LB313 – Increase the sales tax rate and provide property tax credits
Good afternoon, Chairman Smith and members of the Revenue Committee. My name is Nicole Fox, and I am the Director of Government Relations for the Platte Institute.
LB 313 proposes to increase the state sales tax rate to 6.5%, increase the earned income tax credit to 17% and creates the Excess Revenue Property Tax Credit Fund. The Platte Institute opposes LB 313. My testimony today will focus on our opposition to increasing the state sales tax rate as the Platte Institute feels this is counterintuitive to expert recommendations given to grow Nebraska’s economy.
The Tax Foundation is the nation’s leading independent tax policy research organization. Each year, they publish a State Business Tax Climate Index as an indicator as to which states’ tax systems are the most hospitable to business and economic growth. The index is built from 5 components, individual income tax, corporate income tax, unemployment insurance tax, property tax and sales tax. The Tax Foundation’s 2017 State Business Tax Climate Index ranks Nebraska 25th overall and 12th in terms of sales tax. A sales tax rate increase could result in a poorer sales tax component ranking, therefore negatively affecting Nebraska’s overall Business Tax Climate Index.
Among those states with a sales tax, those with general low rates and broad bases, and those who avoid taxing business inputs do best. A state with a high sales tax rate reduces demand for in-state retail sales. In order to make their money go farther, consumers will turn more frequently to cross-border, catalog or on-line purchases to save money, resulting in less business activity in the state.
LB 313 would impose a sales tax increase that would make us an outlier compared with our neighboring states. At 6.5%, this is how Nebraska would compare:
Iowa = 6.0%
Missouri = 4.225%
Kansas = 6.5%
Colorado = 2.9%
Wyoming = 4.0%
South Dakota = 4.5%
In the early years of sales tax, the consumer economy was primarily transactions of goods, but in recent decades, the consumer economy has changed and now includes far more services. Services represent nearly 2/3 of consumption and largely go untaxed. In its “A 21st Century Tax Code for Nebraska,” the Tax Foundation noted that extending the sales-tax base to include services would reduce pressure on any individual item in the tax base and increase the revenue generated, even at a lower tax rate. This principle of including services in the sales tax base is agreed to across the philosophical spectrum among tax policy experts. The Platte Institute agrees that the state’s tax base needs to be updated to account for the momentum towards a more service-based economy, with new revenue going towards comprehensive tax relief. The Tax Foundation’s research states that income taxes are the most harmful to a state.
The process that occurs when a tax that has been levied on one person or group is transferred to instead be paid for by others is a tax shift. LB 313 uses higher sales taxes to increase property tax credit funding. LB 313 does not reduce the property taxes through decreased levies and valuations. Increasing the state sales tax in order to provide property tax relief is a prime example of a tax shift. Sales taxes affect everyone. Property taxes do not. Purchases made by hard-working Nebraskans of all income levels will benefit only those who are able to afford to own property. That means that workers making consumer purchases in our state will bear the burden so that a few can benefit from property tax relief.
Increasing tax rates on hard-working Nebraskans is contrary to growing a state’s economy. Nebraskans already face a high tax burden. We can’t attract more people to Nebraska by having policies that are hostile to people earning an income. The Platte Institute feels that increasing the state sales tax rate as a means of revenue generation for property tax relief is poor tax policy and a tax shift — raising the state sales tax rate will hinder our growth and worsen our uncompetitive position in the Midwest. Instead, we feel that broadening our sales tax base to include the increasing service sector from which consumers make purchases as well as controlling spending is a more responsible and proven means to improve Nebraska’s economic outlook. The Platte Institute feels that any increased revenue should go to comprehensive tax relief.
Thank you for the opportunity to testify today. I am happy to answer any questions the committee may have.