Principles of Good Tax Policy
I recently had the opportunity of catching up with David Brunori whom I worked with extensively on the Blueprint Nebraska Tax Modernization plan. David is nationally known as a journalist, author, educator, and lawyer who specializes in state and local tax policy.
In our podcast hosted by Jim Vokal and the Platte Institute, David and I talked about recent national public policy trends, as well as known and rumored proposals in the Cornhusker State to restructure the tax code and reduce the property tax burden.
During my time as Chair of the Revenue Committee, I frequently heard the comparison of the state’s overall tax burden to an uneven three-legged stool, with the legs represented by property, income, and sales taxes. The suggestion is that the stool is uneven because the overall property tax burden is more than the burden of both income tax and sales tax. But while the imagery of a wobbly stool may perfectly describe the problem, more careful consideration should be given to how best to “even out” the legs of the stool without violating the principles of good tax policy and harming sustainable economic growth and individual prosperity.
Foundational to the discussion, most of the State of Nebraska’s tax revenues come from income and sales taxes and are largely used for statewide needs including health and human services (e.g., Medicaid), state aid to public schools, higher education, and public safety. However, like other states, Nebraska’s local property tax revenues come from local government levies (e.g., counties, schools, and other special districts) for the express purpose of satisfying the unique and diverse needs of local communities.
The latest news out of Lincoln suggests that serious consideration is being given to broadening the State’s sales tax base (i.e., removing sales tax exemptions on goods and services) and increasing its sales tax rate in order to provide local property tax relief. Although broadening the State’s sales tax base and reducing the local property tax burden are both commendable goals, the two are not interchangeable. Subsidizing local governments with the State’s sales tax revenues collected for statewide purposes is unwise and unfair and will prove ineffective without enforceable controls on local taxing authorities.
Another but bolder consideration for local property tax relief percolating in the state is the EPIC (Consumption Tax) Option. Rather than simply redistributing tax revenues between the State of Nebraska and local governments, this approach replaces all State and local taxes with a single tax on services and goods. Beyond supplanting local control and subsidizing local governments, this ill-contrived plan will be the first of its kind in the country and will result in a consumption rate much higher than the current state sales tax rate.
If solving Nebraska’s property tax problem were easy, we would have fixed it long ago. Unfortunately, too many of us have come to believe that the state’s government – that is the Governor and the Legislature – have responsibility to correct the local property tax problem created by local governments and local officeholders.
Instead of relying on tax shifts and promises of a quick fix, local property tax relief is best solved by the disciplined actions of locally elected officials under the informed and watchful eye of the local taxpayer and property owner. Here are a few examples of how Nebraska can further modernize its income and sales tax codes and set a course for local accountability and lasting property tax relief.
- Continue to draw down the state corporate and individual tax rates to create behaviors that lead to economic growth and competitiveness. As a complement to this action, legislators should also work to cautiously expand the state’s sales tax base without taxing business inputs or increasing the overall sales tax rate.
- Promote transparency in the budgeting process by protecting and promoting programs like Truth-in-Taxation. This bill was passed by the Legislature in 2021 to protect Nebraskans from automatic tax increases by political subdivisions by notifying them and holding public meetings when property values increase.
- Create greater taxpayer involvement at the polls by scheduling major bonding referendums for the general election instead of holding a special election.
- Avoid creating local mandates that inadvertently force increases in local property taxes and stay away from saddling local government with costs better suited for state government. An example of the latter is LB783 that repealed the community college property tax, replacing it with funding through the state’s general fund.
- Work towards comprehensive modernization of property tax practices that includes improving how taxable value is measured, setting firm budgetary and tax rate limitations, and considering whether to continue past property-exemption practices.
Jim Smith is Chief Strategy Officer at the Platte Institute and previously served as President of Blueprint Nebraska. Jim served two terms in the Nebraska Unicameral Legislature where he chaired the Transportation and Telecommunications Committee and the Revenue Committee.