Key Findings

• A possible Nebraska poll initiative, often called the EPIC Choice, would get rid of all revenue, property, and inheritance taxes and substitute them with a statewide consumption taxA consumption tax is usually levied on the acquisition of products or companies and is paid immediately or not directly by the patron within the type of retail gross sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an revenue tax the place all financial savings is tax-deductible.
  of seven.5 p.c.
• The proposed price relies on flawed calculations that don’t mirror the tax baseThe tax base is the entire quantity of revenue, property, belongings, consumption, transactions, or different financial exercise topic to taxation by a tax authority. A slim tax base is non-neutral and inefficient. A broad tax base reduces tax administration prices and permits extra income to be raised at decrease charges.
  outlined within the underlying proposal.
• TaxA tax is a compulsory cost or cost collected by native, state, and nationwide governments from people or companies to cowl the prices of common authorities companies, items, and actions.
  Basis calculations recommend that the EPIC plan would require a statewide consumption tax price of 21.6 p.c or extra.
• The EPIC Choice doesn’t stop native governments from enacting consumption taxes, which means the entire price might be a lot larger than marketed.
• EPIC would probably end in substantial cross-border buying, permitting Nebraskans near a border with a decrease gross sales taxA gross sales tax is levied on retail gross sales of products and companies and, ideally, ought to apply to all closing consumption with few exemptions. Many governments exempt items like groceries; base broadening, comparable to together with groceries, may maintain charges decrease. A gross sales tax ought to exempt business-to-business transactions which, when taxed, trigger tax pyramiding.
  state to avail themselves of the decrease charges whereas leaving taxpayers within the inside of the state to bear the brunt of the newly established consumption tax.
• The anticipated financial advantages of the proposed tax overhaul are unlikely to materialize beneath such a excessive consumption tax price.
• Policymakers in search of to constrain property taxes have better-targeted methods to realize these goals.

Introduction

No state has ever abolished the property taxA property tax is primarily levied on immovable property like land and buildings, in addition to on tangible private property that’s movable, like automobiles and tools. Property taxes are the one largest supply of state and native income within the U.S. and assist fund colleges, roads, police, and different companies.
, which is way and away the first supply of native authorities income in each state, however an formidable Nebraska proposal would make the Cornhusker State the primary to take action—and that’s simply scratching the floor. The EPIC Choice, which stands for Get rid of Property, Revenue (and Inheritance), and Company Taxes,[1] would do what it says on the label, repealing nearly all of Nebraska’s taxes and changing them with a broad-based consumption tax at an enticingly low price of seven.5 p.c. Sadly, there’s an issue with the elements checklist. Whereas proponents tout a research they commissioned figuring out a 7.23 p.c revenue-neutral consumption tax price,[2] and the formal proposal is for a 7.5 p.c price,[3] a Tax Basis evaluation finds that the speed would should be at the very least 21.6 p.c to offset the foregone income. Concentrating state and native tax revenues in a single exceedingly high-rate tax, furthermore, would have deleterious financial results. Somewhat than facilitating financial progress, this extremely anomalous tax would undercut the state’s competitiveness.

Hovering property tax burdens are a real concern, and it’s acceptable for policymakers to hunt options. Advocates of the EPIC Choice are appropriate, furthermore, that consumption taxes are extra conducive to progress than revenue taxes, introducing fewer financial distortions and making a extra favorable atmosphere for funding and job creation. Nonetheless, it’s attainable to have an excessive amount of of factor, particularly if the ensuing system is so radically totally different than these of different states as to create uncompetitive arbitrage alternatives. And if revenue, property, inheritance, and the prevailing state and native gross sales taxes have been all changed by a consumption tax on the implausibly low 7.5 p.c price specified within the EPIC laws, the end result could be an unprecedented fiscal disaster, with Nebraska state and native governments shedding roughly two-thirds of their present revenues.

Background

Tax competitors is actual, and lately, Nebraska has made a concerted effort to enact pro-growth, aggressive, tax reforms. Lawmakers continued this work in 2023 by accelerating beforehand enacted cuts to the person and company tax charges. Enacted in Could 2023, Legislative Invoice 754 will section down the state’s prime marginal particular person and company tax charges to three.99 p.c by 2027, with preliminary reductions of each prime marginal charges to five.84 p.c in 2024, reaching the goal three years sooner than initially projected.[4]

The identical legislation additionally replaces Nebraska’s graduated-rate company revenue taxA company revenue tax (CIT) is levied by federal and state governments on enterprise earnings. Many corporations aren’t topic to the CIT as a result of they’re taxed as pass-through companies, with revenue reportable beneath the particular person revenue tax.
right into a single price in 2025. Equally, the state’s 4 marginal particular person revenue taxA person revenue tax (or private revenue tax) is levied on the wages, salaries, investments, or different types of revenue a person or family earns. The U.S. imposes a progressive revenue tax the place charges improve with revenue. The Federal Revenue Tax was established in 1913 with the ratification of the sixteenth Modification. Although barely 100 years previous, particular person revenue taxes are the largest supply of tax income within the U.S.
charges will probably be consolidated into three starting in 2026. With these reforms, the state’s competitiveness ought to develop. Every of those modifications helps deliver Nebraska according to price reductions and different reforms adopted in competitor states.

Addressing property taxes, nonetheless, has confirmed tough, although it is rather a lot a precedence for state lawmakers, who’ve devoted important time and state assets to the duty. Nebraska owners, like their friends throughout the nation, have skilled a dramatic rise in assessed values lately, with the prospect of considerably elevated tax burdens if millages (charges) aren’t decreased commensurately.

