‘Everybody’s got to play’: Breaking down Nebraska’s more than 100 sales tax exemptions

Zach Wendling

FREMONT, Nebraska — While the State of Nebraska annually collects about $2 billion in sales taxes, another $6.5 billion is left off the table through more than 100 sales tax exemptions.

Those exemptions have been approved by the Legislature, little by little, since the statewide sales tax was first implemented in 1967 because voters overturned a tax on intangible property and certain household goods. Over time, lawmakers have argued that certain interest groups are worthy of a tax break.

Services are implicitly left out of Nebraska’s tax code unless lawmakers add a tax, former Nebraska Tax Commissioner Kim Conroy wrote in a tweet. Tangible personal property, on the other hand, is subject to sales taxes unless exempted.

More town halls scheduled

Gov. Jim Pillen’s office has scheduled four property tax town halls for this week:

Thursday, June 13 at 11:30 a.m. — Mid-Plains Community College North Campus, 1101 Halligan Drive, North Platte.
Thursday, June 13 at 4 p.m. — Norfolk Country Club, 1700 Riverside Blvd., Norfolk.
Friday, June 14 at 1:30 p.m. — Auburn Manor, 1617 Central Ave., Auburn.
Friday, June 14 at 3:30 p.m. — Arbor Bank, 911 Central Ave., Nebraska City.

Nebraska Gov. Jim Pillen has made clear that every exemption is on the table this year, ranging from admission to Omaha’s Henry Doorly Zoo to laundry services to hair cuts and certain pet-related services and agricultural and business inputs.

But taxing those inputs, such as materials, seeds, artificial insemination of farm animals and water irrigation, has been widely condemned by some senators across ideological divides.

“Everybody’s got to play in the game,” Pillen told the Nebraska Examiner.

‘I’m working day and night’

Much of the talk around sales taxes, as well as a previously rejected effort to raise the state’s sales tax rate for the first time in more than 20 years, revolves around Pillen achieving his goal of reducing property taxes by 40%, or $2 billion, in his first two years in office.

Pillen is now pitching whether and how to broaden the state tax base, such as through certain tax exemptions, as he remains focused on calling a special session to adopt changes in the state’s system of taxation.

“We’re not talking about discretionary sales tax anymore,” Pillen said.

The governor has said at multiple property tax town halls he wants to see Nebraska collect fewer taxes overall. At more recent events he has suggested possibly reducing the statewide sales tax rate, from 5.5 cents per dollar to 5 cents per dollar.

That would be a significant shift from his proposals last winter, which included raising the state sales tax rate by 1 cent to 2 cents.

Pillen hopes to use the town halls to rally Nebraskans to press their state senators to support Pillen. He needs 33 votes for an eventual property tax session. The town halls, he says, are not just for talk.

“I wouldn’t be here if I didn’t think we were going to win,” Pillen told an audience Friday in Fremont.

“We’re not going in there hoping we’re going to win. We’re out here because I say, ‘BS,” Pillen continued. “If you don’t want to call, then don’t (expletive deleted) to me next year about it. If you don’t want to help, (expletive deleted), I can’t do it all myself. I need everybody’s help. … I’m working day and night.”

Pillen is ramping up the pressure on state senators, including Fremont’s representative, State Sen. Lynne Walz.

“I’m not here to make threats,” Pillen said. “I love Senator Walz, but if she’s going to vote against me, if she’s not going to be for fixing property taxes, I’ll be back. We have to fix it. And we have to come to a consensus to fix it.”

If one special session fails, he said, he’ll call special sessions “til Christmas.”

Balancing the tax ‘equation’

State Sen. Tom Brandt of Plymouth said he is in favor of eliminating some tax exemptions and that the “sky is not going to fall” if some exemptions are removed, such as those for services by lawyers and accountants, along with exemptions for pop, candy and zoo admissions.

Nebraska’s state taxes are often referred to as a “three-legged stool,” referring to property, income and sales taxes.

However, Brandt said, a true “tax shift” has come to property taxes, which are on the verge of increasing $1 million each day and could reach $6 billion total in the next couple of years. Pillen has presented a chart at each of his town halls about the rate at which property tax is growing.

Income or sales taxes, Brandt said, might need to “help solve the other part of the equation.”

Sales taxes are ‘regressive’

State Sen. John Cavanaugh of Omaha opposed the latest tax package, pitched by Pillen during this year’s regular legislative session because it originally called for an increase of one or two cents in the sales tax rate. Cavanaugh said sales taxes are, by definition, “regressive” and would have a bigger impact on lower income residents, who don’t buy as many discretionary items and have less of a choice about their purchases.

“While it may seem attractive to some people to put a tax on pop and candy, it would disproportionately affect poorer folks,” Cavanaugh said.

Brandt said that if people are getting their food just from a convenience store, such as for pop and candy, “you got a bigger problem.”

In the last two years, state senators have expanded, not decreased, the list of tax exemptions, including Cavanaugh, who successfully argued this year to exempt diapers for both babies and adults from taxation.

