Tax plan pits Nev. gov against business groups

LINCOLN, Neb. (AP) -- Nebraska Gov. Dave Heineman's tax plan is pitting the Republican governor against many of his traditional allies in the business community, who welcome the conversation but say his specific plan would create financial uncertainty.

Heineman presented his plan to a legislative panel Wednesday and argued that it would benefit small businesses, working Nebraskans and veterans who live on a fixed income.

"It is a risk — a significant risk — not to change," Heineman said. "If we don't change, then we'd better be prepared to understand what we're saying — that we think the current tax system is the best we can do."

His comments to the Legislature's Revenue Committee came in the face of new opposition from state and local chambers of commerce, as well as some industry groups that represent bankers, retailers and independent-business groups.

In a press conference before the committee hearing, the governor struck a populist tone as he announced that a state veterans' group had endorsed his plan.

"Big businesses with their highly paid lobbyists are trying to protect their special-interest exemption," Heineman said. "I understand that. But what about small businesses in this state? What about working Nebraskans? What about military retirees? Seniors on Social Security?"

Heineman is seeking to end billions of dollars in sales tax exemptions in exchange for eliminating Nebraska's income tax. Many business groups have raised concerns about the bill, saying it would create uncertainty for manufacturers, processors and industries that serve agriculture.

The bill as written has drawn opposition from the Nebraska Chamber of Commerce and Industry, the Nebraska Bankers Association, the Nebraska Retail Federation and the state chapter of the National Federation of Independent Business. The Greater Omaha Chamber of Commerce chose to stay neutral on the bill, despite concerns that the measure could increase the financial burden on businesses that enjoy the exemptions.

The larger of his two proposals would end about $2.4 billion in state sales tax exemptions, while cutting out the corporate and individual income tax. The second, smaller proposal would eliminate about $395 million in exemptions and reduce what retirees pay in taxes.

The bill's prime sponsor, Sen. Beau McCoy of Omaha, said he introduced the measure because Nebraska's tax system hasn't seen an overhaul in nearly five decades. He jokingly referred to the bill as the "Lobbyist Full Employment Act of 2013," a reference to the opposition from business groups, hospitals, nonprofits and others.

McCoy challenged opponents to present their own ideas to make the state more competitive.

"Can anyone tell me with a straight face that our current system of keeping our young people and retirees here in Nebraska is working as well as it could and should?" McCoy said. "It is time to get serious about this, and this is an important part of the solution."

Sen. Brad Ashford, who is co-sponsoring the bill, said the state's focus on small tax changes over the years has left the system "out of whack" and in need of dramatic changes.

"That's why property taxes are too high, and that's why income taxes are too high," said Ashford, also of Omaha. "Despite all the good work the Legislature has done over the years to incent businesses to come here, we have to a certain extent forgotten the individual taxpayer."

Sen. Burke Harr of Omaha suggested that eliminating certain sales tax exemptions would drive customers to out-of-state businesses. The Revenue Committee member from Omaha pointed to a provision of the bill that would end a sales tax exemption for combines and other farm machinery.

"Wouldn't it make sense to go to a state that doesn't have a sales tax and bring it back, rather than buying it here in Nebraska and paying that 5.5 percent?" Harr asked, referring to the state sales tax.

McCoy said the concern was legitimate and should play into the larger tax discussion.

Nebraska is one of seven states that do not exempt a portion of all Social Security income from taxes. Nebraska also does not exempt any portion of military retirement pay from taxes, unlike 23 other states.

Several business groups argue that ending a state exemption on "inputs," such as raw materials and energy, would drive businesses out of Nebraska. Heineman has argued that every business wants to protect its particular exemption.

The governor pledged to fight for his proposal, which is certain to face at least some resistance in the Legislature.

Veteran state Sen. Ernie Chambers of Omaha, known for his ability to stall and derail bills he opposes, promised Wednesday to "tie up the session forever" if the Revenue Committee sends Heineman's larger tax bill to the full Legislature.

Heineman noted that most of the sales tax exemptions in his proposals are aimed at businesses. He also has said he wants to keep the state's sales tax exemption on food.

"I'm glad he's going to be here, and we're going to have that conversation," Heineman said of Chambers. "I guess he's going to have a lot of long nights down here, but we need the conversation."

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The bill is LB405.