Major state tax changes, or mere tweaks? Study may tell.

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February 21, 2013 - 4:32pm

After killing Gov. Dave Heineman’s proposal to abolish Nebraska income taxes, the Legislature is now gearing up to study the state’s tax system. But for people questioning how their taxes might change, the answer appears to be "wait and see."

When he unveiled his proposal, Gov. Dave Heineman described it as a bold plan to spur economic growth. It would have abolished the state’s personal and corporate income taxes, replacing the lost revenue by ending sales tax exemptions, particularly for manufacturers and farmers.

Those politically powerful groups fought back, and Wednesday, the Legislature’s Revenue Committee killed the governor’s proposal without a dissenting vote.

Thursday, its members endorsed creating a Tax Modernization Committee to study the state’s tax system and recommend changes in state, county and local taxes by Dec. 15. Omaha Sen. Beau McCoy, the lead sponsor of the governor’s plan in the Legislature, said even though that specific proposal is dead, there’s still a need for change. "I don’t talk to anybody who says ‘Oh, we don’t need to talk about tax reform…there’s a lot of other important things out there.’ Everyone says ‘We need to modernize our tax code.’ It’s just a matter of how do we go about doing that?" McCoy said.

The proposed study, which McCoy will make his priority bill, (LB613), is supposed to answer that question. It will create a special committee whose voting members will be the members of the Revenue Committee, along with the chairs of the Education, Health and Human Services, Planning, Agriculture, and Appropriations Committees. They’ll hold five hearings around the state and a public tax summit, and solicit public input through online questionnaires and other means.

Appropriations Committee Chairman Sen. Heath Mello of Omaha said the uncertainty of what the group will come up with is part of its strength. "There is no predetermined outcome. We don’t know exactly what is going to come from our study on the income tax side, the sales tax side, the property tax side and/or the fiscal policy side," Mello said.

Kearney Sen. Galen Hadley, chairman of the Revenue Committee, said a key goal is fairness. "The idea behind this commission is to look at the equity in our tax code: property tax, income tax, and sales tax. Are we out of balance with the way we charge the people of Nebraska those three taxes?" Hadley said.

"The goal is not to lower overall taxes in the macro sense -- it has to be neutral. Which means in the micro sense, some people may pay a little bit more, and some people may pay a little less. That’s the way the system is going to work," Hadley added.

Hadley said he hopes the outcome is some good, overarching policies to guide lawmakers in the future. Going into the study, he suspects the system is out of balance. "I think we are high on property taxes," he said. "We are probably where we need to be – you know, in the ballpark – on income taxes, and sales taxes is where we haven’t modernized it to look at services and other areas that are not being taxed now."

Columbus Sen. Paul Schumacher, who originally introduced the study proposal, said people should expect it to be fair. But he said most state spending is necessary, and he suggested the reality of 1.8 million Nebraskans paying for about $4 billion of spending per year means most people shouldn’t count on getting a big tax break.

"In the end, except for probably the people on either end of the rich or the poor spectrum, the burden has got to be carried by the middle," Schumacher said.

This is not the first time the Legislature has undertaken a comprehensive tax study. Studies were also done from 1986 to 1988, and again from 2005 to 2007, without producing major changes. Schumacher said that may -- or may not -- happen again.

"It’s impossible to say ahead of time. We may come out of this study with a conclusion that we’ve got a pretty good system that needs some tweaking, but not a complete overhaul," he said.

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