Making Cents: Why Nebraska Should Modernize the Sales Tax, Pt. 1

Making Cents: Why Nebraska Should Modernize the Sales Tax, Pt. 1

Most people take for granted that the sales tax is the tax we pay when we buy things. But if you look carefully at your receipts, you’ll begin to notice most of the things you buy in Nebraska don’t have sales tax collected on them. This is also known as a sales tax exemption.

On one hand, you might say “hey, that’s great, one place I’m finally getting a tax break.” On the other hand, Nebraska has many other high tax rates, and complex taxes that other states just don’t have.

In the 2019-2020 fiscal year, about 58% of Nebraska’s state general fund revenue came from income taxes, while 38% was sales tax. That’s a difference of just under $1 billion. On top of that, Nebraska local governments levy $4.5 billion in local property taxes annually.  

Sales tax exemptions contribute to these problems, putting higher taxes on our workforce, housing, and investing in Nebraska. 

Today we’re going to discuss the reasons why Nebraska should modernize its sales tax so that there are fewer exemptions and more options for removing barriers in Nebraska’s tax system. There are actually more reasons than I have time to share with you on a single episode of Nebraskanomics, so this will be a two-part series.

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

Here are the three reasons we’ll discuss on this episode:

  1. As our episode title suggests, a modernized sales tax makes more sense than the tax system we have now.
  2. As times and technologies change, so should our sales tax base.
  3. Virtually all tax and economic policy experts agree with the principles of sales tax modernization.

#1. A modernized sales tax makes more sense than the tax system we have now.

Let’s clarify what the sales tax is supposed to be. It’s a way to help pay for the government services we all benefit from by collecting a percentage of how much consumers spend in Nebraska. But right now, the sales tax picks winners and losers in some arbitrary ways. Depending on what you like to buy, you might pay more or less sales tax. 

One of the most noticeable imbalances is among services.

For example, someone who owns an outdoor swimming pool might hire a pool cleaner. The price of the service for cleaning the pool is tax-free.

Meanwhile, someone without a pool might want to keep cool by buying an outside water toy, like a slide or sprinkler. But because that purchase is a good and not a service, they’ll pay sales tax.

Now, nobody in the government intentionally decided the tax code should favor pool cleaning over Slip ‘n Slides. Sales taxes came about in the U.S. during the Depression-era when the economy was mainly goods-based, so that’s what sales taxes were designed around.

In modern times, many service providers already collect sales tax if they sell goods. For example, in Nebraska, shampoo sold at a salon is taxed, but a haircut isn’t.

In addition to the sales tax being based on a 1930s concept of the economy, some purchases have been actively exempted from the sales tax over time. In the 1980s, Nebraska removed groceries from the sales tax base. Now, a lot of people don’t like the idea of paying sales tax on groceries, but even this exemption has contradictions.

A lot of people informally call sales taxes on groceries a tax on food, but there’s plenty of food purchased in Nebraska that’s already taxable. Whether you pay tax depends on how and where you buy your food.

If you buy a hot rotisserie chicken to take home for dinner in Omaha, you’re taxed as if you went out to eat, because the sale includes sales tax and restaurant tax.

Or let’s say you want to buy a small bag of potato chips and a bottle of your favorite soft drink. At a fast-food place, it’s taxed as a prepared restaurant meal. The exact same items at a grocery store, though, are exempt from sales tax as groceries.

Or let’s say you want to bring your co-workers something to eat for a morning meeting, and you stop at a drive-thru along the way to buy everyone breakfast sandwiches. If you spent $20, at a 7% tax rate, you’ll have to add $1.40 in sales tax to the purchase.

But let’s say instead that the drive-thru window isn’t selling breakfast sandwiches, but boxes of doughnuts. 

Well, under Nebraska’s sales tax laws, doughnuts are considered a bakery item not for immediate consumption. So, even though you didn’t buy them at a grocery store, they’re treated like unprepared groceries, and are tax-free.

All of these examples raise the same basic point. Why should the person buying breakfast sandwiches contribute $1.40 to the cost of paying for state and local government, and the person buying doughnuts pay $0? 

There is no real economic reason, of course. Policymakers often think sales tax exemptions make the sales tax fairer when buying necessities, but that’s actually backwards. 

We have a system where someone who can afford a grocery cart full of lobster tails pays zero sales tax, while we make taxpayers out of the person whose idea of dinner is the hot dog combo at Sam’s Club.

Having so many exemptions on consumer spending not only makes the sales tax more unfair and confusing, it also makes the whole tax system more confusing, because you need other taxes to make up for the lost revenue. 

