LB 422 — a measure that will be the focus of a Wednesday Revenue Committee hearing — would help modernize Nebraska’s sales tax by expanding the tax to more services and lower the rate, which would offset any increased regressivity from expanding the base.
In Nebraska, goods are taxed unless specifically exempted by law, while services are exempt unless specifically taxed. This has contributed to a narrowing tax base as our economy has shifted away from being goods based and towards being service based.
This policy has created inconsistencies in the tax code, as well. For example, Nebraska taxes a night at the movies, but not a day at the spa. Barber shop and beauty parlor services aren’t taxed, but pet grooming services are. Indoor swimming pool cleaning is taxed, but outdoor pool cleaning is not.[1] Other states have broadened their bases to reduce inconsistencies, including South Dakota, which taxes 152 services versus Nebraska’s 81.[2]
Many of the services proposed for inclusion in LB 422, such as dry cleaning, interior design and investment advice, are more likely to be purchased by higher-income households, which helps offset the overall regressivity of the base expansion that may affect lower-income households.
Some of the services included, however, are concerning as they would exacerbate regressivity, including health care and automotive repairs, all of which would fall disproportionately on lower-income households. Excluding these services from the measure would alleviate these concerns.
A portion of the increased revenue raised by LB 422 could be used to make some targeted investments that have been recommended in recent economic development reports to grow our economy. This would include increasing access to broadband, supporting entrepreneurs through the Business Innovation Act, and supporting workforce development through workforce training.
Other productive uses of these funds include increased investment in K-12 education to help reduce Nebraska’s high reliance on property taxes or bolstering the state’s cash reserve, which can help the state weather the impact of the pandemic and the effects of recently passed tax legislation that will reduce state revenues for years to come.
The hearing on LB422 starts at 9:30 a.m. NET Nebraska will stream the hearing live.