Property tax collections mustn’t maintain tempo with hovering property values as a result of the price and worth of presidency companies aren’t depending on these values. Whereas inflationInflation is when the final value of products and companies will increase throughout the economic system, lowering the buying energy of a forex and the worth of sure belongings. The identical paycheck covers much less items, companies, and payments. It’s generally known as a “hidden tax,” because it leaves taxpayers much less well-off because of larger prices and “bracket creep,” whereas growing the federal government’s spending energy.
has elevated the price of authorities, there isn’t any purpose why a group the place property values have elevated by, say, 40 p.c ought to need to remit 40 p.c extra in property taxes from that very same set of properties. Residents aren’t receiving 40 p.c extra or higher authorities for his or her cash.

State lawmakers have sought to stem the rise in property taxes by creating, and increasing, a refundable revenue tax credit scoreA tax credit score is a provision that reduces a taxpayer’s closing tax invoice, dollar-for-dollar. A tax credit score differs from deductions and exemptions, which cut back taxable revenue, somewhat than the taxpayer’s tax invoice immediately.
to defray the price of faculty district and group school actual property taxes, and by proscribing price will increase for varsity district property taxes. For owners, each measures are welcome, however they arrive with limitations that also go away many crying out for aid. Proscribing a rise in charges is of restricted utility when assessed values are rising quick sufficient to yield substantial property tax will increase beneath unchanged charges. And whereas refundable revenue tax credit do cut back the general chunk of property taxes, they don’t constrain it at its supply, leaving localities and faculty districts free to extend property tax payments, assured within the data that the state—utilizing different income sources—will defray a few of these prices. The end result shouldn’t be true tax aid, and even when they are going to obtain an offset from the state, property homeowners nonetheless see that property tax invoice and discover it justifiably upsetting.

On this context, it’s unsurprising {that a} proposal to unravel the issue in essentially the most easy approach—by casting off the property tax—has substantial enchantment. However issues that appear too good to be true usually are. Proponents see their plan as “EPIC.” However the world of workable tax coverage isn’t so swashbuckling. The EPIC Choice is thrilling, however its promise withers beneath additional evaluation.

An Introduction to EPIC

As famous, the EPIC initiative goals to get rid of virtually all classes of taxation, together with tax expenditures (e.g., deductions, credit, and exemptions—a few of them tax preferences, however others forming structurally vital components of the tax code), and implement a consumption tax because the state’s main income supply, together with the upkeep of at present present excise taxes. The consumption tax could be imposed on a comparatively broad base, however one which nowhere close to approaches all closing consumption, with important carveouts for groceries, insurance coverage, most well being and training spending, and extra. Estimates commissioned by proponents recommend—implausibly—{that a} consumption tax price of seven.23 p.c in 2026 and 6.52 p.c in 2030 may guarantee ample income, although the plan requires a price of seven.5 p.c.[5] The EPIC-commissioned financial evaluation additionally observes {that a} decrease price may prevail if the grocery exemption have been eliminated.[6]

The EPIC Choice has been superior each as laws and, now, as a possible 2024 poll measure. The poll initiative would amend the state structure to limit Nebraska state and native governments to elevating income from “retail consumption taxes and excise taxes,” eliminating property taxes, revenue taxes, gross sales taxes (aside from the alternative consumption tax), and inheritance taxes. The constitutional modification would additionally exempt groceries from taxation. It will then be as much as the Unicameral to implement the brand new consumption tax laws, although the automobile for such motion is Legislative Invoice 79 of 2024, which follows within the footsteps of a previous legislative effort in 2021, LB 133.

The EPIC laws particularly exempts a number of classes of purchases from the consumption tax, however these purchases should still be topic to different state taxes not particularly repealed. For instance, insurance coverage premiums and gasoline aren’t included within the consumption tax base however are nonetheless topic to state excise taxes. Regardless of the precept that the consumption tax wouldn’t apply to something individually topic to an excise taxAn excise tax is a tax imposed on a selected good or exercise. Excise taxes are generally levied on cigarettes, alcoholic drinks, soda, gasoline, insurance coverage premiums, amusement actions, and betting, and usually make up a comparatively small and unstable portion of state and native and, to a lesser extent, federal tax collections.
, gaming—which is topic to a separate tax—is included within the consumption tax base.[7] Whereas the sale of an present construction is exempt, the companies of the agent(s) for the customer and vendor could also be topic to tax, and new development could be taxed as effectively. Groceries consumed off premises are exempt, however ready meals and meals consumed on premises aren’t. Curiously, authorities consumption and government-paid wages are topic to tax, which is unconstitutional as pertains to federal authorities workers and round for state and native workers, with no internet income generated by authorities paying itself.

Commendably, the laws exempts all intermediate transactions, avoiding what is called tax pyramidingTax pyramiding happens when the identical closing good or service is taxed a number of occasions alongside the manufacturing course of. This yields vastly totally different efficient tax charges relying on the size of the provision chain and disproportionately harms low-margin companies. Gross receipts taxes are a main instance of tax pyramiding in motion.
, the place a closing product has tax embedded in it a number of occasions, imposed at totally different factors of the manufacturing course of.[8] Nonetheless, these enterprise inputs at present comprise an estimated 44 p.c of Nebraska’s gross sales tax base,[9] which is unusually excessive. Transferring away from this uncompetitive system is very fascinating, and a rising variety of states are working to cut back their taxation of those transactions. However the exclusion leaves a big gap within the present gross sales tax base, which means that the newly taxed areas of private consumption need to cowl a considerable loss towards the prevailing base earlier than they will even start to offset revenues from revenue, property, or inheritance taxes.