If the state of Nebraska suddenly had $1 billion more from ending sales tax exemptions, there are a lot of outdated taxes impacting economic opportunity that could be taken off the books, or at least scaled back. There’s also a lot we could do to make sure nobody was unduly burdened by the sales tax.

For example, federal law already prohibits sales taxes from being charged on purchases using SNAP or WIC benefits, so the state could build upon that policy to make sure the sales tax was being collected in a fair way.

This would make the experience of paying taxes in Nebraska less of a hassle for everyone. 

#2. As times and technologies change, so should our sales tax base.

Of course, I don’t expect that Nebraska will ever collect sales tax on everything consumers buy, but there are examples we can follow for making the system more modern. 

Countries all over the world have broad consumption taxes. Did you know that New Zealand has a 15% consumption tax on goods and services? That’s hefty by U.S. standards. 

But they also don’t have an inheritance tax, a capital gains tax, or even the separate payroll taxes we all pay into Social Security and Medicare.

And in addition to the Tax Foundation giving the country high marks for its tax competitiveness, New Zealand’s government actively promotes the benefits of its tax structure for attracting international investment and migration.  

But we don’t have to look all the way around the globe to find a model for Nebraska. 

In neighboring South Dakota, the sales tax covers many more goods and services. 62% of the state’s personal income is subject to sales tax. In Nebraska, our sales tax captures just under half as much economic activity, with 34% in the tax base. When it comes to services, South Dakota collects sales tax on 152 kinds of services, while Nebraska collects tax on 81.

Making this change might sound new and different, but every state in the country recently had to address a similar problem with their sales tax. For years, online sales were treated like old-school catalog purchases, and collecting sales tax was only the retailer’s responsibility if they had a presence in your state, like a store, or a warehouse.

The U.S. Supreme Court overturned that precedent in 2018, providing guidelines for how states could collect remote seller sales taxes. Today, every state has a process for collecting these sales taxes. It turned out to be especially helpful for revenues during the COVID-19 pandemic, as many consumers turned to online shopping.

Of course, paying sales taxes on purchases you weren’t before can seem annoying, but the sales tax should keep up with changes in the economy. The growth of the service sector is as significant in our daily lives as the growth of e-commerce. 

You might also remember a time when you’d go to a place called a video store to rent or buy a movie to watch at home. Those purchases were taxable, of course, but in some states, online services for video streaming still aren’t taxed.

Or as another example, people who buy their own car or motor vehicle pay a sales tax on the final purchase price. But if you get around using ridesharing services, which didn’t exist too many years ago, your fare is not currently taxed.

Some people will complain that collecting sales tax on streaming or ridesharing is a special tax, but it’s not. It’s really just collecting the same sales tax people have always paid on those equivalent purchases before. While Nebraska does not currently collect sales tax on ridesharing or other ride hailing services, to the state’s credit, it already collects sales tax on digital purchases and many online subscriptions.

Clearly, at the Platte Institute, we think sales tax modernization makes a ton of sense. It can make the tax system fairer, simpler, and more oriented toward economic growth for the benefit of taxpayers and tax collectors alike. 

#3. Virtually all tax and economic policy experts agree with the principles of sales tax modernization.

We’re far from the only people who agree with this idea. Although there are different schools of economic thought, almost everyone who studies taxes is on the same page about what the ideal sales tax should look like, and it’s not the one most states have today.

These are two principles nearly universally agreed upon:

  1. The ideal sales tax should apply to consumer goods and services alike
  2. Business inputs, or business-to-business transactions, should not be included in the sales tax

It might be confusing to think about at first, but this means the sales tax is both too narrow in some areas, and too broad in others. Almost every year in the Legislature, lawmakers find examples of business purchases that shouldn’t be included in the sales tax.

For instance, farmers are sometimes criticized for not paying enough sales tax. But unlike other exemptions, preventing a tax on business items like seed, fertilizer, energy, water, and all the equipment needed to produce a bushel of corn does make economic sense. Otherwise, the cost of the tax will be embedded into the final price of the product several times over.

So as states modernize their sales tax, avoiding taxes on inputs is just as important as addressing exemptions on what consumers buy.

So today we discussed how a modernized sales tax makes more sense than the tax system we have now, that as times and technologies change, so should our sales tax base, and that virtually all tax and economic policy experts agree with the principles of sales tax modernization.

But even though there is broad agreement on these principles, that doesn’t mean tax experts agree on what should be done with the money the sales tax raises. Tune in to our next episode, where I’ll discuss how sales tax modernization can help Nebraska have a better tax system that is simple, sustainable, and supports economic growth.


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

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