the most competitive component of Nebraska’s overall tax code.
Nebraska can continue to make great progress by reforming its property tax in 2024. But lawmakers should avoid worsening the sales tax in order to improve the property tax. Nebraska should keep its competitive sales tax rate, and avoid any new sales taxation on business inputs like digital advertisements.