Economists recommend changes to state's tax system

2014-02-07T17:30:00Z 2014-02-08T01:20:11Z Economists recommend changes to state's tax systemBy JoANNE YOUNG / Lincoln Journal Star JournalStar.com

Two studies by recognized state economists call for changes to the state's tax system, some of which are bound to be questioned by lawmakers and unpopular with some taxpayers.

The studies, released Friday, were funded by the Lincoln and Omaha chambers of commerce, but the economists -- Ernie Goss, of the Goss Institute for Economic Research in Omaha, and John Anderson and Eric Thompson of the University of Nebraska's Bureau of Business Research in Lincoln -- said they were given no direction, other than to offer their perspective on tax reform.

The two chambers did not necessarily endorse the findings.

The economists made recommendations based on what could be done to encourage the most economic growth in the state. They looked at the issue as economists, not politicians.

They pointed to a variety of changes that could modernize the state's tax code and make it more favorable for growth in the economy.

* Reducing income tax rates about 5 percent a year for five years.

* Limiting the growth of state aid to schools and other local governments to the growth in inflation and population.

* Addressing high property taxes not on the state level but on the local level -- the school districts, cities and counties that collect them.

* Considering an increase in gasoline taxes, which are transparent and share the burden with non-Nebraskans traveling through the state.

* Eliminating sales tax exemptions on food, prescription medicines and some personal services.

* Taxing nonprofits on certain non-mission activities and properties, such as cafeterias that serve the public, student-run ventures and land held for later sale.

David Brown, president and CEO of the Greater Omaha Chamber, said the state is at a crossroads.

"We find ourselves in a situation where our tax burden makes us uncompetitive compared to other states," he said.

At the same time, he said, the state's rainy day fund, or cash reserve, is at a record level. Lowering the tax burden would provide more disposable income for families and businesses, which could turn into economic growth for the state, Brown said.

Only 20 states have a higher tax burden than Nebraska, Goss said, and that has resulted in slower growth compared to neighboring states in jobs, the values of goods and services and wage growth.

A typical family of four would benefit from moving across any one of the state borders, he said.

Nebraska's system needs adjustment, he said. People and businesses are more mobile than they were in the past, and the tax system needs to reflect that, to both attract residents and workers and keep them here.

Proposals to shift the overall tax burden away from property taxes to other taxes should be rejected, Goss said. But high property taxes should be addressed on the local level, not the state level. 

The state has tried to intervene for decades in property taxes with no success, he said. 

Anderson and Thompson proposed two scenarios they said could help the state economy grow. Both would move the state in the direction of a broader tax base and lower income tax rates.

Consumption should be taxed more and production less, Anderson said.

The scenario that would provide the most economic growth would collapse the four personal income tax brackets from four to two, making the bottom rate 2.5 percent and the top rate 5.5 percent. Now, Nebraska's four brackets range from 2.46 percent to 6.84 percent.

That change would cost the state an estimated $402 million in lost revenue. Corporate rates would also be lowered under the scenario for a loss in state revenue of $57 million.

Those losses could be offset by elimination of sales tax exemptions on food, medical supplies, prescription drugs, repair labor and some personal services, and elimination of the real property tax credit.

To broaden the sales tax base significantly, the state would have to go beyond personal services, Anderson said.

Those changes would result in an increase of 2,600 jobs by 2033 and a population gain of 2,000 people.

A more moderate scenario would keep four personal income tax brackets, ranging from 2.5 percent to a top bracket of 5.5 percent, and keep the sales tax exemption for prescription drugs.

Under both, the state could also look at lowering the maximum local option sales tax rate to 1.25 percent.

The Revenue Committee is looking at tax reform proposals, introduced both last session and this year, and deciding which should be debated. They include income tax reductions, tax credits and valuation decreases for agricultural land.

In this session, the state's largest chambers of commerce are supporting a bill (LB1097) introduced by Omaha Sen. Burke Harr that lowers income taxes over three years. Sen. Jim Smith of Papillion has chosen LB1097 as his priority bill.

Reach JoAnne Young at 402-473-7228 or jyoung@journalstar.com -- You can follow JoAnne's tweets at twitter.com/ljslegislature.

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