SCOTTSBLUFF — As the Nebraska Legislature continues to explore ways to reduce the state’s property tax burden, the Omaha-based Platte Institute suggested the elimination of most sales tax exemptions could help lighten the burden.
The Platte Institute’s new policy paper, Nebraska’s Sales Tax, recommends the Legislature “eliminate sales tax exemptions on final consumer purchases of goods and services alike to use the new revenue to reduce Nebraska’s property and sales tax rates.”
Adam Weinberg, the institute’s communications director, co-authored the report. During a Tuesday conference call, he said he recently traveled through several neighboring states on his way to a wedding. So, he did some research on how each state implements sales tax.
“Sales taxes in Nebraska and most other states are often levied arbitrarily, taxing some goods and services at high rates while leaving many others tax-free,” he said. “By leaving most of what Nebraskans buy exempt from sales tax, policymakers are forcing heavier reliance on property taxes and income taxes to pay for government.”
Weinberg added that numerous exemptions are also contributing factors that make the tax rate higher than it would be otherwise.
Nebraska adopted a sales tax in 1967 as a response to a successful constitutional ballot measure that ended property tax from being implemented at the state level.
The sales tax, based on a model from the 1930s, has since become outdated. Today, 66% of the state’s economy is from the sale of services, with the other 34% from goods.
Nebraskans consume approximately $77 billion in goods and services each year. So a 5.5% sales tax on those purchases could potentially raise $4.2 billion in revenue.
Sales tax can also be regressive because lower income taxpayers typically pay a larger percentage of their income for goods, which are subject to sales tax. Services are more often exempt from sales tax.
District 48 State Sen. John Stinner said the Legislature is already working on a way to expand the state’s sales tax base.
“Eliminating the exemptions would provide immediate dollars for property tax relief,” Stinner said. “But Gov. Ricketts has proposed incrementally moving toward a bigger number for direct property tax relief. This biennium, the Legislature moved $105 million from the general fund into property tax relief.”
Stinner also pointed out that during the last session, the governor actively campaigned against raising any kind of new taxes.
“It’s not the Legislature holding things back,” Stinner said. “It’s whether we go with the governor’s plan to move funds directly into property tax relief or whether we eliminate sales tax exemptions on certain things and then have to override a veto.”
He said a third option proposed by Sen. Steve Erdman of Bayard would cut property taxes by 35%, a $1.5 billion cut without a real idea of where the funding would come from.
“I’m open for discussion,” Stinner said. “I’ve voted for every proposal for property tax relief we received. I supported the governor’s $105 million incremental increase and continue to work toward a way to solve this.”
He also noted that state revenue had been running ahead of projections this fiscal year, so the Legislature could possibly add some additional dollars to direct property tax relief.
“We’re not ignoring anyone,” Stinner said. “There are two different approaches to funding property tax relief and we’re trying to accommodate the governor’s approach as best we can until someone comes up with a different solution.”
Sarah Curry, policy director at the Platte Institute, co-authored the Nebraska’s Sales Tax report. She said it’s a guide to explain what a sales tax is, including its history in Nebraska and why the sales tax has been such an integral part of discussions on tax reform.
She urged the state to avoid what she called “tax pyramiding,” which applies a sales tax on every input that goes into a finished product. That causes the final price to be increased through layers of taxation.
Curry also opposed sales tax exemptions that serve no economic purpose, but are only political in nature.
The Nebraska’s Sales Tax report is available from their website: platteinstitute.org/policy.
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The data used in this analysis is from the U.S. Census Bureau 2017 American Community Survey Public Use Microdata Sample (PUMS). At the household level, the total annual real estate property tax paid (including state and local sources) was divided by its property value to compute an effective property tax rate for every home in the U.S. These tax rates were then used to compute the median property tax rate for each state. To control for differences in property types across states, only owner-occupied single family homes on less than 10 acres were included in the analysis. As such, the median household income shown is limited to that cohort of homes as well.