Furthermore, EPIC has the potential to additional distort Nebraska’s economic system. As gross sales of newly constructed houses are topic to the consumption tax, EPIC may disincentivize dwelling constructing. By the use of instance, a newly constructed dwelling valued at $250,000 would value a homebuyer $304,000 after tax beneath our calculations of a revenue-neutral price. The extra value imposed on the homebuyer, with out an related improve within the worth of the house, could trigger homebuyers to go for present development, discouraging individuals from dwelling within the houses they need and making it dramatically dearer to construct new housing.

The analytical foundations underpinning EPIC are unsound. Beneath, we’ll analyze the assumptions used to justify the EPIC Choice and reveal that the speed and base upon which EPIC depends will should be dramatically elevated and expanded for EPIC to realize its objectives of eliminating virtually all different classes of taxation in Nebraska.

Corrected Calculations Yield a 21.6 P.c Consumption Tax Charge

Proponents tout a research asserting that Nebraska’s present state revenue tax, state gross sales tax, native property tax, and native inheritance taxAn inheritance tax is levied upon a person’s property at demise or upon the belongings transferred from the decedent’s property to their heirs. Not like property taxes, inheritance tax exemptions apply to the scale of the reward somewhat than the scale of the property.
may all get replaced by a broad-based consumption tax at a price of seven.23 p.c.[10] This isn’t believable, neither is the 7.5 p.c price mirrored in LB 79. A Tax Basis evaluation estimates that the income alternative price for a broad-based consumption tax in line with the EPIC plan’s language could be 21.6 p.c or extra.

How may EPIC’s proponents give you such an artificially low alternative tax price? The reply seems to be a mixture of errors and implausible assumptions.

Each the Tax Basis and the research commissioned by EPIC’s supporters rely considerably on a dataset produced by the U.S. Bureau of Financial Evaluation (BEA) detailing state-level private consumption expenditures (PCE).[11] This dataset contains, amongst different issues, each precise rental prices and what are often called implicit rents.

Economically talking, each a house owner and an condo renter are “consuming” housing, although the home-owner, somewhat than paying hire, is both making mortgage funds or—having paid off the house—not conducting any monetary transactions. The BEA acknowledges and places a price ticket on the home-owner’s consumption of housing. This is smart in financial phrases (absent dwelling possession, they must pay for housing another approach, and with dwelling possession, they’ve given up capital that might in any other case be put to different makes use of) however shouldn’t be very helpful for an evaluation of a consumption tax, since clearly owners aren’t going to be taxed on the implicit rental prices of the house they personal. Nor, we assume, would renters pay the tax.[12] These consumption prices should be subtracted earlier than utilizing the dataset.

The EPIC-commissioned research acknowledges this and purports to take action. The determine used for private consumption, nonetheless, is in line with the headline PCE quantity (adjusted to 2026) with none subtractions, together with for precise or implicit hire. That’s the primary drawback, and it’s a important one.

Moreover, the research doesn’t appear to make some other changes from the PCE topline quantity aside from accounting for a grocery exclusion and an exemption for training companies,[13] even when clearly warranted, and even offered for by the underlying proposal. For example, the language of the EPIC proposal solely taxes the share of health-care companies procured by way of non-public out-of-pocket cost (e.g., not by way of insurance coverage or beneath Medicare or Medicaid),[14] however the EPIC research seems to anticipate the taxation of all well being expenditures in PCE—overstating the quantity by 800 p.c. Moreover, the EPIC laws exempts any good or service in any other case taxed beneath an present excise tax, however there isn’t any indication that these consumption classes have been excluded of their calculations.

Even when the purpose was to tax health-care companies broadly, an adjustment must be made for Medicare- and Medicaid-funded care, which isn’t legally taxable. Federal legislation additionally prohibits taxing web entry or federal authorities actions, together with the USPS. Interstate journey prices, together with airfare, are additionally largely out of attain. Consumption by nonprofits, and Nebraskans’ consumption whereas touring, each of that are a part of PCE, additionally should be excluded. There isn’t any indication, nonetheless, that the financial evaluation integrated any of those changes, and certainly their figures are inconsistent with any such adjustment.

The research additionally assumes that the state will be capable to acquire tax on 100% of the share of PCE it chooses to tax. The BEA’s datasets are the perfect out there knowledge for these estimates, which is why they’re utilized by each the Tax Basis on this evaluation and EPIC proponents of their projections, however they aren’t good, and extra importantly, no tax ever achieves full compliance. When utilizing PCE to estimate gross sales tax income, it has develop into customary to imagine 85 to 90 p.c compliance, a tough rule of thumb designed to account for cross-border gross sales, informal gross sales, knowledge limitations, and, after all, some degree of error and tax fraud. We selected, optimistically, to make use of 90 p.c, although a case may be made that this assumption is just too beneficiant, even earlier than taking into consideration the results of such a excessive price on tax avoidance and evasion. EPIC proponents’ assumption that 100% of Nebraska taxable consumption will probably be taxed by the state is wildly unrealistic, even when one solely considers cross-border transactions, like an Omaha resident making a purchase order throughout the border in Iowa and paying Iowa gross sales tax as a substitute.

