Heineman proposes to end Nebraska income taxes

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January 15, 2013 - 5:16pm

Governor Dave Heineman is proposing to eliminate Nebraska’s personal and corporate income taxes.

The governor made the proposal in his annual State of the State speech Tuesday. He said the state has a mediocre tax system that inhibits job creation.

Heineman said of the roughly $4 billion a year Nebraska collects in taxes, nearly $2.4 billion comes from income taxes, and the rest from sales. But he said the state provides another $5 billion in sales tax exemptions. "Imagine if we eliminated just half of the current exemptions," he said. "Nebraska wouldn’t need to have an individual income tax or a corporate income tax."

Heineman said he would propose doing just that. "In the next few days I will have legislation introduced that provides alternative options for eliminating many business sales tax exemptions that could lead to the elimination of the individual income tax and the corporate income tax, or at least lowering Nebraska’s individual and corporate tax rates," he said.

The governor did not say which sales tax exemptions he would propose to eliminate – only that he would keep the exemption for food. That leaves dozens of exemptions potentially on the chopping block.

Tax Commissioner Doug Ewald said the biggest one, worth about 2 billion dollars a year, is on the sale of items for resale, such as from a wholesaler to a retailer. Ewald said it would be undesirable to do away with that, because every other state has it.

Kearney Senator Galen Hadley, chairman of the Revenue Committee, has said the same about the exemption for component parts used in manufacturing, worth about $1.3 billion dollars a year.

Many of the other big exemptions go to items used in agriculture, including machinery, chemicals, seeds and water. Sen. Tom Carlson of Holdrege, a former chairman of the Legislature’s Agriculture Committee, expressed caution about that.

"It’s easy to be for eliminating personal income tax and corporate income tax. And certainly I’m interested in listening, because that’s very interesting," Carlson said.

"I would say that people in agriculture right now, they’re complaining about income tax. They’re having good years. (But) they also like those sales tax exemptions," he added.

Apart from potential objections from industries that might be affected, Omaha Sen. Jeremy Nordquist had another complaint. "This is ultimately a major shift from high-income earners and corporations, shifting our tax burden onto middle-income earners," he said.

In a news conference, Heineman was asked about the argument that the income tax reflects someone’s ability to pay better than the sales tax. "I understand that argument," he said. "But you know, most people feel more comfortable paying a sales tax. They think it’s fairer," he said.

The governor said his tax proposal would be "revenue neutral," meaning it would not raise any more or less money than the current system.

In the part of his speech devoted to the budget, Heineman proposed increasing state school aid by a total of $130 million over the next two years, or 5 percent each year.

Sen. Kate Sullivan of Cedar Rapids, chairwoman of the Education Committee, called that a good starting point. But she said the school aid formula calls for a bigger increase. "Under current statute, with the estimates that have been coming in, it shows a 10 percent increase. That probably is not realistic, nor is it sustainable," Sullivan said.

"That’s the balancing act that the Education Committee has to do. Where we end up – is it going to be somewhere between 5 and 10 percent? Possibly. But I can’t say for sure at this point," she added.

Heineman also included in his budget proposal $77 million more for higher education. The university and state colleges have already agreed to freeze tuition for two years if they get that money, and the governor said he hoped community colleges would follow suit.

The governor is proposing to raise payments to Medicaid providers by two and a quarter percent. But in his news conference, he repeated his opposition, at least for now, to expanding Medicaid to cover more people. "As I’ve said repeatedly, that will be hundreds of millions of dollars on top of what we’re doing. I don’t think we can afford that," he said.

"I think we should go very slowly relative to that. We can have this conversation a year or two years down the road about the expansion," he added.

The governor is proposing to spend $2.1 million to buy an airplane that he and other officials could use. The state is already leasing the 2001 Beechcraft Super King Air B200 turboprop, which holds up to 8 passengers, from the University of Nebraska Foundation. If the purchase is approved, the state would sell a 1982 Cheyenne turboprop, which holds up to seven passengers.

The governor was flying in the Beechcraft to North Platte, Kearney, Grand Island and Norfolk Tuesday to talk about his budget and tax proposals.

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