A bill will be filed this legislative session to eliminate most business sales tax exemptions as well as sales tax breaks enjoyed by farmers in order to pay for the elimination of the state income tax.
Gov. Dave Heineman unveiled the details of his proposal to eliminate the state income tax during a news conference in his Capitol office. The individual and corporate income tax in Nebraska generates $2.4 billion annually for state government. The state grants $5 billion in sales tax exemptions. The governor proposes eliminating an equivalent amount of sales tax exemptions to offset the loss of income tax revenue.
“You look at it at a very high level and philosophically it’s real easy to understand,” Heineman told reporters during the news conference. “We grant $5 billion in exemptions and if you just eliminate half of them, you eliminate the individual income tax and corporate tax.”
The largest sales tax exemption targeted in the bill totals $1.4 billion. It exempts sales tax on ingredients and component parts used by businesses.
Medical equipment and medicine, now exempt from the state sales tax, would be taxed, a total of $125 million; including prescription drugs, as well as nondurable and durable medical equipment.
Another big-ticket item is the sales tax exemption on energy used in industry, which totals $122 million.
A number of sales tax breaks enjoyed by farmers would be eliminated: an exemption on agricultural chemicals which totals $87 million, an exemption on gasoline and diesel used in farming which totals $82.1 million, an exemption on tractors, combines and other farm equipment which totals nearly $67 million and an exemption on seeds for commercial use which totals $42.3 million.
Agricultural leaders earlier this week signaled their resistance to losing the tax breaks, which will increase a farmer’s input costs.
Heineman said he welcomes the discussion.
“It’s tough, but it can be done civilly and respectfully. What should be in and what should be out?” Heineman stated. “But, you also need to ask that farmer and rancher, and I’m already asking them, then what are you for? Are you for the current system that penalizes our families and small businesses and we won’t grow?”
Sen. Beau McCoy of Omaha, who will be one of the bill’s sponsors, agreed with the governor that the debate has just begun.
“We need Nebraskans to weigh in on this. We need the agriculture community to weigh in on this and tell us what’s important to them and what their suggestions would be on this,” McCoy said.
The other bill sponsor, Sen. Brad Ashford of Omaha, suggested that the agriculture sales tax exemptions illustrate a problem with the state sales tax code; it picks winners and losers.
“Omaha and the rest of the state is a transportation hub. Distribution of goods is a major industrial base of our state,” according to Ashford. “So, they’re paying tax for that truck and there is no tax being paid on that combine.”
The plan retains the sales tax exemption for food and for gas as well as other tax breaks enjoyed by Nebraska Lotto, newspapers and nonprofit health clinics.
Heineman insisted during the news conference, as he has since proposing to eliminate the state income tax in his State of the State address, that the move would improve Nebraska’s business climate and help officials attract more corporations to the state.
“I’m trying to create more jobs and higher-paying careers,” Heineman stated. “And, again, when people evaluate your state, the first thing they look at is the tax code and it’s not the sales tax, it’s the income and the corporate tax.”
Sens. McCoy and Ashford will also introduce a second, less ambitious, bill. It would eliminate approximately $395 million in sales tax exemptions in exchange for the elimination of the corporate income tax and an exemption of the first $12,000 of retirement income for married couples and the first $6,000 of retirement income for individuals.
AUDIO: Gov. Heineman holds news conference unveiling proposal to eliminate sales tax exemptions. [12 min.]