LINCOLN — A Lincoln-based policy think tank recommends that Nebraska focus its tax system modernization efforts on property tax relief by shifting the tax load onto more consumer services.
On Tuesday, the Open Sky Policy Institute released its proposed recommendations, which would shift about $156 million worth of taxes.
New taxes would be imposed on a variety of consumer services, including auto repair, haircuts, investment counseling, funerals and income tax preparation.
The institute proposed using revenue from taxing those services to reduce property taxes through a combination of more state aid to local schools and limits on how much of a taxpayer's income could be spent on property taxes, calling it a “circuit breaker.”
The tax suggestions are the second set of proposals offered this month by a policy think tank, and they come as the Legislature is winding up a study of proposed tax changes with public hearings in Omaha and Lincoln later this week.
“We want to hear from people at the last two hearings and then sit down with the committee to see what their thoughts are,” said State Sen. Galen Hadley of Kearney, chairman of the Legislature's Tax Modernization Committee.
He said that both the Open Sky Institute and the Omaha-based Platte Institute have good ideas, but the Legislature probably can't adopt them all.
Neither the Open Sky ideas, nor those from the Platte Institute, would decrease the total amount of taxes collected. But both plans would shift more of the load for raising revenue onto sales taxes by taxing more services.
Renee Fry, Open Sky's executive director, said its proposals reflect the tax change sought most often by Nebraskans — lower property taxes — and are modest because wholesale changes are not needed.
“Most states would envy our economy,” Fry said. “Do you make wholesale (tax) changes when the economy is strong? That's why we're not.”
Open Sky projected the impact of proposed tax changes on six households. Its report said that cutting the state's top income tax rate, as recommended by the Platte Institute, the Nebraska Chamber of Commerce & Industry and Gov. Dave Heineman, would mostly benefit wealthier taxpayers with more than $359,000 in annual income.
By contrast, Open Sky estimated that expanding the sales tax base and putting a “circuit breaker” on how much personal income could be used to pay property taxes would provide a net benefit to households with less than $67,000 in income.
For instance, a couple with $66,545 in income who own a home would see a net tax cut of about $100 a year if a circuit breaker were enacted.
Circuit breakers are used by many states. They give state income tax credits to those whose property tax bills rise above a certain percentage of income. Open Sky suggests capping the credits a taxpayer could get at $1,200 a year.
Hadley, the state senator, said he still has questions about whether circuit breakers would violate the clause of the state constitution that requires classes of taxpayers to be treated equally.
Two weeks ago, the Platte Institute revealed a trio of plans, all of which also called for expanding sales taxes to more services. But Platte's plans focused on state income tax cuts, saying Nebraska is uncompetitive for top-flight jobs because its top income tax bracket is higher than every neighboring state except Iowa.
The Platte plan mirrors many of the goals voiced by Heineman, who has called Nebraska's tax system “mediocre,” mostly due to the top income tax rate. In the spring, Heineman called for the elimination of all state income taxes, a plan that drew a flood of opposition from business and farm groups and that he has since abandoned.
The conservative Republican governor, in a column last month, blasted Open Sky's call for increased state aid to schools, saying there's no guarantee that local governments will use state aid to lower local property taxes and labeling the group a “liberal” organization.
Fry said that the liberal label would come as a surprise to the Republicans on her nine-member board of directors, and that increasing state aid did lower property tax bills until the state started cutting back on state aid to schools and other local governments.