Legislative Testimony for LR300CA: Constitutional amendment to prohibit all forms of taxation other than a consumption tax

Good afternoon, Chairwoman Linehan and members of the Revenue Committee. I’m Nicole Fox, Director of Government Relations at the Platte Institute and I am testifying in a neutral capacity on LR300CA. Thank you to Sen. Erdman for proposing this constitutional amendment, which is prompting a needed discussion about creating a more complete vision for tax reform in Nebraska.

Nebraska’s economic competitiveness and the simplicity of our tax code would improve substantially if the Legislature and voters chose to forgo state income taxes and local property taxes.

Since as far back as 2013, the Platte Institute and the Tax Foundation have recommended that the Legislature remove exemptions in the state and local sales tax and use those revenues to reduce the state’s high tax rates.

However, the proposal in LR300CA would be new territory as it relates to eliminating property taxes, since all other states currently levy them.

A key reason is stability. Even in states with low property taxes, local governments know they can count on them when budgeting because real property can’t be moved outside their jurisdiction.

But if the Legislature wanted to replace property taxes altogether, or even significantly reduce local property tax authority, using a broad-based consumption tax is a good alternative. For example, neighboring South Dakota has no income tax and a broad-based sales tax, and their state revenues are ranked the most stable.

The proposed amendment to LR300CA also properly clarifies that business-to-business transactions should not be subject to consumption or sales tax. Business inputs should not be taxed in order to avoid tax pyramiding.

One difficulty of implementing this policy, however, is that even with its very broad base, the consumption tax rate needed to replace all other taxes except for motor fuel excise tax would have to be among the country’s highest. Granted, LR300CA would be giving us a tax rate of zero on our income, property, and much more, so voters would have the chance to decide if that was worth the trade-off.

And while it’s a good thing that the proposed amendment allows counties, cities, townships, and villages to have a consumption tax to make local financial decisions, this means the combined tax rate will be even higher, particularly in communities that don’t have a lot of retail sales.

Because a relatively high rate would fall on nearly all of our consumption, there will certainly be border bleed for goods and services that can be purchased out of state.

That’s one reason it’s worth bearing in mind that as favorably as we would look upon the prospect of ending the income and property tax, even a reduction of tax rates with a more modest consumption tax would go a long way to improving Nebraska’s overall tax climate.

States without income or sales tax do tend to rank well in tax climate competitiveness rankings, but there are also states with all of the major taxes, like Utah or Indiana, that still rank among the best because they employ broad bases and low rates.

However, if voters should decide to approve a constitutional amendment for a 35% credit of property taxes, the Legislature may need to consider using an approach closer to LR300CA in order to limit how much the state would need to pay in rebates for local property taxes.