Debate over effective tax policy will exist as long as taxes are collected. Obscuring the current discussion of reasonable tax policy proposals introduced in the Nebraska Legislature are euphemisms, rhetoric, and catch phrases that oversimplify the ramifications of proposed tax changes. Terms like “expanding the tax base”, “revenue neutral”, and “three-legged stool” sound reasonable and pragmatic. Unfortunately, they are commonly used to misrepresent a dynamic shift in the sources of tax revenue that can significantly change the tax bill your family pays.
Taxes collected by the state have fallen short of projections made by the Nebraska Economic Forecasting Advisory Board during the last year. This has prompted discussion about “expanding the tax base”, which means assessing sales tax on items currently exempt from sales tax. Food, professional services, and business inputs are just a few of the many items currently exempt from sales tax. Put simply, you will pay more sales tax than you currently do of these items are subject to the state rate of 5.5% in addition to local rates.
According to the Tax Foundation, the average Nebraska family of four currently pays $4300 in sales tax annually, the 19th highest per person rate in the nation. Because they are incremental costs at the time of purchase, most taxpayers don’t recognize the total impact of sales taxes on their budget. One current proposal would increase the state sales tax to 6.5%, which would mean an addition $754 each year for the average family.
Advocates of current sales tax increases in Nebraska pair their tax hike with the concept of “revenue neutrality”. This political spin assumes that while your family will pay more in sales taxes, that increase in state revenue will cause a dollar-for-dollar decrease in the amount of other taxes you pay. Current proposals in the Legislature direct those dollars to a property tax credit fund to create a direct rebate to property taxes. That assumption does not reflect reality.
While the state collects and appropriates sales tax revenue, the Legislature does not set property tax levy rates or spend property tax dollars. Only local governments and individual political subdivision boards set, collect, and spend property tax dollars. The current proposal does not provide more money to local governments that set property tax rates and spend property taxes. There is no requirement that they limit their budget growth, spending, or levy increases. Past experience with the Property Tax Credit Fund and directing additional state revenue to local political subdivision demonstrates that you will pay more in sales taxes and your property tax bills will continue to rise.
Raising sales tax rates, adding sales tax to additional goods and services, and attempting to shift state general fund dollars to obfuscate local government spending are sold to taxpayers under the guise of rebalancing a purported “three legged stool” that is held as a standard for tax policy. The term “three legged stool” has its roots in marketing campaigns for financial planning services, not tax policy. A study of Nebraska’s tax history shows many changes and alterations, but an equal balance of sales, income, and property tax revenues has never existed.
Furthermore, that distribution of revenues is not a standard applied in other states. Nine states don’t even have a personal income tax, including Nebraska’s neighbors Wyoming and South Dakota. Property tax bases and funds are applied differently in each state.
The past fiscal year has demonstrated how variable state revenue from income and sales taxes can be. Programs funded by state revenues must be able to adapt and respond to the inherent swings that accompany economic cycles. While the “three-legged stool” concept is intended to provide a visual image of stability, it fails to reflect the dynamic nature of tax revenue and government spending.