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Tax policy discussions in Nebraska tend to focus on the “big three” taxes: property, sales, and income. Most of the graphics you see and statistics you read compare the total amount of property taxes collected by local governments with the sales tax and income tax revenues of the state General Fund. Ignoring almost half of the other sources of revenue collected by state and local government in Nebraska, these oversimplified comparisons exclude a substantial tax you pay: local sales taxes.
In addition to the state sales tax rate of 5.5%, cities and counties have the option to charge an additional sales tax rate of 0.5, 1.0, 1.5, 1.75, or 2% on your purchases. The location of the point of sale determines the total tax rate. Over 200 cities and villages charge sales tax. One county, Dakota County, has a 0.5% sales tax. Of those cities, 16 communities, including Minden in District 38, charge the highest rate of 2%. The state collects the combined rate and distributes the municipality’s portion back.
During calendar year 2017, $462 Million were collected by cities in local sales and use taxes. To put this amount in perspective, the total sales tax collections by the state of Nebraska for fiscal year 2017 was $1.55 Billion. Local communities charged you an additional 30% of the state total in local sales taxes. Each of those small, interval amounts on your receipts add up to a substantial sum.
As we all are aware, the property tax burden is a subject of much conversation across Nebraska. Cities set a levy and collect property taxes as well. In 2017, cities collected $398 Million from property owners. This amount is dwarfed by the $462 Million in sales taxes collected by cities during that same time period–a total of 16% more to be exact. Combined, cities and villages assessed $860 Million in local taxes to fund city government. These, of course, are not the only sources of revenue for cities and villages.
A number of tax reform proposals include charging sales taxes on goods and services that are currently exempt. The concept is to expand the tax base over more goods and start charging sales taxes on previously untaxed services. The purported purpose would be to use the additional revenues collected by the state to fund local government activities currently paid by property taxes. The historical experience and practical outcomes of that tax policy are the topic of another column, but the proposal does have significant tax implications beyond generating state revenue. Charging sales taxes on more goods and services will increase the amount you pay in local sales tax as well.
Unlike a simple increase in the state sales tax rate, which only increases your tax bill to the state, eliminating current sales tax exemptions increases both state and local taxes. Whether or not local cities would lower their property taxes in the same amount their sales tax revenue increases would be determined by each community. They could simply use the increased revenue as a windfall and increase their spending and your total tax bill.
Since 2006 Nebraska municipalities have collected over $4.6 Billion in local sales and use taxes. A 54% increase in sales taxes collected, over $162 Million more is charged annually by city governments today. During that same time period, city property taxes collected increased by 57%, from $253 Million to the current $398 Million. I don’t know about your personal situation, but I can assure you neither my income nor my disposable budget have increased by 50% since 2006. It is no wonder Nebraska tax payers are feeling pinched in every direction.
Any honest discussion about balancing Nebraska’s tax burden must include all of the taxes Nebraskans pay. Excluding significant tax burdens from the analysis of any tax solution, such as local sales taxes, is akin to trying to solve a Rubik’s cube with the specific color of half the squares covered. The “big three” is an incomplete representation of Nebraska’s tax burden. It must include all taxes collected by state and local government, including local sales tax.