Three major tax sources fund Nebraska's state and local governments. Of the revenue, 44 percent comes from property taxes, 29 percent from income taxes and 27 percent from sales taxes.
A study of Nebraska taxes got underway Wednesday morning at the Capitol with a two-hour overview of the system by tax and finance specialists, followed in the afternoon by a session with sales tax expert John Mikesell from the Indiana University School of Public and Environmental Affairs.
"Your objective of tax policy is to get your revenue system to behave like a pickpocket -- and not like a mugger," Mikesell told the committee.
The state needs the money, but it needs to minimize collateral damage, he said.
"In an important sense, that's all you need to know about tax policy."
Mikesell said a retail sales tax driven by general household consumption is a stronger tax for financing general government operations. It's less harmful for economic growth.
If business purchases and inputs are taxed, he said, they become part of the business cost and are passed on in the price of the product. So the consumer ends up paying a tax on the final purchase and also on the earlier tax to the manufacturer.
Taxing businesses results in hidden taxes and can be a disincentive for business expansion and investment, Mikesell said.
Regardless, states continue to tax business inputs because of the revenue it brings in and because sales tax exemptions look like tax breaks for businesses, he said.
Changing that could mean more sales tax exemptions for businesses and fewer for consumers, including the now exempted food sales tax, which is on the table but a particularly hard sell.
Sen. Galen Hadley, chairman of the Tax Modernization Committee, said Mikesell had a valid policy argument. The pyramiding of taxes in business adds to the final cost to the consumer.
"So to me you're in a kind of a Catch-22," he said. "Does a consumer … pay a higher cost for a product because the businesses are paying sales tax, or do they pay a lower price for a product because the businesses aren't paying a pyramiding sales tax?"
In 2010, Nebraska appeared to be getting a larger percentage of total sales tax revenue from business inputs than the national average, Hadley said.
To reduce that, the state would have to figure out some way to broaden other taxes -- services, income, property taxes.
"I think a policy should be wherever possible not to tax business inputs where it is practical and efficient to exempt them," Hadley said.
In the morning, senators on the committee heard a Nebraska Taxes 101 review about revenue diversification and stability, how the state compares nationally and with surrounding states, and the elements of the three tax sources.
* From 1992 to 2012, revenue from state sales taxes grew 4.5 percent; individual income taxes, 5.2 percent; and property taxes, 5.3 percent.
* In those years, tax expenditures for state use went up 4.3 percent and for local government use up 4.7 percent.
* In comparison to the average of six surrounding states, Nebraska brings in a higher percentage of property taxes -- for local governments such as school districts, cities and counties -- and a lower percentage of general sales tax. Income taxes are just slightly higher than the other six states' average.
* In 2009-10, Nebraska tax expenditures per capita were higher than the U.S. average and six surrounding states for education and roads, and lower on those comparisons for health and welfare and public safety.
Senators are doing the tax study between legislative sessions to determine the equity of Nebraska's tax system and to make recommendations for changes if needed, Hadley said.
He said Wednesday's first meeting was a good one because people got an idea of the complexity of the issues. "It's not easy."
The committee will have five public hearings around the state beginning Sept. 23 in Scottsbluff and the next day in North Platte.
Materials presented in the work sessions will be available on the committee's website at news.legislature.ne.gov/tmc.