On the flip aspect, the research doesn’t appear to make a optimistic income adjustment for nonresident spending in Nebraska. In different phrases, it wrongly contains quantities that Nebraskans spend out-of-state, both because of cross-border buying (e.g., shopping for one thing in Iowa) or journey (e.g., trip spending in Hawaii), whereas additionally failing to account for the Nebraska-taxable spending of nonresidents after they go to Nebraska. We try and account for each, although that is probably beneficiant, as nonresidents’ willingness to place up with a 21.6 p.c price could also be restricted.

In the meantime, the commissioned research anticipates producing substantial income from taxing state and native authorities purchases in addition to—most astonishingly—state and native authorities compensation. Right here, one other error slips in. About $1.7 billion in extra income is supposedly generated by taxing authorities consumption, salaries, and wages, however no adjustment is made to the quantity of income the brand new tax wants to switch. In fact, no income is really generated by the federal government taxing itself: the cash goes out one door and in one other. However by counting $1.7 billion in extra income on one aspect of the ledger however not recognizing it as having any impact on authorities stability sheets, proponents additional contribute to the artificially low marketed consumption tax price.

Much less considerably, the Tax Basis was unable to breed EPIC proponents’ estimates of the price of new residential development. Each the EPIC-commissioned research and the Tax Basis use BEA nationwide accounts knowledge adjusted to yield a tough estimate of a Nebraska share. Affordable variations can emerge in calculating a state-specific share of those nationwide knowledge (we opted to scale primarily based on Nebraska’s share of nationwide housing values), however our estimate of $3.9 billion in residential new development and enhancements is sharply divergent from EPIC’s $6.5 billion estimate.

Charge projections are primarily based on income alternative. The EPIC-commissioned research, revealed in February 2023, needed to depend on grossing up older knowledge, whereas the Tax Basis was capable of make use of the latest income forecasts,[15] however fortuitously, these figures intently agree, with the EPIC research assuming that $11.67 billion in income would should be changed by calendar yr 2026 whereas the Tax Basis evaluation assumes $11.81 billion. The EPIC research seems, nonetheless, to permit a nominal (non-inflation adjusted) progress price of just below 2.4 p.c per yr, which can be unusually low, making its figures for 2030 much less believable. On the state degree, progress has been about 3 p.c lately, and about double that on the native degree.

These errors and questionable assumptions add up. We discover that the consumption tax base specified by the EPIC plan is just 45 p.c as giant as proponents anticipated.[16] Utilizing the broad consumption tax base outlined within the EPIC modification, the income alternative price must be 2.5 occasions what proponents anticipated on a static foundation, and, if this a lot larger tax wipes out the projected dynamic progress, virtually 3 occasions the marketed price for 2026: 21.6 p.c somewhat than 7.23 p.c.

The crux of the deal the EPIC Choice presents Nebraskans is to just accept a broad-based consumption tax in lieu of most present taxes. This implies taxing new development, out-of-pocket health-care bills, monetary companies, skilled companies like authorized and accounting companies (when bought by customers), gaming, and the like. Good arguments may be superior for taxing some or all of those classes of consumption, significantly if it leads to the elimination of different taxes. If a 7.5 p.c price on this tax base, as included within the laws, may actually substitute all these different taxes, it could be a remarkably whole lot that Nebraskans could be well-advised to undertake.

However the actuality is that the breadth of the proposed EPIC consumption tax shouldn’t be a lot broader than that of the present gross sales tax. It’s higher designed, because it avoids the taxation of enterprise inputs (a lot of which is finally handed on to customers) and as a substitute captures a broader base of private consumption, however it’s nonetheless lower than 25 p.c broader than the present gross sales tax base. On this context, the issue is apparent: clearly Nebraska can not fund the elimination of the state revenue tax, native gross sales taxes, native property taxes, and the inheritance tax all by growing state gross sales tax income by lower than 25 p.c.

The Downside of Cross-Border Purchasing

Even a 7.5 p.c consumption tax price could be the very best statewide levy on comparable purchases within the nation, and above common even when taking into consideration different states’ native gross sales taxes. However at 21.6 p.c, Nebraska’s consumption tax price would tower over some other state’s gross sales tax price. Nebraska’s neighbors have mixed gross sales tax charges starting from 5.44 p.c in Wyoming to eight.65 p.c in Kansas, and plenty of Nebraskans stay close to a state border. This creates a considerable incentive for cross-border buying to keep away from the burden of the proposed consumption tax. Practically 30 p.c of the state’s inhabitants is in Douglas County (the place Omaha is positioned), located alongside the Iowa border. One other 16.5 p.c of the state’s inhabitants is in Lancaster County (Lincoln), significantly farther from a state boundary, however nonetheless not as far as to make cross-border buying impractical for high-cost gadgets.

Furthermore, the EPIC plan permits native jurisdictions to impose their very own consumption taxes, which may improve the mixed tax price above and past the 21.6 p.c we estimate. The uniquely excessive price of the statewide consumption tax, mixed with the native possibility tax, may end in higher charges of cross-border purchasing for these Nebraskans shut sufficient to decrease tax jurisdictions, eroding the income the state is relying on from the tax and leaving these within the inside of the state to bear the brunt of the newly elevated tax.

