Governor: End Nebraska's income, corporate taxes

LINCOLN, Neb. (AP) -- Gov. Dave Heineman called Tuesday for ridding Nebraska of its individual and corporate income taxes and making up the difference by ending as much as $2.4 billion in sales tax breaks for businesses, and all goods and services — except for food — are on the table.

The Republican governor unveiled his tax overhaul plan and budget proposal in his annual State of the State address to lawmakers.

"Are we going to be satisfied with a mediocre tax system that won't create the jobs of the future for our sons and daughters?" Heineman asked. "Or, are we willing to consider reforming the tax code so that we have a modern, simpler and fairer tax code? Are we willing to consider a bold, innovative and strategic tax reform plan that would create a top ten business climate in Nebraska?"

Heineman said he would introduce "alternative options" for lawmakers in the next few days that would cut many sales tax exemptions for businesses. But he avoided specifics, except to say he wouldn't support taxing food.

In a news conference immediately after the address, Heineman said all other exemptions were on the table, including breaks for manufacturing and agribusiness, two of the state's largest industries.

Nebraska exempts $5 billion in purchases a year, more than it collects. In fiscal year 2014, Nebraska is projected to bring in $1.5 billion in sales and use taxes.

The plan would require lawmakers to eliminate as much as $2.4 billion in sales tax breaks for businesses, many of whom will likely fight to protect their particular exemption. However, Heineman said he has approached Nebraska business leaders in recent months to see if they were willing to trade their sales tax exemptions for lower corporate and individual taxes.

The governor said he has spoken with farmers and ranchers who are willing to talk about the trade-off.

"You may be surprised, but many are willing to have that discussion," Heineman said. "They want simplicity and fairness. They want a modern tax code that rewards productivity, profits and job creation rather than having their lawyers and accountants spending time mining the tax code for exemptions."

Heineman said he could agree to a plan that would lower income tax rates instead of eliminating the tax altogether. The governor's proposal would also exempt military retirement pay and Social Security income from state income taxes. Lawmakers have signaled an interest in eliminating both taxes this year, with several bills already introduced.

State Sen. Brad Ashford of Omaha, who is running for mayor there, said the governor's proposal could produce a cash windfall for Nebraska cities. Cities are allowed to impose a sales tax of up to 1.5 percent, and ending exemptions for certain goods and services would allow them to collect more.

"Cities get a windfall, so from that standpoint it's good," Ashford said. "The cities will benefit dramatically."

Heineman also unveiled his proposal for a new, two-year budget that sets the stage for a showdown with lawmakers on several issues. The plan includes no money to expand Medicaid coverage, an optional part of the federal health care law. Some lawmakers in the officially nonpartisan Legislature are expected to push for expanded coverage as a way to lower health care costs, and Heineman has promised to oppose them.

Heineman's budget also attempts to de-fund prenatal care services for illegal immigrants and other low-income women. Lawmakers overrode the governor's veto of the bill last year and approved $786,000 per year for coverage, despite his strong objections.

Heineman's proposal also calls for an additional $62.1 million to the University of Nebraska and a $6.2 million increase to the Nebraska State College System, which has three schools. In exchange for the extra money, the schools have agreed to freeze tuition for two years. Heineman said he has offered a $10.7 million increase in funding to Nebraska's community colleges if they agree to a similar freeze.

Ashford said he supported the increased investment in state funding for universities, but he still plans to push for an overhaul of the state's juvenile services, which would also require a state investment.

Heineman proposed a $130 million annual increase in state aid to schools through the state's funding formula, which distributes money based on student enrollment and land values. Rural schools with declining student numbers and soaring farmland values likely won't see as much aid as larger urban districts. Heineman's budget would also deliver nearly $30 million in aid for special education, which is shared more evenly.