LINCOLN — A preliminary proposal to revise Nebraska’s tax system is getting a mix of kudos and criticism, generating little consensus.
While those who represent retirees and low-income groups say the plan would help people afford to live in Nebraska, officials with business, farm and conservative groups say it’s far from ambitious.
“If we’re going to go through this exercise, we ought to do it with purpose and to make Nebraska more competitive,” said Joseph Young of the Greater Omaha Chamber of Commerce, which supports cuts in income taxes. “Let’s make a more significant impact than this approach.”
Said Steve Nelson of the Nebraska Farm Bureau: “We really need to do a lot more with the issues related to property tax.”
Last week a committee of 14 lawmakers looking at possible state tax revisions agreed to study nine possibilities. The goal of the Tax Modernization Committee is to craft a fairer tax system.
The list of proposals amounts to a tax shift of about $60 million, a pretty modest amount compared with the $6.8 billion a year in taxes collected by state and local governments.
The list of beneficiaries is broad — from retirees to farm implement dealers to property taxpayers to corporations — though no group would get a windfall in tax cuts.
But even among state senators who generally agree on the ideas, there were stark differences of opinion about things like tapping the state’s cash reserves or imposing higher taxes on the rich.
State Sen. Galen Hadley of Kearney, committee chairman, called the proposal a “package of ideas” that is a starting point for more discussion.
He said it addresses concerns about high property taxes and unfair taxes on retirees. The complaints have festered for several years, Hadley said, so it’s unreasonable to expect the Legislature to correct them in one year.
“It’s an evolutionary approach to fixing our problems rather than a revolutionary approach,” Hadley said. “It’s a start. We can’t do everything at once.”
A representative of the Lincoln-based Open Sky Policy Institute said the measured approach is a wise one.
“We don’t need to take an economy that’s better than the rest of the country and turn it on its head,” said Renee Fry of Open Sky.
Fry said Kansas adopted tax changes and ended up facing a budget deficit, with little economic growth.
The tax study grew out of the ashes of a bold plan by Gov. Dave Heineman for Nebraska to join nine states that levy no state income taxes.
But Heineman’s route to tax nirvana caused an uproar among business, farm and nonprofit groups. Taxes would have been shifted onto previously tax-xempt hospital beds, business inputs, farm chemicals and seeds. The plan was swiftly killed.
The governor has since joined business groups and the Platte Institute in calling for cuts in income tax rates for individuals and corporations, saying Nebraska’s rates are too high and not competitive with rates in neighboring states.
Heineman declined to comment Friday. A spokeswoman for the governor said the Tax Modernization Committee’s ideas aren’t a final plan yet.
But representatives of the Platte Institute, as well as the Omaha and state chambers of commerce, said while they like the small adjustments in individual and corporate income taxes, Hadley’s ideas don’t go far enough.
They have all pointed to Nebraska’s No. 34 ranking in state business climate by the Tax Foundation as “mediocre” and a sign that the state has a handicap in attracting high-paying jobs and keeping young people from moving away.
“As far as being effective in moving Nebraska in any rankings, it won’t do it,” said Barry Kennedy of the Nebraska Chamber of Commerce and Industry, a major player on state policies.
The state chamber wants cuts in the top individual income tax rate, from 6.84 percent to below 6 percent. It wants the top corporate income tax rate, now at 7.81 percent, to make a similar drop.
The Platte Institute wants those rates even lower, to 5.5 percent, but the tax committee’s ideas don’t call for such reductions.
“This (plan) is not a game changer to make Nebraska more competitive,” said Jim Vokal of the Platte Institute.
The tax ideas have some fans.
Representatives of AARP, which speaks for retirees, and the Appleseed Center, which lobbies for low-income Nebraskans, said they appreciate the proposal because it makes the state tax system less regressive.
Unlike some states, Nebraska taxes utility bills, but a proposed refundable energy tax credit would give about 50,000 lower-income residents a break on those expenses.
The Tax Modernization Committee’s ideas include raising the income threshold at which Social Security income is taxable — from the current $25,000 for an individual and $32,000 for a married couple to $30,000 and $37,000, respectively. It would be the first change to those income brackets in three decades.
Mark Intermill of AARP said the change would reflect the impact of inflation since 1984. Along with a tax break on electric and gas bills, he said, it would help make the overall tax system fairer.
He cited a recent “Who Pays” report by the Institute on Taxation and Economic Policy that called Nebraska’s tax system slightly regressive, with the lowest 20 percent of income earners paying about 11 percent of their income in taxes, while those in the top 1 percent pay about 2 percent.
“Anything that would target relief to lower-income groups would equalize the tax burden across income groups,” Intermill said.
Steve Nelson of the Nebraska Farm Bureau said his group wants to see cuts in local property taxes of more than $405million, about a 12 percent cut. But he added that such major cuts would take more than one year.
Making big changes will be complicated in 2014 because the Legislature meets in a short 60-day session, seven of the 49 senators are up for re-election, and Heineman will be a lame duck in his last year in office.
There’s also a controversial mix of issues to be dealt with, including proposed Medicaid expansion, that could deliver time-killing filibusters and divert attention from tax changes.
Changes under consideration by the Tax Modernization Committee
Return an additional $30 million to taxpayers through an existing property tax credit program. On a home valued at $100,000 for tax purposes, it would add $15 to $20 to the $66 credit that a homeowner will get this year. Lawmakers said that it would be only a one-year tax savings and that the entire property tax credit program should be reviewed. The committee is also considering an alternative that would increase state aid to schools by $30 million.
Impose $60 million in new sales taxes on previously tax-exempt services. Exactly which services would be taxed wasn’t spelled out, but the committee has talked about taxing auto repair labor, landscaping services, haircuts and funeral services, and not services used by businesses.
Provide a sales tax exemption on repair parts for farm machinery — a $9.7 million tax savings that has long been sought by implement dealers and farm groups.
Index income tax brackets for inflation — a mostly revenue-neutral move to ensure that lower- and middle-income taxpayers don’t end up subject to higher tax rates because their incomes rise. The state’s highest income tax rate, 6.84 percent, kicks in at $54,000 of income for a married couple filing jointly — a threshold that has been criticized as too low.
Raise the income threshold at which Nebraskans must pay taxes on Social Security income, providing about $8 million in tax savings for retirees. Right now, the first $25,000 of income for an individual, and $32,000 for a couple, is exempt. But several states totally exempt such income, which leads to low ratings for Nebraska on tax friendliness for retirees.
Provide a refundable energy tax credit for low-income Nebraskans, supplying about $4.5 million in tax savings to about 50,000 households.
Adjust corporate income tax brackets so the highest rate doesn’t kick in until after $250,000 in annual income. That would provide about $5 million in tax savings for smaller businesses.
Provide about $6 million in one-time aid to counties to offset the higher costs of the state’s new juvenile justice program, which shifted significant costs from the state to counties.
Cap itemized income tax deductions at $25,000 for Nebraskans with adjusted gross incomes of $400,000 or more, which would raise about $9million in new tax revenue. The proposal would affect about one-half of 1 percent of the state’s taxpayers, said Sen. Heath Mello of Omaha. The idea, he said, was prompted by the federal government’s tax increase on the wealthiest Americans, but Mello has said he doesn’t think the idea will be adopted.
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