The Honorable Lou Ann Linehan
Chairperson, Revenue Committee
Nebraska State Capitol
Lincoln, NE, 68509
Dear Chairperson Linehan,
On behalf of National Taxpayers Union, the nation’s oldest taxpayer advocacy organization, I write to express our deep concerns regarding Legislative Bill 314 and Legislative Bill 497. Both of these proposals aim to address the issue of ballooning property tax burdens that are affecting Nebraska taxpayers in rural, suburban, and urban areas. While we commend the laudable intentions of LB 314 and LB 497, we have concluded that these bills simply amount to shifting the tax burden without solving the long-term problem and fail to deliver real tax relief to hardworking taxpayers. We encourage the committee to work towards comprehensive relief and reform without raising taxes.
As the growing assessments and soaring property tax bills of recent years have demonstrated, the current system can create uncertainty and hardship for Nebraska taxpayers, taking a bigger bite out of family budgets. As such, NTU is pleased to offer our recommendations for LB 314 and LB 497 as you prepare to take them up in committee:
No Income Tax Hike: Section 21 of LB 314 proposes the adoption of a 7.84 percent surcharge on earned income above $500,000 for joint filers and $250,000 for individual filers. Increasing taxes on wealthier Nebraskans has an outsized impact on investment and entrepreneurship because people in the top income tax bracket are more likely to engage in economic ventures that may involve higher levels of risk. Importantly, small businesses that file under the individual tax rate as an S-corporation will be needlessly harmed under such a surcharge. Taking capital out of small businesses, the lifeblood of Nebraska’s economy, will make it harder for job creators to invest in new equipment, expand their business, or hire new workers.
Concerningly, this legislation would also impose an alternative minimum tax on individuals and estates, which adds another layer of complexity to the state tax code. The AMT requires certain taxpayers to essentially figure out their taxes twice; once under traditional income tax rules and again under AMT rules. Usually taxpayers must complete additional forms to determine whether the AMT will apply to them. After doing so, they then proceed to fill out two different tax forms to determine what they owe the government.
These negative tax changes are estimated to raise taxes by nearly $100 million annually by 2021. NTU recommends completely removing Section 21 from LB 314.
Avoid Increasing Tobacco Taxes: Both LB 314 and LB 497 propose permanently raising the state excise tax on cigarettes from 64 cents to $2.64 per pack, totalling a 230 percent increase over the current rate. For a pack-a-day user, they will be forced to pay an additional $592 annually in new tax to the state. While it is true that cigarette tax increases usually correspond with a short-term bump in revenue, after a few years it drops precipitously due to smuggling or declines in smoking rates. The Fiscal Note for LB 497 estimates an additional $96 million in revenue annually by FY21, but as we’ve seen in nearly every case, these revenue projections often come up short. In fact, a 2013 study from NTU’s research arm, National Taxpayers Union Foundation, found 7 out of every 10 state-level tobacco tax hikes enacted between 2001 and 2011 resulted in lower-than-anticipated revenues. All too often, this meant additional levies were soon to follow. In fact, our study found that 66 out of 96 tobacco tax hikes were followed by additional hikes within two years.
Further, LB 314 also proposes lumping vapor products into the same category as other tobacco products, despite a clear distinction between the two. Vapor products contain no tobacco; they contain nicotine without the harmful chemicals found in traditional tobacco products. Some estimates indicate vapor products are 95 percent less harmful. Because these products are considered safer, vapor products have emerged as an innovative and effective bridge for smokers transitioning towards a significantly less harmful alternative. By subjecting these innovative products to a 20 percent tax rate, LB 314 constructs new barriers for consumer to access less harmful choices while also derailing efforts to lower health care costs and reduce government spending.
NTU recommends completely removing Section 19 and Section 36 from LB 314 and Section 15 from LB 497.
Broaden the Sales Tax Base, Don’t Raise the Rate: Both LB 314 and LB 497 propose to make the tax code fairer by expanding the sales tax base to include select services currently granted exemption. These proposals would now apply sales tax on consumption, like dry cleaning, limousine service, landscaping, travel agencies, and many other areas. While on net, removing certain exemptions may be considered a tax increase, but broadening the base creates a more stable sales tax, with government out of the business of picking winners and losers through the tax code.
While LB 314 would rightly broaden the tax base, Section 22 wrongly proposes to slightly increase the sales tax rate from 5.5 to 6 percent on purchases. Sales tax hikes are extremely regressive, as these new burdens will fall heaviest on lower-income consumers who spend a greater share of their income on everyday products.
NTU recommends removing Section 22 (5) from LB 314.
No Increase to Alcohol Excise Taxes: Both LB 314 and LB 497 propose significant increases to excise taxes on brewers, distillers, and winemakers. If enacted, brewers would be hit with a 345 percent tax increase, winemakers with a 270 percent tax increase, and spirit distillers with a 227 percent tax increase. Nebraska currently charges the 20th highest beer excise tax, 20th highest wine excise tax, and 38th highest spirits excise tax. However, if adopted, Nebraska have the highest beer excise tax, highest wine excise tax, and crack the top 10 for spirit excise taxes. These tax increases are estimated to generate $90 million in annual tax revenue by 2021.
These tax increases are problematic, both from a budgetary perspective as well as an economic one. Sin taxes are generally an unreliable stream of revenue and should not be considered a silver bullet for funding state budgets. According to an in-depth 2018 report by the Pew Charitable Trusts, “Given alcohol’s quantity-based tax structure and that usage ebbs and flows with societal trends and consumer whims, revenue gains may not always be a reality—nor is increased usage desirable from a public health or safety perspective. Policymakers should therefore not rely on alcohol tax revenue for long-term budget commitments.” Furthermore, placing additional burdens on craft brewers will make it extremely difficult for them to remain competitive in what is increasingly becoming a highly saturated industry. Small businesses have benefitted from a low tax environment that has allowed this budding industry to bloom over the past decade, but enacting misguided tax increases threatens to reverse this progress.
NTU recommends completely removing Section 7 from LB 314 and Section 5 from LB 497.
Remote Sales Tax Collection Provision: Prior to this legislation, Nebraska's Department of Revenue had announced changes to how it collected sales taxes unilaterally, without legislative input. It's a positive sign that Nebraska legislators are getting involved and looking at using any revenue raised from economic nexus legislation to lower property taxes rather than simply pocketing the change. Additionally, Nebraska's legislation contains a "safe harbor" for small businesses that do not reach a certain level of transactions within the state, an important step to protect entrepreneurship. The only downside is that Nebraska's legislation does not specifically preclude its Department of Revenue from seeking retroactive taxes, which are punishing to businesses, while also violating clear rules of tax fairness.
Addressing Nebraska’s property tax issue should be a top priority for lawmakers during the 2019 legislative session. Data from the Department of Revenue indicates property tax collections have increased by more than 50 percent since 2008. NTU was pleased to recently offer property tax reform recommendations to legislators in neighboring Iowa, where taxpayers are experiencing similar skyrocketing burdens. We hope to be a resource for you just as we have been for them.
Sincerely,
Thomas Aiello
Policy and Government Affairs Associate