Nebraska tax change “options” headed for public hearings

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September 9th, 2013

Filters emerge from an electric oven at Baldwin Filters in Kearney. Nebraska does  not tax energy used in manufacturing, but is considering tax changes. (Photo courtesy Baldwin Filters).

Filters emerge from an electric oven at Baldwin Filters in Kearney. Nebraska does not tax energy used in manufacturing, but is considering tax changes. (Photo courtesy Baldwin Filters).

Lincoln, NE– A group studying state taxes is about to hit the road to ask Nebraskans about possible changes. The governor says he thinks the group’s headed in the right direction. But every possible change also involves tradeoffs.
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Last week, the Legislature’s Tax Modernization Committee met in the Capitol to discuss options. This week, Gov. Dave Heineman said he’s optimistic.

“I’m very encouraged by what I hear from them and then my own conversations with them, that we’re headed towards a package of income and property tax relief. And that would be good news,” Heineman told NET News.

That might make it sound like the committee is planning to propose cutting taxes. But according to its chairman, Sen. Galen Hadley of Kearney, “The charge of this committee is not to lower the overall revenues of Nebraska. Nor is it to increase the overall revenues of Nebraska. It’s to make sure that the system is equitable to the citizens of Nebraska.”

Is the governor’s goal — income and property tax relief — compatible with the chairman’s statement that it’s not his committee’s job to decrease revenues?

Heineman says they are compatible. Last January, he proposed abolishing income taxes and making up the lost revenue by applying the sales tax to currently exempt items, like inputs used in agriculture and manufacturing.

The Legislature killed that plan. But Heineman suggests the committee could consider a scaled-back version.

“I think most of us are in agreement: ag and manufacturing inputs are off the table. But having said that, you’ve also got, for example, energy used by agriculture and manufacturing is exempt, only for those two industries but not for other industries. So I think there’s an item you ought to take a look
at,” Heineman said.

One company that could affect is Baldwin Filters, based in Kearney, where it manufactures filters for trucks and heavy equipment. Baldwin employs about 900 people in Kearney, and is about to start work on a $40 million expansion it says was based in part on the belief Nebraska would remain a manufacturing-friendly state.

Baldwin said its market is highly competitive, and the proposal to end the state’s manufacturing energy exemption would substantially increase its operating costs. That point is driven home as Dan Schulte, vice president for operations, shows a visitor around the plant, where giant machines powered by electricity are stamp, cut and shape steel and cellulose into filters.

Taxing energy for manufacturing isn’t specifically on a list of options the Tax Modernization Committee is compiling for public hearings later this month. But reviewing sales tax exemptions in general is.

So is taxing certain consumer services. The list isn’t spelled out, but previous bills have listed everything from car repairs to haircuts. Also on the list are proposals to cut income tax rates, or to limit property taxes to a certain percentage of income.

Hadley said there are trade-offs to all these options.

“If we feel it’s unequitable (sic) in one area because we’re taxing too much, then we might have to look at other areas where we feel we might not be taxing as much as we should be,” Hadley said.

Trying to lower some taxes could raise others, even without legislative action. For example, Nebraska could lower the taxable value of agricultural land, to bring it closer to the level of taxation in neighboring states. But if local governments still try to collect the same amount overall, that could drive up taxes on everything from tractors to railroads, pipelines, homes, and businesses.

On income taxes, the committee is looking at options including cutting rates on individuals, businesses, and capital gains. Also on the list is reducing or eliminating taxes on Social Security income, which Hadley says would help many retirees.

However, Hadley says a proposal to exempt military retirement income is not on the list, because it begs the question of where to stop.

“I’ve heard bills to exempt teacher’s retirement, state government employees retirement, federal government employees retirement, Social Security, military retirement, or all retirement. That’s six different potential exemptions of retirement,” he said.

But Heineman said military retirement is still on his list.

“I think military retirement ought to be exempt from taxation. These are men and women who fought for our freedoms, put their life on the line. In my opinion, that one’s still very much a viable option. And again, I think it’ll be considered ultimately in the mix, if not by this committee then by the Revenue Committee and ultimately the entire Legislature,” the governor said.

Hadley calls the Tax Modernization Committee’s list of options a “work in progress” – just because something’s on the list doesn’t mean the committee thinks it’s a good idea. And just because something’s not on the list doesn’t mean it should not be discussed.

“These aren’t all the options. But they’re some of the potential options. And if you have other options, tell us,” Hadley said.

Nebraskans will have their chance to do just that, in a series of public hearings that begins Sept. 23rd in Scottsbluff.

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