Executive summary:
Nebraskans may consider primarily funding government through a sales tax
Proponents of a measure that would replace all Nebraska state and local taxes with a sales tax are currently gathering signatures to put the question on the ballot in November 2024. The proposal is known as the Nebraska EPIC Option Consumption Tax Act (EPIC Act). The ‘EPIC’ stands for eliminate all property, income and corporate taxes (as well as inheritance taxes). If passed, the state would be constitutionally prohibited from imposing any tax except for a state-administered sales tax.
Nebraska lawmakers propose 'EPIC' SALT reforms
The measure was first introduced in the Nebraska legislature as L.B. 79 earlier in 2023 but did not garner enough support to move out of committee. The backers of the reform are now attempting to place the question before the voters through two ballet measures, one that would prohibit taxes other than retail consumption or excise taxes among all state and local government entities and one that would impose the consumption or excise tax with no exemptions except for grocery items purchased for off-premises consumption. If the voters approve the measures, Nebraska state and local governments would no longer tax corporate or personal income, inheritances, or property. The state would presumably continue to impose various excise taxes. As of the date of this article, the measures have not been approved for the November 2024 ballot. Note that the language of the measures may change.
No state has ever attempted to jettison virtually all state and local taxes in favor a single sales tax. Under the proposed legislation, the sales tax rate would be 7.5%. Other discussions related to the ballot measures have suggested the rate to be no more than 8%. It would not, according to the EPIC Option (a group advocating for the singular sales tax), be imposed on groceries. Essentially, all state and local public services would be funded through the statewide sales tax. The state would distribute funds to local governments and school districts through a predetermined formula.
The ultimate cost of the single sales tax has been hotly debated. A fiscal note from Nebraska’s Department of Revenue determined that L.B. 79 could result in net revenue loss of $5 billion by fiscal year 2027-28. Others have predicted revenue losses as high as $7.4 billion a year.
Separately, Nebraska Gov. Jim Pillen has proposed an increase to the sales tax and an expansion of the sales tax base to partially account for property tax reductions. More information on the governor’s approach is anticipated within the next couple weeks as the legislature ramps up for the year.
RSM’s state and local tax policy experts weigh in on the bold – and unusual – EPIC proposal.
Amy Letourneau
Proponents of the EPIC option assert that its aim is to create jobs, increase investment, stimulate economic growth, and simplify a complex tax system. Supporters within the Nebraska legislature also hope to create a more competitive tax environment as compared to neighboring states, and to address complaints from constituents over rising property taxes resulting from increased property values. There is no doubt these objectives have merit and should appeal to voters. So, what’s the catch?
When I first read of Nebraska’s efforts to overhaul its existing tax system in favor of a consumption-based tax, I expected to see a tax rate well into the double digits. However, L.B. 79 sets the rate at a mere 7.5%. This rate is touted to be revenue neutral after eliminating other tax-types and is supported by a study from the Beacon Hill Policy Institute. Even with a significant base expansion from the current sales tax, it is hard to believe that a 7.5% rate would cut it given that the sales tax rate is 5.5% (not including sales tax from local jurisdictions). Could a base expansion really make up for eliminating virtually every other tax in the state?
I am not the only sceptic. A policy brief from the OpenSky Policy Institute, in an analysis conducted with the Institute on Taxation and Economic Policy, found that Nebraska would have to impose a consumption tax rate of 22.1% to achieve a revenue neutral result. The EPIC option is represented as a win-win for everyone. No revenue is lost, no sacrifice is required of the budget, and all Nebraska taxpayers enjoy a reduction in state and local taxes. However, we know that any significant change to an existing tax system will produce winners and losers.
This brings me to my next point. A common criticism of a consumption-based tax system is that it inherently is regressive in nature. A consumption-based tax is applied uniformly regardless of the taxpayer’s income levels, and as a result, low-income taxpayers bear a disproportionate burden of the tax to their earnings. There are ways to alleviate that burden, including advanced rebates (or ‘prebates’) and credits for low-income taxpayers. Previous versions of bills introduced by the Nebraska legislature had included just that. However, L.B. 79 omits any type of rebate, opting instead to exempt groceries and used goods from the tax. The exemption for groceries and used goods seems to assume that those provisions correct the regressive nature of the consumption-based tax, without directly analyzing the variable impact to all income-groups in Nebraska. And maybe Nebraska voters do not care that the EPIC option could lead to greater tax disparity if it means they are rid of their property and income tax bills. I guess we may soon find out.
David Brunori
I want so desperately to love this proposal. It dares mighty things. Ending the corporate income tax is, as far as I am concerned, the gold standard of good tax policy. It is a tax that does not work well and punishes workers and consumers. Ending the personal income tax – which is very high in Nebraska – is good too. People would rather have their money in their pockets. And they will spend that money more efficiently and effectively than the government can ever hope to. Inheritance taxes are envy fueled money grabs. Income and death taxes cause people to move. And people have been moving out of Nebraska.
The predictions that the cost is too high do not bother me. If the people approve this measure, they may have to accept less government. I am not sure that is a bad thing.
Alas, the proponents boldly go too far for me. Getting rid of the property tax is a fundamentally bad idea. Despite its almost universal hatred among property owners, the tax is good. It helps ensure local political autonomy. It provides a stable source of revenue for local government services. In suburbia, the tax serves as a quasi-user fee; both the tax and the services are capitalized in the value of your home. Without the property tax, local governments are dependent on a centralized financing system. They become another special interest in the capital asking for money. The property tax is key to keeping local governments efficient and effective.
Again, people hate the property tax. That hatred may propel this measure to passage. A better, albeit admittedly less bold, proposal would have been to swap the income and inheritance taxes for a broad-based sales tax. Then, address the issues plaguing Nebraska’s property tax regime. Such a plan would have still been EPIC.
Mo Bell-Jacobs
Bold. Budget-balancing. A step in the right direction. That’s not quite how I would describe the EPIC proposal. My colleague Amy summarizes my own thoughts well. The 7.5% or 8% rate is unrealistic. Even using back-of-the-envelope math with taking the highest and best liberties the calculation does not compute. In a state with a $15 billion annual budget, removing $5 billion is far from child’s play – it’s frankly obscene.
It’s easy to dislike taxes. The benefits of tax payments can be difficult to trace from the sales tax paid on a Big Mac to the support of a well-functioning society. But taxes pay for roads. They pay for hospitals. They pay for fire safety and police protection. They provide for incentives. They keep our society educated. They subsidize industry. They help provide security and medical care into old age. While not always effectively put to use, taxes are a critical component of society. Does U.S. subnational tax policy need work? Certainly. Is there a wand we can wave or federal law we can pass that could make that happen? Not unless Harry Potter earns that CPA and a Master of Laws (LLM).
Finally, it is worth noting the benefit of value added taxes (VAT) in the United States. Almost every country in the world has a VAT. Many function very well and, if you turn your head and squint, this proposal has a slight blur of a VAT (although completely unintentionally and perhaps more of a stretch than I care to admit). Consider a tax that is broad-based and easy to administer, collected at each stage of production, efficiently tracked and collected and able to replace the growing compliance nightmare that is the U.S. subnational indirect tax system. Maybe we should be exploring VAT structures instead of unique sales and use tax proposals?
Perhaps the EPIC folks are right. Changes are past due and needed now. I’m just not sure the wholesale elimination of a number of taxes for an 8% sales tax will get Nebraskans to where they need to be.