Researchers have investigated the incidence of cross-border buying ensuing from modifications in gross sales tax charges. One such research centered on Nebraska and located {that a} one p.c improve within the native gross sales tax price would end in a 3.94 p.c improve in cross-border buying in a metropolis with an adjoining lower-tax jurisdiction and by 2.53 p.c in a jurisdiction that may be a 20-minute drive from its closest neighbor.[17] The research additionally exhibits that these incentives are drastically decreased in a locality that may be a 50-mile drive to its closest neighbor, demonstrating that proximity to decrease gross sales tax charges corresponds with higher cross-border buying.[18] The present state-level gross sales tax in Nebraska is 5.5 p.c, with the common native possibility gross sales tax elevating the entire burden to six.96 p.c. This mixed price is according to regional opponents. But when the brand new price have been 21.6 p.c or extra, an Omaha resident would have a robust incentive to buy in neighboring Iowa (6.94 p.c mixed common price).

The EPIC laws makes an attempt to disincentivize out-of-state cross-border buying by requiring people to remit the consumption tax on merchandise introduced into the state for private use. Nonetheless, though the laws is unclear on this level, use taxes—that are a part of all states’ gross sales tax codes—don’t apply the place gross sales tax has already been charged.

If, for example, a Nebraska resident orders a product from Iowa and it’s shipped to her, Nebraska gross sales tax will probably be charged, since gross sales taxes are usually destination-sourced. In the event that they buy the product elsewhere and, as a result of the merchandise is destined for Nebraska, no gross sales tax is charged, they’d be answerable for remitting use tax (both beneath the present system or beneath the proposed EPIC tax) to Nebraska. But when they shopped in Iowa and paid Iowa gross sales tax, then Nebraska use tax wouldn’t ordinarily apply.

If the EPIC Choice contemplates imposing one other layer of Nebraska tax on already taxed in one other state, this raises constitutional questions by imposing distinctive burdens on interstate commerce, as out-of-state purchases could be topic to 2 taxes. And if that isn’t the intent, and EPIC would enact a typical compensating use tax (for which shopper compliance has at all times been fairly low[19]), then nothing would stop residents from saving considerably by buying items throughout state borders.

Dynamic ScoringDynamic scoring estimates the impact of tax modifications on key financial elements, comparable to jobs, wages, funding, federal income, and GDP. It’s a instrument policymakers can use to distinguish between tax modifications that look comparable utilizing typical scoring however have vastly totally different results on financial progress.

Lately, it has develop into extra frequent to attain tax and spending proposals dynamically (i.e., taking their financial impacts into consideration). If, for example, an revenue tax price discount yields larger charges of funding and thus generates extra state revenue, then the decrease price will apply to a broader base of taxable revenueTaxable revenue is the quantity of revenue topic to tax, after deductions and exemptions. For each people and firms, taxable revenue differs from—and is lower than—gross revenue.
, partially defraying the federal government value of the tax discount. Tax cuts virtually by no means “pay for themselves,” however accountable tax reductions do allow financial progress that reduces their value. The Tax Basis applies dynamic scoring to federal tax proposals, as does the U.S. Congressional Joint Committee on Taxation (JCT). The City-Brookings Tax Coverage Middle’s tax mannequin and the Penn Wharton Funds Mannequin additionally incorporate dynamic scoring, and appropriately so.

It’s not unreasonable, due to this fact, that the EPIC-commissioned research would try to attain these broader financial impacts. But it surely should be remembered that they scored a massively decrease price. On a static foundation, the research assumed that it could take an 8.67 p.c price to realize income neutrality, however taking financial progress into consideration, they landed on 7.23 p.c because the break-even level. If, after all, the static price is definitely 21.6 p.c, the financial incentives look radically totally different, and behavioral responses to the tax will probably erode revenues nonetheless additional. Maybe some individuals could be favorably motivated by such a tax construction; think about, for example, a rich particular person who relied closely on out-of-state consumption however took benefit of the dearth of revenue or property taxes. Such people, after all, wouldn’t contribute a lot to the state’s coffers even when they have been interested in the state as a result of the EPIC Choice was in place.

Alternatively, many present residents would discover the price of in-state purchases exorbitant and would search for authorized (cross-border buying) and unlawful (black and grey markets) methods to keep away from the consumption tax. Proponents’ assumption that the plan would develop the taxable base is uncertain at greatest. Somewhat than a optimistic dynamic suggestions impact, it’s simple to think about a detrimental one, the place the taxable base shrinks in response to the legislation.

Property Taxes and Sound Aid Alternate options to EPIC

When structured accurately, the property tax is comparatively environment friendly. Few taxes are extra clear because the tax is levied towards homeowners primarily based on a property’s assessed worth, which is commonly shared immediately with the taxpayer. Cost, too, in lots of situations is made on to the federal government by the taxpayer, except held in escrow by a mortgage firm.

A well-designed property tax is extra impartial than most different taxes. It corresponds, albeit imperfectly, with the worth of the general advantages obtained by the property proprietor (e.g., police and hearth safety, roads, and colleges). Consequently, many potential replacements for property tax income do extra financial hurt than the tax they substitute, as could be the case with EPIC. Furthermore, the property tax is commonly one of many few income turbines out there to native governments, making its reform contentious even when justified.

When property tax valuations rise sharply, as has occurred lately, taxpayers are left asking why the identical property ought to now include dramatically larger property taxes. Even when all properties in a jurisdiction see a dramatic improve in market worth, this doesn’t mechanically make it extra pricey to supply authorities companies to these properties. Owners may fairly anticipate to pay decrease charges when values rise, because the tax’s base is now broader. That has not at all times occurred, and is the supply of appreciable frustration.

