Tax Foundation: Proposed Tax Rate Increases Undo Impact of Property Tax Cuts

The Tax Foundation, which studies tax policy issues across the country and internationally, paid a visit to Nebraska this week to weigh in on the Revenue Committee’s property tax reform plan, AM1381 to Legislative Bill 289.

Tax Foundation Executive Vice President Joe Bishop-Henchman, who has been engaged in Nebraska’s tax reform discussions for more than six years, spoke in a neutral capacity at the hearing.

AM1381 would fund a variety of education spending reforms and property tax limits by calling on the Legislature to provide additional aid through the existing property tax credit fund, along with increases to Nebraska’s state sales tax and cigarette excise tax.

The state sales tax would increase from 5.5% to 6.25%, and the cigarette tax would increase 36 cents a pack, from the current rate of 64 cents, to $1.00.

Bishop-Henchman said those tax rate increases would do more harm than good, even with the amendment’s proposed property tax cuts.

“Put simply, Nebraska has high income, business, and property taxes. After this bill, Nebraska would still have high income, business, and property taxes, and also high sales taxes,” Bishop-Henchman said.  

The Tax Foundation issues an annual State Business Tax Climate Index that tracks state tax code factors including the scope of state tax bases and the rates states charge.

Currently, Nebraska ranks 24^th overall. One reason for the state’s middle of the pack ranking is its relatively low state excise taxes and a combined state and local sales tax rate that is about average.

But under AM1381, Nebraska’s combined sales tax rate would rise from the 25^th highest to the 17^th highest, reducing Nebraska’s overall ranking on the State Business Tax Climate Index, while only improving its property tax ranking very slightly.

“We project Nebraska would fall on our State Business Tax Climate Index from 24^th best to either 26^th or 29^th, depending on if the property tax cuts fully materialize. If 29^th, that would have the state fall below Kansas on that evaluation of tax structures,” Bishop-Henchman said.

Bishop-Henchman suggested senators could instead consider expanding the state’s sales tax base to include more exempt goods and services, which many other states have undertaken in an effort to modernize their tax codes.

One factor that could hold back that effort, however, is insisting on only lifting sales tax exemptions on sales deemed not to be “necessities.”    

“Every sale of a good or service will be considered a necessity by someone,” Bishop-Henchman, said, and only picking a small number of exemptions to remove leaves those selected feeling like they’ve been unfairly targeted.

Bishop-Henchman said that while a broad expansion of the sales tax base would attract significantly more opposition from industries, lawmakers would be able to state that everyone is being included in the tax reform effort.

In addition to the Platte Institute, a wide variety of policy organizations at the hearing echoed the Tax Foundation’s view that a broader sales tax base expansion would be a desirable alternative to the currently proposed three-quarter cent increase in the sales tax rate.