Nebraskans got a big win last year after Governor Jim Pillen signed a law to cut both the income and corporate tax rate, making Nebraska more economically competitive with neighboring states. This year, the Governor has his sights set on tackling high property taxes.
The Governor’s plan came out of a 40-person working group that the Governor put together last July to address high property taxes. The group is composed of state senators, members of the Nebraska, Omaha, and Lincoln Chambers of Commerce, and agriculture industry groups.
The Governor is right to try and address property taxes in the state. According to Forbes, Nebraska ranked 8th in the nation for highest property taxes, with the average effective property tax rate being 1.633% with an aggregate $1.75 billion paid towards property taxes in the state. Not only are Nebraska’s numbers so drastic, but they are far greater than property taxes in neighboring states, making the state less economically competitive and showing that effective property tax reform is needed.
While we commend Governor Pillen for looking to alleviate the property tax burden for millions of Nebraskans, the framework released by the working group takes the wrong approach to do so. This plan does little to provide Nebraskan families with tax relief but rather just shifts the burden away from property towards other goods.
Similar “tax shift” proposals were rejected by former Nebraska Governor Pete Ricketts, with him arguing that hiking one tax to reduce another constituted a tax increase.
The Governor’s plan calls for raising the state sales tax by 20%, up from 5.5 to 6.5 cents, as well as eliminating certain sales tax exemptions such as those for accounting or business legal services. The plan also hikes the state’s cigarette tax an additional 400%, up to $2.64 per pack. The new revenue sourced from these taxes will be used to lower property taxes.
While reducing property taxes is desirable, the tax shift from property to sales taxes will do little to reduce the overall tax burden of Nebraskan families. Following the Governor’s proposal, a 6.5 cent sales tax would leave Nebraska with one of the highest sales taxes in the entire country, outpacing progressive bastions such as Illinois and Vermont. A 6.5 cent sales tax would also make Nebraska less economically competitive and an outlier when compared to neighboring states. Of Nebraska’s six neighboring states, five have a sales tax below Nebraska’s under the proposed plan, with only Kansas tying Nebraska at 6.5 percent.
An increased sales tax will also result in higher prices when Nebraskans purchase goods and services. The cost of essential goods such as cars, clothing, and even diapers would see a price increase. When you couple the increased sales tax rate with the elimination of exemptions for accounting and legal services, Nebraskan families will face even higher costs for already expensive services. If a Nebraskan needs legal counsel or simply wants to hire an accountant to file their taxes, they’ll be paying a higher price – all at a time when American families are already struggling to pay their bills.
Yet the sales tax hike is not the only pay-for included in the bill that will adversely affect Nebraska. The Governor’s proposal to increase cigarette taxes by an additional $2 will adversely affect Nebraska’s lower-income residents, with roughly 28% of Nebraskans earning less than $25,000 being smokers, while only 8.9% of Nebraskans earning $75,000 or more smoke. Increasing the cigarette tax will mean less money in the pockets of Nebraska’s most vulnerable. Additionally, increasing the tax on cigarettes and similar vaping products will benefit Nebraska’s neighboring states, with research showing that higher taxes on cigarettes create a substantial movement of black-market tobacco products into high-tax states from low-tax states. A $2.64 cigarette tax puts Nebraska far above neighboring states, only worsening the potential impact for black-market products to make their way into the state.
Given the Governor’s concern over rising property taxes, there are other proposals that he could pursue to alleviate the problem without shifting the tax burden elsewhere. In Alabama, there is new legislation that places a cap on the amount that property values can be increased on annual reappraisals. A similar proposal in Nebraska would allow Governor Pillen to ease soaring property taxes on homeowners effectively and responsibly.
The Governor’s efforts to reduce property taxes should be pursued while preserving the Cornhusker state’s numerous tax advantages. The adverse economic consequences will impact Nebraska’s lowest earners and do little to provide them with substantial tax relief.