There are three main ways in which governments can restrict the expansion of property taxes: evaluation limits, price limits, and levy (collections) limits. Evaluation limits create important market distortions and different inequities. Charge limits do nothing to forestall tax payments from hovering when assessed values rise and are essentially the most simply undermined by native authorities. Levy limits limit income collections in essentially the most impartial method, lowering general property tax millages to offset jurisdiction-wide will increase in assessed values.[20]

Charge limits are carried out to restrain native officers from growing the property tax burden by way of legislative will increase within the tax price. Evaluation limits stop a property proprietor from shedding their dwelling when there’s a sharp rise in property valuations. There’s a sure logic to this. Whereas wealth and revenue are each measures of monetary safety, one doesn’t essentially observe the opposite. A taxpayer’s internet belongings could give the impression of wealth, however revenue liquidity defines instant buying energy. As property valuations rise, a taxpayer will seem wealthier, however and not using a commensurate improve in actual revenue, the taxpayer could not be capable to afford the rise in property taxes. Evaluation limits acknowledge this discrepancy and search to forestall the disparity between wealth and revenue from inflicting one to be priced out of their dwelling.

As famous, price limits do little to guard from surging valuations as the identical tax price utilized to a dramatically elevated property worth will end in extra taxes owed. Evaluation limits, for his or her half, create troubling market distortions that greater than offset their coverage advantages. For instance, evaluation limits require {that a} higher share of property tax income be collected from newer or improved houses, with burdens shifted to those properties since present unsold properties are held in verify. This creates a lock-in impact the place present owners are discouraged from promoting (whether or not to improve or downsize).

Equally, evaluation limits can mute the will to undertake main dwelling renovation initiatives as a result of such initiatives may additionally set off a brand new tax evaluation. Additionally they discourage new development as a result of these buildings will probably be assessed at the next worth than a considerably comparable property constructed a number of years earlier. The truth is, it’s fully attainable for 2 practically equivalent properties in the identical neighborhood to pay drastically totally different property taxes primarily based solely on buy date. The sum of those market distortions hurts not solely dwelling builders and residential sellers, but additionally a group’s youthful inhabitants and lower-income households that may discover it more durable to safe a starter dwelling, and in flip, construct wealth. Over time, evaluation limits cut back housing availability and drive up the price of dwelling.

Conversely, levy limits constrain income progress. This prevents native governments from reaping a windfall when property valuations rise dramatically. Whereas particular person tax legal responsibility may improve or lower because of assessed values and price modifications, income assortment within the mixture is constrained. Property tax legal responsibility remains to be related to market worth, such that some owners aren’t favored over others, however everybody sees their millages rolled again when assessed values soar. Consequently, levy limits don’t create the identical inequities that end result from evaluation limits, and by limiting collections, they assist keep away from out-of-control tax will increase that may happen with solely a price restrict.

Past restrictions on native authorities tax will increase, states may also defray property tax burdens by way of transfers or offsets, like Nebraska already does with the Nebraska Property Tax Incentive Act. Such approaches are extra sensible than the EPIC Choice, however nonetheless contain tradeoffs and require cautious design to make sure that they don’t facilitate a rise in general ranges of taxation, which might occur if future native property tax will increase aren’t constrained, and localities conclude that they’ve extra fiscal house through which to function because of offsetting state aid.

The simplest property tax aid packages pair collections limitations with spending restraint. Nebraska may reform and tighten its present price and levy limits to guard owners from pointless property tax will increase with out doing something as drastic as eliminating the tax outright.

Conclusion

The EPIC proposal is constructed on a defective basis that might negatively affect Nebraskans and the state’s economic system. If the EPIC Choice have been carried out, the progress legislators have made up to now on tax competitiveness could be eroded and changed with an uncompetitive tax code, each regionally and nationally. The proposal’s contemplated consumption tax price of seven.5 p.c dramatically underfunds state coffers, requiring a price of over 21 p.c to fund the federal government at its present ranges. Which means the legislature will virtually instantly be known as upon to extend the statewide consumption tax price, as allowed by the statute.

In fact, not all that EPIC proposes is dangerous coverage. The state ought to take into account repealing the inheritance tax, as EPIC does. The state must also take into account adopting a aggressive tangible private property de minimis exemption, which might assist take away a big variety of small companies from the rolls of this inefficient property tax. The state may additionally decouple from the federal tax code for functions of everlasting full expensingFull expensing permits companies to instantly deduct the complete value of sure investments in new or improved expertise, tools, or buildings. It alleviates a bias within the tax code and incentivizes corporations to take a position extra, which, in the long term, raises employee productiveness, boosts wages, and creates extra jobs.
, making qualifying capital bills within the state worthwhile from yr one.[21]

For actual property homeowners, Nebraska at present employs each price and levy limitations to restrict property tax legal responsibility. Charge limits, nonetheless, do nothing to forestall elevated tax legal responsibility ensuing from sudden valuation surges, as have been seen all through the nation. For its half, the present levy restrict dates to 1998 when it imposed a cap of $2.19 per $100 of property worth. Nonetheless, the restrict doesn’t apply to bond points, which means taxpayers will pay greater than the $2.19 cap. Due to this fact, the statewide limitation is neither efficient nor clear as it may be elevated on the native degree.[22] Policymakers would do effectively to reform the levy restrict to make sure that property taxes aren’t growing with out justification. There are many reforms for lawmakers to think about. From these reforms, EPIC is a serious, unworkable distraction.

