State should allow city income tax

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BY STUART LONG

Nebraska state government for its first century was funded by the property tax. Historically, tax collectors have liked this tax because it’s impossible to hide real estate. In 1966, however, dissatisfaction became wide enough to elect Republican banker Norbert Tiemann governor on his promise of tax reform.

The state began the sales tax in June 1967 and the income tax in January 1968. About a 1 percent state property tax vanished forever from taxpayers’ bills.

From the outset, state legislators granted Nebraska municipalities a local option sales tax if voters approved. Omaha was first to add a city sales tax in 1969; Lincoln followed in 1970.

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Stuart Long

Stuart Long

Now, 173 municipalities and one county have adopted a local sales tax. The sales tax is widely regarded as fair although disproportionately heavier on the poor. Groceries are not taxed in Nebraska to remedy this.

My question for the 2009 Legislature is this: Why not grant the same local option on the income tax? The state already shares this tax base with the federal government; why not share it with Nebraska cities and towns, too?

Taxpayers are fed up with high property taxes. Local mill levies are under attack everywhere.

Lincoln, for example, has experienced three successive budget emergencies in which every device but a mill levy increase has been used to balance the city budget. The City Council has reduced city services, jacked up fees, cut 134 city employees and drained various funds rather than raise taxes.

Partly this is because of the way taxes are paid. No one knows how much sales tax they pay in a year because it is paid a few cents at a time. For most people, income taxes are withheld every pay period and when they prepare their return, all they focus on is whether they still owe money or get a refund.

Real estate taxes are different. Only those whose lender is paying the tax from an escrow account fail to feel the bite. Everyone else has to write two checks to the county treasurer. These are large checks, in many cases the biggest checks a person will write all year.

The property tax checks are also large because so many jurisdictions rely on the property tax: county, city, school district, community college, natural resource district, etc. Some taxpayers apparently fail to understand that close to two-thirds of their property taxes go to schools. Almost no one appears at budget hearings to protest school or county spending, yet city spending is under intense scrutiny.

Administratively, a local income tax would operate the same as the sales tax. The state Revenue Department would collect the taxes and reimburse the cities. This would add little to the cost of government. W-2 statements already include the city page.

An income tax is widely accepted as the fairest of all taxes. Tax bills are based on financial success — those who lack the ability to pay don’t, those who enjoy the ability to pay do. Income taxes follow the normal graph of an individual’s earnings; that is, they are modest when a person is starting in the work force, increase gradually as job experience leads to greater income, then generally cease on retirement.

Some will say now is not the time for tax reform. But the housing loan crisis, the stock market meltdown and the general recession are all good reasons for shifting taxes from property to income. Otherwise, more unemployed, underemployed or retired Nebraskans might be forced out of their homes, adding to personal misery and slowing economic recovery for all.

What might be the result in Lincoln’s case? State revenue statistics from 2006 show the Lincoln School District (same boundaries as city) had about 114,000 income tax returns with federal adjusted gross income totaling nearly $6 billion.

If the city had collected 1 percent of that income, it would have had $60 million to replace the $41 million it levied in property taxes. If the city had collected 0.5 percent, or $30 million, it could have cut its property tax levy in half and still had money left over.

Imagine the past three years under this scenario. No painful budget cuts, no emptied funds, no fees increased, no one laid off, full city services, streets maintained and extended, extra money for new projects — in sum, a city able to pay its way as it goes. Perhaps the city’s net debt per capita would not have doubled in the past decade, but that’s probably a complex enough subject for another column.

All I’m suggesting here is that state senators empower local voters to choose which forms of taxation they prefer.

Stuart Long is a retired newspaperman, citizen volunteer and serious library patron.