Published Sunday, October 20, 2013 at 1:00 am / Updated at 5:32 pm
Midlands Voices: Adjustments, not overhaul, needed to improve tax code

The author is the executive director of the OpenSky Policy Institute in Lincoln.

Nebraska's economy and tax system are very healthy in many ways. Our economic growth is strong and unemployment is low.

And Nebraska is not unusual when it comes to taxes, as all of our tax rates rank in the middle nationally.

But there is always room for improvement.

Nebraska is hampered by a sales tax that was set up in the economy of the 1960s, when sales of goods like cars and appliances dominated. It hasn't kept pace with today's economy, which is more oriented toward services like haircuts, dry cleaning and massages.

As a result, Nebraska forgoes millions in revenue each year because of untaxed services, according to research the OpenSky Policy Institute completed last year.

With less state revenue, Nebraska has cut support for local governments, forcing these local entities to increase property taxes to pay their bills. Nebraskans from Scottsbluff to Omaha feel this property-tax pinch as property taxes across the state have risen in recent years.

This aggravation with property taxes has been evidenced by the droves of residents who have turned out at the Legislature's Tax Modernization Committee hearings to plead for lower property taxes.

To improve our tax code, we recommend changes that would lower property taxes as well as strengthen our investments in schools, safe communities and other things that help keep our economy strong. These changes include taxing more services and using the increased revenue to boost state aid to local governments like K-12 school districts, which would allow them to reduce property taxes.

In the 1990s, the Legislature increased state aid to school districts, which took funding pressure off schools and allowed them to lower property taxes.

Since then, the state has cut funding to school districts and other local governments, and property taxes have steadily increased again.

The downside of broadening the sales tax base is that it increases taxes on low- and middle-income earners.

To offset this, the state could use property tax “circuit breakers” to provide targeted relief to those who pay high property taxes in relation to their incomes. They are called circuit breakers because they are triggered, much like their electrical namesakes, when a person's property tax bill reaches a certain percentage of his or her income. Circuit breakers could be designed in any number of ways to target certain groups, such as renters or farmers and ranchers.

We do not, however, recommend income tax cuts.

Such tax cuts do little to foster economic growth, research shows. In fact, Nebraska has had more economic growth and lower unemployment than nearly every state that has no income tax. Nebraska's economy has also grown faster than all of our neighbors, except for Iowa — which has a higher income tax rate.

Income tax cuts also do little to benefit middle- and low-income earners. In a recent analysis, we looked at how six real Nebraska families would be affected by lowering the state's top income tax rate to 5.75 percent from 6.84 percent.

Three of those families, all earning less than $70,000 annually, would get no income tax cut. In fact, if the state were to cut its income tax and raise sales taxes to make up the lost revenue, most Nebraskans would pay more in taxes, not less. That's because middle- and low-income earners spend more of their income on sales taxes than do wealthier households.

The Tax Modernization Committee should be commended for its efforts. It has worked hard and its thoughtful approach has put the Legislature in good position to enact changes to our tax code that make sense and will benefit the state and all of its residents for years to come.

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