“To pay for property tax relief by just shifting that burden more disproportionately onto folks who maybe can’t afford to buy property because [of] the fact that they’re lower income, means that they are paying more in taxes and not deriving this benefit that is being proposed,” Cavanaugh said.

The latest new or expanded exemptions include:

Baling wire and twine.
Certain nonprofits that offer community-based mental health or substance use services.
Electric energy when stored, used or consumed by a motor vehicle when the electricity is subject to a new excise tax.
Bullion (gold or silver) that will now also include coins, notes, leaf, foil and film.

‘You’re raising taxes’

State Sen. Julie Slama of Dunbar was one of the leading opponents to the most recent tax package, Legislative Bill 388, stating it came from a “baseline belief” that certain taxes can’t be raised to cut other taxes. She argued that the governor can’t say he cut taxes by adopting that model.

“There’s no guarantee that that money from increased revenue is going to be one-to-one property tax relief,” Slama said. “It just isn’t.”

Pillen has argued that taxing business or agricultural inputs would actually lower taxes overall. He clarified in Fremont that Nebraskans shouldn’t pay sales taxes on items that count for personal property, such as farm machinery.

Slama said this would be “double taxation,” while Brandt agreed the move would be a “huge red flag” and might lead some businesses to the state.

Brandt pointed out that for pop or candy, as an example product, the manufacturer does not pay sales tax on the ingredients. Instead, the consumer pays sales taxes on the finished product.

The Nebraska Department of Revenue’s 2022 Tax Expenditure Report estimated that the state is not collecting $1.7 billion from exemptions for business components or ingredients. Another $2.1 billion is not collected through numerous agricultural exemptions, from artificial insemination, animal feed and veterinary services to chemicals, water irrigation and machinery parts or equipment.

“You’re raising taxes on farmers to say that you’ve cut property taxes for farmers. Nebraskans are smarter than that,” Slama said. “I’m not going to, in my last act in the Legislature, vote to raise taxes, especially not on farmers.”

Estimates were not available for some exemptions and didn’t include carveouts passed in 2023 or 2024. This means the state is likely not collecting more than $6.5 billion in annual revenue.

‘Property tax task force’ in progress

State Sen. Rob Clements of Elmwood, chair of the Legislature’s Appropriations Committee, said he would prefer not to tax business inputs for that reason.

“Otherwise, I think it’s best to tackle a wider variety so one person can’t say, ‘I got picked on and he didn’t,’” Clements said. “I think a broad base is better.”

Clements confirmed he is part of a “property tax task force” working to craft a tax proposal, which includes more than one dozen state senators, according to an Examiner count. Pillen, Lt. Gov. Joe Kelly, Budget Director Lee Will and State Treasurer Tom Briese, a former state senator, are also part of the discussions.

State Sen. Lou Ann Linehan of Elkhorn, the Legislature’s Revenue Committee chair, confirmed there have been meetings at the Governor’s Mansion but had no update.

How to ‘expand the base’

A number of exemptions were considered and abandoned in this year’s regular legislative session that were estimated to gather $234 million in additional revenue in the first year. Proposals for about half of that sum made it into the final 2024 proposal, and some could resurface, including:

A cigarette tax hike was also on the table, as was a proposal from State Sen. Jana Hughes of Seward to increase taxes on vaping products. She championed the state’s first vape tax last year and sought to increase the level this year to 20% of wholesale sales.

Research suggests taxes can lead to less smoking, Hughes said, though the research isn’t yet as clear for vapes. She also proposed new state-level regulations on vapes this year.

“If we had to have anything passed, I’m so glad vape regs passed, even before increasing the tax,” Hughes said. “That’s more important, I think, in stopping kids using these.”

Pillen said he’s in favor of increasing “sin” taxes on smoking and alcohol, such as a $1 to $2 increase on the cigarette tax, which is currently 64 cents per pack. The tax has not been adjusted since 2002. Nebraska has one of the nation’s lowest cigarette tax rates.

“If you said, ‘I’m going to quit smoking, I can’t afford that,’ I say, ‘Good, then you’ll be healthy,’” Pillen said at one of his recent town halls. “If you say, ‘I don’t care,’ then I say, ‘That helps us with our property tax relief reform so that we have an economy that we can compete.’”

‘Real relief’ is the goal

Hughes said exemptions on agricultural inputs might need to stay in place, as well as exemptions on food. She noted that talk of any exemptions will lead advocates to “crawl out of the woodwork” to protect their carveouts. But broadening the tax base, she said, could lead to a lower overall tax rate.

“I think that would be a win-win,” she said.

Slama said Pillen should “come back home” to his fiscal conservative roots by eliminating certain taxing authorities and cutting wasteful spending, which is “at the core of every high tax problem.”

The biggest feedback Slama said she’s heard from her community, in her final year as a state senator, is “don’t raise our taxes for a line on a campaign card that says you cut them.”

“If you’re going to get real relief, get real relief, which I am entirely on board with,” Slama said.