EPIC dramatically overpromises, underfunds the federal government, and will place Nebraskans in a precarious financial place. Proponents search to do on the poll what was unachievable within the legislature. Fortuitously, the state has higher choices and may take into account transferring ahead with them somewhat than adopting an unproven and unsound plan.

In spite of everything, one thing may be epic—however it could actually additionally be an epic, within the sense of some sweeping, consequential story. Sadly, most of the nice epic tales are tragedies, or at the very least contain them. The artwork of doing coverage is that of navigating between Charybdis and Scylla, however the EPIC Choice runs headlong into disaster. Both Nebraskans would face the Scyllan rock of an impossibly excessive 21.6 p.c consumption tax or the Charybdian whirlpool of depriving the federal government of two-thirds of its income and seeing what occurs. If neither possibility is engaging, then Nebraskans ought to focus their efforts on different, extra accountable strategies of preserving property taxes in verify, strategies that present each tax competitiveness and income stability.

Methodology

Methodological Notes

In calculating a revenue-neutral tax price of 21.6 p.c, the Tax Basis started with the next inputs:

1. Nebraska private consumption expenditures (PCE) for 2022, grossed up in line with present forecasts of PCE progress to yield a 2026 determine[23]
2. Nebraska new development prices, derived from national-level NIPA knowledge on new constructions, allotted to Nebraska in line with Nebraska’s Census-calculated share of nationwide residential property worth and grossed up in line with PCE[24]
3. Nonresident expenditures in Nebraska, primarily based on Nebraska Tourism Fee-funded estimates of taxable classes of in-state nonresident spending, and grossed as much as 2026 ranges[25]

We then subtracted the next classes of PCE as both expressly exempt beneath the EPIC proposal or untaxable because of the lack of consideration (no trade happening) or a federal prohibition, with changes to 2026 ranges:

1. Groceries, by excluding the share of meals for dwelling consumption constituting groceries, primarily based on the Shopper Expenditure Survey[26]
2. Imputed rents from dwelling possession and rental prices of residential leases, as damaged out within the PCE dataset
3. Insurance coverage, as damaged out within the PCE dataset
4. Personal training prices, as damaged out within the PCE dataset
5. Used automobile purchases, as damaged out within the PCE dataset
6. Web service, USPS companies, worldwide expenditures, and consumption financed by nonprofits, as damaged out within the PCE dataset
7. Items topic to present excise taxes, like gasoline, tobacco, and alcohol, as damaged out within the PCE dataset and utilizing U.S. Vitality Data Administration knowledge to again out the suitable share of the broader class of motor fuels and fluids related to gasoline[27]
8. Well being-care prices borne by Medicare, Medicaid, or non-public insurer funds, utilizing a nationwide ratio offered by the U.S. Facilities for Medicare & Medicaid Companies[28]
9. Present gross sales tax embedded inside PCE, prorated in line with the Council on State Taxation’s evaluation of the share of Nebraska’s present gross sales tax imposed on private consumption[29]
10. Charges of tax avoidance because of cross-border buying, journey, and noncompliance, assumed at 10 p.c of PCE
11. The executive charge, at 0.25 p.c of collections

[1] EPIC Choice, https://epicoption.org/.

[2] David G. Tuerck, “The Fiscal & Financial Results of the Proposed EPIC Consumption Tax in Nebraska,” The Beacon Hill Institute for Public Coverage Analysis, February 2023, https://epicconsumptiontax.org/bhi-study.

[3] Nebraska Legislative Invoice 79 (2024), https://nebraskalegislature.gov/payments/view_bill.php?DocumentID=50183.

[4] Nebraska Legislative Invoice 754 (2024), https://nebraskalegislature.gov/payments/view_bill.php?DocumentID=50792. For Tax Basis legislative testimony on LB 754, see Katherine Loughead, “Testimony: Issues for Further Revenue Tax Reform and Aid in Nebraska,” Tax Basis, Feb. 3, 2023, https://taxfoundation.org/analysis/all/state/nebraska-income-tax-reform-relief/.

[5] David G. Tuerck, “The Fiscal & Financial Results of the Proposed EPIC Consumption Tax in Nebraska.”

[6] Id. See additionally Nebraska LB 79, Modification 314 (proposing a consumption tax price of seven.5 p.c).

[7] One may plausibly argue that the tax on gross gaming revenues, which is extra of a gross revenue tax (although not, evidently, deemed precluded by the restrictions within the proposed constitutional modification), is on a sufficiently distinct base as to not be one other advert valorem tax on gaming, along with the brand new consumption tax.

[8] For a dialogue of the gross sales tax remedy of enterprise inputs, and the way such taxation impacts each customers and traders, see Jared Walczak, Katherine Loughead, and Andrey Yushkov, “Kentucky Gross sales Tax Modernization: Conserving the Gross sales Tax on Gross sales, Not Manufacturing,” Tax Basis, Jan. 24, 2024, https://taxfoundation.org/analysis/all/state/kentucky-sales-tax-reform/, 3-15.

[9] Andrew Phillips and Muath Ibaid, “The Impression of Imposing Gross sales Taxes on Enterprise Inputs,” State Tax Analysis Institute and the Council on State Taxation, Could 2019, https://belongings.ey.com/content material/dam/ey-sites/ey-com/en_us/information/2019/06/ey-the-impact-of-imposing-sales-taxes-on-business-inputs.pdf, 8.

