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Advocacy groups and senators are exploring a number of different tax reform proposals for introduction during the next legislative session or possible ballot initiatives. Among the areas being discussed are changes to personal property, real estate, income, and sales taxes. Many of the proposals would involve changes to multiple taxes to balance the state budget and offset local property tax collections. As various groups begin promoting their favorite ideas, voters need to understand the full impact of each plan.
The principles of simplicity, transparency, neutrality, and stability can be applied to the various ideas to help taxpayers evaluate proposed changes to Nebraska’s current tax system. Two concepts currently being discussed involve providing refundable income tax credits for a portion of your property tax bill. One, known as the “50/50 plan”, proposes to refund 50% of the public school portion of your property tax bill, minus bonds, to your income tax liability. The other would refund 35% of your total property tax bill on your income taxes.
The use of state General Fund revenue to provide an income tax credit to offset property tax collections fails the simplicity standard. Schools collect $2.3 Billion in property taxes, including bonds. Under the “50/50” proposal, around $1 Billion of the General Fund would be refunded. Under the 35% proposal, $1.3 Billion of the $4.3 Billion currently collected by the General Fund would be refunded. Covering the refunds would require either a 25% reduction to existing General Fund programs or a 50% increase to the current total collections of either sales or individual income taxes. For a family to understand the net impact of the change to their own budgets requires calculating the increased taxes they will pay in either sales or income tax and compare it to their property tax liability. It is impossible for a family to know that impact with accuracy until after the policy has been passed and they have paid a year’s worth of taxes.
Using tax dollars collected and appropriated by the state to offset property taxes levied and spent by independent local boards fails the standard of transparency. Under both proposals, over $1 Billion of state General Fund spending would be dictated by local officials with no accountability to state lawmakers or residents in other communities. Local spending decisions made by board members in metro Omaha and Lincoln would be covered by taxpayers in District 38, while neither you nor your senator will have any influence or control over those spending choices. A clear line of sight between taxpayers and those who spend their money does not exist.
Neutrality is difficult to evaluate until full modeling of the tax shift proposed by the income tax refund proposals is completed by the Legislative Fiscal Office. It is assumed there will be a $1 Billion tax increase to fund the proposals. If applied to current sales and income tax policy, the increases will magnify any favoritism and carve outs that exist in the current system. If some existing exemptions are eliminated, the impact to any taxpayer will not be known until the specific exemptions are identified, further exacerbating the complexity of the proposals.
The long term stability of the income tax refund proposals is also an open question. The property tax crisis has been created by dramatic increases in local subdivision spending over recent years. Nothing in the proposals alters that pattern. In fact, past experience has demonstrated that increased state spending to cover local spending results in increased local spending. Both proposals set the impact on the state budget as a percentage of local property taxes levied, which state legislators have no control over. The long term stability of the state budget would be determined by the individual actions of all the local boards across the state, with no accountability at the state level. The level of the tax credit would need to be adjusted downward in a few years in order to balance the state budget if local budgets continue to grow at a rate greater than state revenues. Thus, the policy would not be stable in the long term.
Anyone who tells you a major tax change can be accurately explained in 30 seconds or less is being dishonest. In tax policy, “there is no such thing as a free lunch”. With so many tax proposals being discussed, voters will need to critically evaluate each and ask questions to understand the immediate and long term impact of the changes on their family and community.