Across the country, states are overly reliant on sales tax revenues. In 2016, states collected $441 billion from sales taxes, which accounted for 35 percent of states’ own-source (not federally funded) general revenue, according to the Tax Policy Center.
In Nebraska, the state legislature is considering a major tax reform proposal (Legislative Bill 289) that would hike sales and sin taxes while reducing property taxes—a tax swap that would place a major burden on Nebraska consumers. If passed, L.B. 289 would give Nebraska a higher sales tax rate than every neighboring state except Kansas.
In general, sin taxes—especially those on tobacco—are unreliable and do not support long term initiatives. It’s also important to note all sales taxes are regressive because they place an increased burden on lower-income families. According to the Institute on Taxation and Economic Policy (ITEP), poor families pay almost eight times more as a share of their incomes in sales taxes than high-income families. Similarly, middle-income families pay more about five times more as a share of their incomes in sales taxes than wealthy families. ITEP found on average, low-income families pay 7.1 percent of their incomes in sales taxes, middle-income families pay 4.8 percent, and high-income families pay 0.9 percent.
Although L.B. 289 is intended to help Nebraskans, it is deeply flawed. The Cornhusker State currently has some of the highest property tax rates of any state. The average effective property tax rate in Nebraska is 1.83 percent, which ranks seventh highest in the country, according to the Tax Foundation.
These high rates are particularly detrimental for Nebraska’s farmers and ranchers, who have experienced higher property taxes over the past few years. Because of skyrocketing taxes and low commodity costs, many Nebraska farmers will probably be unable to afford these exorbitant taxes for much longer.
State lawmakers have attempted to provide increased funding to local governments in the past, and a Property Tax Credit Relief Fund funnels millions to local governments to keep property tax rates down. However, this has not lowered rates in the long term. In Lincoln County, Nebraska property tax requests increased from $42,316,249 in 2007–08 to $69,246,005 in 2017–18, a 63.6 percent rise in property taxes. During this same period, disbursements and transfers (spending) increased by 44.7 percent, and school districts in Lincoln County increased their property tax requests by 71.8 percent and increased spending by 45.3 percent. In Banner County, which is much smaller than Lincoln County, property tax requests doubled from $1,952,086 to $3,945,477.
Simply put, unless and until lawmakers cut spending, tax increases (or swaps) are inevitable.
The following documents examine sales and property tax reforms in greater detail.
Regressive Effects: Causes and Consequences of Selective Consumption Taxation
In this study authored for the Mercatus Center at George Mason University, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas examine selective consumption taxes. The authors argue they do little to change individual behavior and are extremely regressive, placing an unnecessary burden on the poor. “The study concludes that selective consumption taxes are both ineffective and regressive, and that improving education and increasing the availability of healthier goods may be better steps than raising taxes on those who can least afford them,” the authors wrote.
Research & Commentary: Nebraska Should Avoid Using Tobacco and Vaping Taxes for Property Tax Relief
In this Research & Commentary, Lindsey Stroud examines a proposal to increase Nebraska’s tobacco tax and create a vaping tax which would disproportionately impact lower income Nebraskans harm public health.
Sin Taxes: Size, Growth, and Creation of the Sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, although advocates of sin taxes claim those taxes are justified because the “sinners” impose costs on society, taxing “sins” for general budget revenue contradicts that argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being targeted results in unproductive lobbying aimed at preventing new industries from being considered “sinful.”
Nothing in this Research & Commentary 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 Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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