Scarcely had Governor Heineman revealed half of his idea to eliminate income tax in favor of a somehow broader sales tax, than professor Richard Pomp, tax teacher and writer, and former tax change commission member, arrived in Lincoln to offer a few tax basics.
Invited by the Open Sky Policy Institute, the professor offered serious advice in homey and humorous terms. The Institute is a Nebraska group that says it was formed to provide impartial and precise research, analysis and education to put Nebraska on a sustainable long-term growth path that balances the state’s needs with revenue.
Speaking to 20 senators, staff and other invitees at a January 17 policy symposium at the Capitol and earlier at a breakfast to mostly Lincoln area community leaders, Pomp drew on his membership in New York and California state tax reform groups and his legal academic research and teaching to offer advice.
“First, don’t look for the Holy Grail,” he advised, “and beware of false messengers,” indicating most states have a mixture of the same taxes that Nebraska now has.
Just the Facts, Ma’am
“There is a lot of empirical evidence (verifiable information derived from observations) out there about taxes. You don’t have to rely on self-serving anecdotes” about the impact of taxes, he said.
“Don’t put all your eggs in one basket,” said Pomp, comparing tax systems to investments and recommending diversification. He said some states are exceptions. For instance, Wyoming and Texas count on taxes from gas and oil receipts. And Florida and Nevada are unusual because they are tourist destinations.
“New Hampshire is just quirky. Look at their state motto, ‘Live free or die.’” He said they have low taxes and a poor public sector with poor schools, noting that many professors who teach at Dartmouth, send their children to school in Vermont.
Pomp offered another two-part rule of taxation policy: “Do no harm and beware the law of unintended consequences.” Of all the taxes, only income tax is progressive, taking proportionally more from those who can afford more. That contrasts with sales tax that generally takes more from those who have less.
“If you eliminate personal income tax and increase sales tax, you will increase taxes on the middle class,” he said. “As an outsider, I don’t see a problem with the Nebraska personal income tax. It’s certainly within the range of many other states.”
“Sales tax is also a volatile tax,” Pomp added. “In a recession, sales tax revenue goes down quickly.” He said that if a state increases its reliance on any one tax, it may weaken the reliability of its revenues.
Referring to an argument made in favor of the Governor’s idea, Pomp asked two questions: “Will eliminating income tax improve Nebraska’s ranking with the Tax Foundation? Yes. The second question is, so what?” He contended that rankings are overrated. He said there is no fact-based evidence that cutting income tax is a viable strategy for economic development.
Pomp said that Nebraska has been ranked number one in the nation for tax rates for new businesses. But many other factors figure into a business’s location decision, he said, notably vibrancy of its social structure.
Still on the topic of ratings, Pomp asked, “Will eliminating income tax attract retirees to Nebraska? AARP already ranks Omaha number four in places to retire. You should talk about that.”
Pomp reminded listeners that sales tax does not tax business inputs, otherwise that would be “pyramiding,” taxing taxes. There should be no taxes on ingredients, components or items for resale. “This is a basic premise of sales tax and should be off the table,” he emphasized.
“What should be taxed?” he asked. “Services.” Expenditures have changed since sales tax began, shifting from things to services and the tax code should be updated to reflect that, he advised.
He said “waste in taxation” should be eliminated, pointing to tax credits. He said research raises questions whether such credits attract new businesses to a state. But, he added, they are certainly unfair to existing businesses. In Nebraska, he noted, some credits are not even open records and cannot be evaluated. They are expenditures of public money, he said, and should be opened for evaluation for effectiveness.
Pomp said the Governor is correct that the tax system needs review but it should not be changed wily-nily. He said that the fact that the Nebraska has had long-term structural deficits suggests something is amiss, recommending Nebraska form a tax study commission with time and a staff.
“Successful change in New York took four years,” he said. “That was a problem in California,” he added. “They rushed it. It was a travesty.”