Testimony to the Joint Session of the Nebraska Revenue, Education, and Retirement Committees

Members of the Revenue, Education, and Retirement Committees,

Thank you for the opportunity to testify today on LB 289 as amended by AM 1381. My name is Joseph Bishop-Henchman, and I am with the Tax Foundation in Washington, D.C. We are a national think tank that collects data and conducts analysis on tax issues. We do not take a position on legislation, but I would like to make three informational points.

First, sales tax broadening is a common trend undertaken in many states now, as a way of modernizing the sales tax to reflect today’s service-based economy. However, you should be aware that including sales tax exemptions only for necessities is a difficult task, as every sale of a good or service is considered a necessity by someone. Additionally, picking only a few goods and services to subject to sales tax, rather than a more comprehensive approach that doesn’t leave many exemptions on the table as you do here, can leave the sectors you are expanding the sales tax to feeling unfairly targeted.

Second, cigarette tax revenue declines year over year, due to falling consumption of that product. This is a nationwide, decades-long trend. Using this revenue dollar-for-dollar for tax cuts elsewhere may balance in year one but will create a widening gap in subsequent years as that revenue source resumes its monotonic decline. Cigarette tax revenue should not be part of a package designed to be revenue-neutral, because it makes it not revenue-neutral.

Third, Nebraska currently has the 27^th highest sales tax in the United States by rate when you include both state and average local sales taxes. This bill would take it to 17th highest, similar to Colorado’s.

Nebraska’s property tax is currently 12^th highest by collection, and this bill would take it to 13^th or 14^th highest, still higher than Kansas, Missouri, Colorado, and South Dakota. (See table.)

Nebraska would still have the 19^th highest individual income tax, just below Minnesota and higher than Missouri, Kansas, and Colorado, and 16^th highest corporate income tax, as this bill misses the opportunity to address those taxes.

Overall, we project that this bill would worsen Nebraska’s ranking on the State Business Tax Climate Index, our comprehensive ranking of state tax structures for business friendliness, from 24^th to 26^th if the property tax reductions fully materialize, and 29^th if they do not, moving below Kansas in terms of our ranking of state tax structure. It would not be unprecedented: my home state of California, for example, has a core tax policy of raising sales and income taxes to pay for lower property taxes, with resultant pros and cons.

Put simply, Nebraska has high income, business, and property taxes. This bill would result in Nebraska having high income, business, property, and sales taxes. Thank you.