OpenSky testimony for the Tax Modernization Committee

Good afternoon chairman Hadley and members of the Tax Modernization Committee. My name is Renee Fry and I’m the executive director of OpenSky Policy Institute. I want to begin by thanking you for doing this important work.

We all know that property taxes are a concern for Nebraska families. It’s no surprise, as property taxes have been increasing faster than inflation since the late 1990’s. And property taxes aren’t just a rural issue- they are a state-wide issue and have been for decades.

So what can we do about it?

First, we can broaden the sales tax base by taxing consumer services. We spend a greater share on services today than we did when the sales tax passed in the 1960’s. Failure to collect revenue from many of these consumer services has contributed to the inability of our sales tax to keep pace with the state’s economy, and has led to inconsistencies in how we tax goods and services in our tax code. And when our state revenues fall, our practice has been to reduce state aid to local governments, increasing their reliance on property taxes. We have included in our materials a list of services that we estimate would raise approximately $150 million per year.

We can then use this revenue to reduce property taxes.

In the past several years, we have cut state aid to local governments, such as cities, counties and school districts. In fact, we rank 43^rd in the percentage of local government funding that comes from state aid. We rank 49^th in the percentage of K-12 education funded by state aid, and it would take over $500 million in additional state aid to get us to the national average.

States like Nebraska that are heavily reliant on property taxes to fund K-12 education have greater challenges ensuring that all students receive a good education across the state. For example, even with much lower property tax rates, districts with the highest property values are able to raise nearly 3.4 times as many dollars per student compared to areas with the lowest property values in the state.

Therefore we recommend increasing state aid to K-12 education to ensure a more equitable distribution of resources while also reducing property taxes. An infusion of state aid combined with property tax limits has worked to significantly reduce property taxes before. I have passed out a couple of charts that illustrate this- more state aid keeps property taxes down. Cuts to state aid result in increased local taxes. Regardless of how state aid works in other states, we know, without a doubt, that this has been an effective property tax reduction mechanism in Nebraska.

We also suggest that the state reinstate state aid for other local governments and examine countywide local sales taxes and local income and payroll taxes as potential revenue raising options.

In part to offset the regressive effect of broadening the sales tax base, we recommend implementing a circuit breaker to provide a tax credit based on the percentage of income people pay in property taxes. About 18 states use circuit breakers to help offset high property taxes for those with relatively low incomes.

The cost of circuit breakers can vary based on how they are designed. They can include caps or no caps and the income levels and amount of rebate tend to be unique to each state, its particular needs and the cost of the program. Typically the property tax is still collected at the local level with a refundable credit provided through the income tax. In my opinion, this would not violate the uniformity clause as it would not increase the property tax burden of the remaining taxpayers.

We also recommend exempting agricultural repair and replacement parts and making sure that the state’s individual income tax rates and brackets automatically take account of inflation, a process known as indexing.

We do not, however, recommend cutting income taxes for the following reasons:

In the past decade, Nebraska’s economy grew faster than all neighboring states with lower income taxes.
Nebraska’s unemployment rate was lower than nearly all of those neighboring states, as well.
The only neighboring state with a faster-growing economy in that time was Iowa, which has a higher top income tax rate than Nebraska.
Relative to other similarly situated states, our income tax is already low.
And because the vast majority of academic research shows that income tax cuts do not create jobs and have no major impact on state economies.

The income tax is a progressive tax, which means people pay higher rates as their incomes increase. So it’s higher earners who benefit most when income taxes are cut. And when a cut to the income tax is combined with a broadening of the sales tax, the net effect is extremely regressive, and results in the wealthiest Nebraskans getting a significant tax cut, and everyone else getting a tax increase.

In order to help illustrate how the various options would affect real Nebraska taxpayers, we partnered with an accountant who provided us with anonymous but real Nebraska taxpayer information and how much they actually pay in taxes every year. We’ve applied the various options to these real taxpayers, so you can see the impact to actual Nebraskans. We’ve also completed a comprehensive memo reviewing the options put forth by the committee which is available on our website.

Finally, we strongly recommend not using the cash reserve to lower taxes. While the cash reserve is currently at the minimum recommended level, this would quickly deplete the cash reserve, leaving us without a strong safety net. It’s a risky move, especially as corn prices are dropping. In fact most states are looking to trying to strengthen their cash reserves — not weaken them.

Thanks so much for your time and hard work. I’d be happy to answer any questions.