In the past two years, Omaha restaurant customers have paid around $50 million in taxes, and the city is now considering levying a new occupation tax on smokers. Occupation taxes are a kind of gross receipts tax, levied on gross income rather than net income, on an occupation or business.
The proposed city ordinance would add an occupation tax of about 35 cents per pack of cigarettes purchased in Omaha, in addition to the state taxes already imposed. The tax would be designated for construction of a cancer complex on the University of Nebraska Medical Center and Nebraska Medical Center campus, a $35 million city contribution over 10 years.
This tax proposal is problematic for several reasons. First, occupation taxes lack transparency; they tack additional costs on to consumer purchases with many customers being unaware of the tax. Nebraska state Sen. Deb Fischer (R-Valentine) proposed a bill in January to require cities to put proposed occupation taxes to a vote of the people, along with requiring a specific purpose for the tax revenue and a sunset date.
Second, occupation taxes are not subject to the same restrictions as income and sales taxes and could serve as a new medium for large tax increases for municipalities seeking to close budget deficits.
Third, the tax will have a strong detrimental effect on Omaha businesses. Omaha retailers and wholesalers will lose sales as consumers avoid the tax by buying cigarettes outside the city.
Fourth, using tobacco taxes as a source of revenue can lead to budget shortfalls. Tobacco taxes are notoriously unreliable, and as the number of smokers has fallen in recent years, the taxes are a shrinking source of revenue.
Finally, cigarette taxes unduly burden moderate- and low-income individuals. According to the Bureau of Labor Statistics, 95.8 percent of tobacco expenditures are made by consumer units (people spending together) who earn less than $150,000 a year.
Although an expanded medical campus could be beneficial, critics say funding its construction is not a proper function of city government. “The core functions of city government are police, fire and public works,” said Chip Maxwell of the Omaha Alliance, WOWT Omaha reported. “You could also make the argument for parks, pools and libraries, which many families use, but now we’re talking about another realm with the city forcing its taxpayers to subsidize medical research at the state university?”
The following articles examine occupation and tobacco taxes and Omaha’s proposal from multiple perspectives.
New Cigarette Tax Could Help Fund UNMC Cancer Center
http://www.omaha.com/article/20120907/NEWS/120909794/1161
Juan Perez Jr. and John Ferak of the Omaha World-Herald discuss the Omaha City Council proposal to use an occupation tax on cigarettes to help fund the construction of a cancer complex on the University of Nebraska Medical Center and Nebraska Medical Center campus.
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
http://heartland.org/sites/default/files/%287-25-2011%29%20Lehrer%20on%20Tobacco%20Taxes.pdf
This Heartland Institute Policy Brief notes, “Tax increases above current levels are not justified by appealing to the costs that smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”
Are Tax Dollars the Answer?
http://www.omaha.com/article/20120911/NEWS0802/709119961/1677#are-tax-dollars-the-answer
In an editorial, the Omaha World-Herald discusses the proposed occupation tax on cigarettes, the possible effects on Omaha’s business climate, and other funding possibilities for the medical complex.
Nebraska Department of Revenue: Occupation Taxes
http://www.revenue.state.ne.us/info/occupation_tax.html
The Nebraska Department of Revenue explains what occupation taxes are, how they work, and how they are calculated.
Fischer Introduces Bill to Control Occupation Taxes
http://watchdog.org/44229/ne-fischer-introduces-bill-to-control-occupation-taxes/
Deena Winter of Nebraska Watchdog discusses a bill proposed by Nebraska State Senator Deb Fischer (R-Valentine) that would require cities to put proposed occupation taxes up for a vote, along with requiring a specific purpose for the tax revenue and a sunset date for the tax.
Replacing the Business and Occupation Tax with a Single Business Tax
http://www.washingtonpolicy.org/publications/brief/replacing-business-and-occupation-tax-single-business-tax-0
The Washington Policy Center examines Washington’s Business and Occupation tax (B&O), describing its history and present administration, and proposes a revenue-neutral alternative that would simplify the financial burden state lawmakers place on businesses and their customers.
Give Citizens a Voice on Occupation Taxes
http://www.platteinstitute.org/blog/blog_detail.asp?id=160
The Platte Institute argues in favor of a proposal to give voters a chance to vote on whether occupation taxes should be applied in their communities.
Nebraska Lawmakers Scrutinize Occupation Tax Bill
http://www.norfolkdailynews.com/news/nebraska-lawmakers-scrutinize-occupation-tax-bill/article_cceb8eac-4831-11e1-8388-0019bb30f31a.html
Paul Hammel of the World-Herald Bureau speaks with local Nebraska legislators critical of Sen. Fischer’s bill calling for a vote for all occupation taxes.
Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
http://www.budgetandtax-news.org/article/25987
This Heartland Institute Research & Commentary explains how targeted tax increases on items such as cigarettes undermine fiscal soundness and the press for real budget reform.
Ten Principles of State Fiscal Policy
http://www.budgetandtax-news.org/article/19354
In a concise, easy-to-read guide to state fiscal policy matters, The Heartland Institute presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Platte Institute Legislative Wish List: Restrict Local Occupation Taxes
http://www.platteinstitute.org/docLib/20120104_1-4-2012.pdf
John S. McCollister, executive director of the Platte Institute, examines several changes the organization suggests for the 2012 Nebraska legislative session. A primary goal is increased restrictions on occupation taxes. Restricting these taxes would protect citizens and keep government transparent.
Debunking the “Tax Thee, But Not Me” Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
http://www.ntu.org/main/press_issuebriefs.php?PressID=1001&org_name=NTU
The National Taxpayers Union observes, “the per-capita state and local tax burden in high-tobacco tax states is 8 percent above the national average, while the general tax bill for residents of low-tobacco tax states is 15 percent below the national average.”
Nothing in this document is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at http://heartland.org and PolicyBot, Heartland’s free online research database.
If you have any questions about this issue or The Heartland Institute, contact Heartland Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