[10] David G. Tuerck, “The Fiscal & Financial Results of the Proposed EPIC Consumption Tax in Nebraska.”

[11] U.S. Bureau of Financial Evaluation, “SAPCE4 Private consumption expenditures (PCE) by state by operate” (Nebraska), https://www.bea.gov/itable/regional-gdp-and-personal-income.

[12] Whereas the laws taxes hire, there may be an exclusion for the rental of used property. We infer that, since new development is topic to tax, the rental of a dwelling on which tax has already been paid (or would have been paid had the tax been in impact when it was constructed) would fall beneath the exemption for used property and be exempt from tax. Had been this not the case, there could be an infinite bias towards renters and rental properties.

[13] Even right here, it’s not apparent that this has been executed, however on condition that the research doesn’t explicitly state what annual progress price it assumed in projecting 2026 PCE, it’s tough to make sure. However, complete PCE of their 2019 base yr (the Tax Basis evaluation makes use of 2022 figures grossed up in line with current PCE progress forecasts) was $79.9 billion, and the EPIC calculation contains $108.5 billion as a taxable share in 2026, which represents 35.8 p.c nominal progress primarily based on the entire quantity, or 79.8 p.c progress if that they had backed out housing, groceries, and training. That is earlier than any dynamic changes primarily based on presumed financial or inhabitants progress because of the implementation of the EPIC plan. Suffice it to say, private consumption, which grew a cumulative 21.5 p.c in nominal phrases (not inflation-adjusted) within the prior seven years—according to long-term traits—shouldn’t be anticipated to soar 79.8 p.c within the subsequent seven.

[14] To be honest, the laws solely clearly excludes well being care bought by way of insurance coverage, and it’s not clear that authorities insurance coverage packages are contemplated on this definition. Nonetheless, federal legislation prohibits the taxation of Medicare and Medicaid expenditures, so these wouldn’t be taxed whatever the intentions of EPIC’s supporters, and are excluded in our calculations.

[15] Nebraska Legislative Fiscal Workplace, “Tax Charge Assessment Committee Annual Report,” Nov. 20, 2023, https://nebraskalegislature.gov/pdf/reviews/fiscal/taxratereview_annual_2023.pdf.

[16] These figures are primarily based on the research’s personal knowledge sources, because the evaluation relied on 2019 pre-pandemic consumption figures. Consumption soared in the course of the pandemic, which arguably makes the pre-pandemic figures a greater baseline, however we’ve taken the strategy of utilizing the latest 2022 knowledge with changes primarily based on present PCE forecasts, which present a a lot decrease price of progress than the EPIC-commissioned evaluation entailed.

[17] Iksoo Cho, “Native Gross sales Tax, Cross-Border Purchasing, and Journey Value,” Nebraska Division of Income, Mar. 29, 2016 (revised Nov. 24, 2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2756208.

[18] Id.

[19] Many states have even included house on state revenue tax returns to make reporting of use tax obligations simpler. Nonetheless, compliance charges have proved to be low as taxpayers hardly ever report and remit use taxes for out-of-state purchases. See James Alm and Mikhail I. Melnik, “Cross‐border buying and state use tax liabilities: Proof from eBay transactions,” Public Budgeting & Finance 32.1 (2012): 5-35.

[20] For a extra complete remedy of evaluation, price, and levy limits, see Jared Walczak, “Property Tax Limitation Regimes: A Primer,” Tax Basis, Apr. 23, 2018, https://taxfoundation.org/analysis/all/state/property-tax-limitation-regimes-primer/.

[21] For an outline of tax reform choices for Nebraska, see Katherine Loughead, “13 Priorities for Professional-Development Tax Modernization in Nebraska,” Tax Basis, Feb. 2, 2021, https://taxfoundation.org/analysis/all/state/nebraska-tax-modernization/.

[22] Manish Bhatt, “Evaluating Nebraska Governor’s Plan for Property Tax Aid.”

[23] U.S. Bureau of Financial Evaluation, “SAPCE4 Private consumption expenditures (PCE) by state by operate” (Nebraska).

[24] Id., “Desk 5.4.6U. Personal Mounted Funding in Buildings by Kind, Chained {dollars},” https://apps.bea.gov/iTable/?reqid=19&step=3&isuri=1&1921=underlying&1903=2031; U.S. Census Bureau, S2506 and 2507, https://knowledge.census.gov/desk/ACSST1Y2022.S2506 and https://knowledge.census.gov/desk/ACSST1Y2022.S2507.

Census Bureau, “New Residential Development,” https://www.census.gov/development/nrc/index.html.

[25] Dean Runyan Associates, “The Financial Impression of Journey,” Ready for the Nebraska Tourism Fee, October 2022, https://visitnebraska.com/websites/default/information/2022-11/Nebraska_Final_2021p.pdf.

[26] U.S. Bureau of Labor Statistics, Shopper Expenditure Survey Desk 1110 (2019), https://www.bls.gov/cex/tables/calendar-year/imply/cu-all-detail-2019.pdf.

[27] U.S. Vitality Data Administration, “Motor gasoline consumption, value, and expenditure estimates, 2022,” https://www.eia.gov/state/seds/sep_fuel/html/fuel_mg.html.

[28] Facilities for Medicare & Medicaid Companies, NHE Reality Sheet (2022), https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/nhe-fact-sheet.

[29] Andrew Phillips and Muath Ibaid, “The Impression of Imposing Gross sales Tax on Enterprise Inputs.”

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