Nebraska tax change "options" headed for public hearings

Filters come out of an electric oven at Baldwin Filters in Kearney, Neb. Nebraska doesn't tax energy for manufacturing, but is considering tax changes. (Photo courtesy of Baldwin Filters)
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September 6, 2013 - 6:30am

A group studying state taxes is getting ready for a series of public hearings to ask Nebraskans about possible changes. The governor says he thinks the group’s headed in the right direction. But every possible change also involves tradeoffs.


Last week, the Legislature’s Tax Modernization Committee met in the Capitol to discuss options. This week, Gov. Dave Heineman said he’s optimistic. “I’m very encouraged by what I hear from them and then my own conversations with them, that we’re headed towards a package of income and property tax relief. And that would be good news,” Heineman told NET News.

That might make it sound like the committee is planning to propose cutting taxes. But according to its chairman, Sen. Galen Hadley of Kearney, “The charge of this committee is not to lower the overall revenues of Nebraska. Nor is it to increase the overall revenues of Nebraska. It’s to make sure that the system is equitable to the citizens of Nebraska.”

Is the governor’s goal -- income and property tax relief -- compatible with the chairman’s statement it's not his committee’s job to decrease revenues?

Heineman said they are compatible. Last January, he proposed abolishing income taxes and making up the lost revenue by applying the sales tax to currently exempt items, like inputs used in agriculture and manufacturing.

The Legislature killed that plan. But Heineman suggested the committee could consider a scaled-back version. “I think most of us are in agreement: ag and manufacturing inputs are off the table. But having said that, you’ve also got, for example, energy used by agriculture and manufacturing is exempt, only for those two industries but not for other industries. So I think there’s an item you ought to take a look at,” Heineman said.

One company that could affect is Baldwin Filters, based in Kearney, Neb., where it manufactures filters for trucks and heavy equipment. Baldwin employs about 900 people in Kearney, and is about to start work on a $40 million expansion it says was based in part on the belief Nebraska would remain a manufacturing-friendly state.

Baldwin says its market is highly competitive, and the proposal to end the state’s manufacturing energy exemption would substantially increase its operating costs. That point is driven home as Dan Schulte, vice president for operations, shows a visitor around the plant, where giant machines powered by electricity are stamp, cut and shape steel and cellulose into filters.

Taxing energy for manufacturing isn’t specifically on a list of options the Tax Modernization Committee is compiling for public hearings later this month. But reviewing sales tax exemptions in general is.

Tax change options

 

Note: This is an unofficial list compiled by NET News based on a draft and discussion between committee members and staff. The committee will put an official list of options on its website, http://news.legislature.ne.gov/tmc/ Monday Sept. 9. The list does not imply endorsement by the committee, and is not intended to preclude discussion of other  options.

 

Property tax

 

Reduce valuation of ag land from current 75 percent of market

Use income capitalization/value approach

Decrease reliance on property tax by increasing state aid to schools, counties, cities, community colleges

Grant or expand authority for schools, counties and community colleges to use other sources, including sales tax

Increase funding of current property tax credit

Create “circuit breaker” program capping property taxes as a percent of income

Give income tax credits for property tax paid on ag and business personal property

Exempt business equipment from personal property tax

Exempt a certain amount of personal property value from taxation

 

Sales tax

Tax certain consumer services (not business to business services)

Periodically review sales tax exemptions

Exempt farm repair and replacement parts

Expand manufacturing machinery and equipment exemption to all businesses

 

Income tax

 

Adjust rates and brackets

Index brackets for inflation

Eliminate itemization, reduce exclusions and credits

Exempt more or all Social Security benefits

Change treatment of capital gains to match feds

Lower rate on capital gains

Eliminate one-time exclusion of capital gains to offset reduction

Eliminate one-time exclusion, period.

Reduce corporate income tax.

 

 

 

So is taxing certain consumer services. The list isn’t spelled out, but previous bills have listed everything from car repairs to haircuts. Also on the list are proposals to cut  income tax rates, or to limit property taxes to a certain percentage of income.

Hadley said there are trade-offs to all these options. “If we feel it’s unequitable in one area because we’re taxing too much, then we might have to look at other areas where we feel we might not be taxing as much as we should be,” he said.

Trying to lower some taxes could raise others, even without legislative action. For example, Nebraska could lower the taxable value of agricultural land, to bring it closer to the level of taxation in neighboring states. But if local governments still try to collect the same amount overall, that could drive up taxes on everything from tractors to railroads, pipelines, homes, and businesses.

On income taxes, the committee is looking at options including cutting rates on individuals, businesses, and capital gains. Also on the list is reducing or eliminating taxes on Social Security income, which Hadley said would help many retirees.

However, Hadley said a proposal to exempt military retirement income is not on the list, because it begs the question of where to stop. “I’ve heard bills to exempt teachers' retirement, state government employees' retirement, federal government employees' retirement, Social Security, military retirement, or all retirement. That’s six different potential exemptions of retirement,” Hadley said.

But Heineman said military retirement is still on his list. “I think military retirement ought to be exempt from taxation. These are men and women who fought for our freedoms, put their life on the line. In my opinion, that one’s still very much a viable option. And again, I think it’ll be considered ultimately in the mix, if not by this committee then by the Revenue Committee and ultimately the entire Legislature,” the governor said.

Hadley called the Tax Modernization Committee’s list of options a “work in progress” – just because something’s on the list doesn’t mean the committee thinks it’s a good idea. And just because something’s not on the list doesn’t mean it should not be discussed.

“These aren’t all the options. But they’re some of the potential options. And if you have other options, tell us,” Hadley said.

Nebraskans will have their chance to do just that, in a series of public hearings that begins Sept. 23rd in Scottsbluff.

 

 

Discussion

 

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