Nebraska Gov. Heineman Renews Push to Eliminate Income Taxes, End Exemptions

Gov. Dave Heineman, who tried to eliminate the state income tax earlier this year, wants to replace the lost revenue by ending some sales tax exemptions. But legislators still aren't sold.

At Governing's Cost of Governing summit in Washington, D.C., Tuesday, Nebraska Gov. Dave Heineman continued his push for eliminating his state's income tax and replacing it with broader sales taxes.

Of the state's $4 billion general fund, about $2.4 billion comes from personal and corporate income taxes and about $1.5 billion from sales taxes, according to the governor. But because of sales tax exemptions, the state is missing out on at least double that amount. So he's pitching to Nebraska lawmakers and citizens to eliminate the personal income tax and make up for the lost revenue by getting rid of some of the sales tax exemptions.

A Republican serving in his second term, Heineman made a similar proposal earlier this year that was defeated in the state legislature -- and he wasn't alone. Lawmakers in several states -- including Kansas, Louisiana, Maine and North Carolina -- also proposed eliminating the income tax this year.

But next week, the topic of tax reform in Nebraska will again heat up when officials begin a series of five public hearings on the issue. By December, the state's Tax Modernization Committee (a product of this year's tax debate) will issue recommendations on the state's tax system.

But thet panel does not appear entirely sold on Heineman's idea. According to the Omaha World-Herald, the committee is seeking feedback about cutting property taxes, broadening the tax base and reducing (but not eliminating) income taxes.

State Sen. Galen Hadley, who leads that tax committee, has said testimony from tax experts suggests the state's mix of income and property tax rates aren't that out of line, the newspaper reports. "A major overhaul (of state taxes) doesn't seem to be justified," Hadley told the publication.

Heineman disagrees.

"Our current tax code ... was designed in the 1960s for the 1960s," Heineman said Tuesday. "We need a tax code that represents the future -- not the past."

He touts eliminating "special interest exemptions" on things like newspaper subscriptions and food sold at hospital cafeterias. Both are outdated and neither serve a real purpose anymore, according to the governor.

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"The citizens are with us," Heineman said. "The challenge is I've got to get the business community and other interest groups ... to understand what this system's all about." The governor said various business interests will likely oppose each type of exemption.

The debate is largely spurred by Nebraska's recent economic success. Tax collections are exceeding forecasts, and its cash reserves grew to a record $679 million this year.

Heineman says "it's a fact" that states with lower income tax rates grow faster economically. But some tax and budget experts disagree.

According to the Center for Budget and Policy Priorities, six states enacted significant personal income tax cuts in the 2000s prior to the recession. Three of them -- Arizona, Ohio and Rhode Island -- actually saw their economies fall behind the rest of the country in terms of job creation, production growth and income growth in the wake of those cuts. Those that did outperform the rest of the country  -- Louisiana, New Mexico and Oklahoma -- are energy-producing states that likely saw economic growth due to rising oil prices.

The left-leaning center also says other factors, such as trends in the national economy and the quality of a state's workforce, play a bigger role in a state's economy than income tax rates. It warns that cutting income taxes would likely result in fewer services with no guarantee of economic growth.

But the governor said that while he's proposing eliminating personal income taxes, he wants it done in a revenue-neutral way so that funding for education or other programs won't be cut.

Some tax experts also argue that by having diverse sources of revenue, states are able to reduce their risk when one of them takes a hit.

As it stands, nine states do not tax wage income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Regardless of how it plays out in Nebraska, Heineman said the debate will be a major topic in the state legislature again in 2014.

"I am confident that next year, the total focus of our sessions is going to be the tax issue," Heineman said. "They're not leaving until they get this one done."

Communications manager for the Texas Medical Center Health Policy Institute