Tax reform needed, but now without thorough review

We said the governor's plan to eliminate individual and corporate income taxes and replace the revenue by removing most sales tax exemption was an idea worth exploring, and that remains to be true.

It's also true, however, that there's no reason to try to change an entire tax system in one session of the Legislature, as Jim Ulrich, Community Hospital president, told the Gazette this week.

That's because the medical industry, as well as agriculture and other large Nebraska industries, would be most affected by new taxes on things they need to provide products and services, as well as the products and services themselves.

More evidence of the need to go slow is contained in a report by the OpenSky think-tank, which says two bills to implement the governor's plan, LB 405 and LB 406, would not be "revenue neutral" as proponents claim.

We're reminded of the privatization of Nebraska's child welfare system in 2009, which was supposed to result in streamlined efficiency, but which resulted in a mess, still being cleaned up, which most hurt the vulnerable children it was supposed to help.

The OpenSky report points to Department of Revenue estimates that show proponents of LB 405 and LB 406 may be just as overly optimistic as proponents of child welfare privatization.

Revenue department figures show than from 1998 to 2010, the potential revenue from eliminating sales tax exemptions would be less than income tax revenues by an average of $426 million a year. That's $5.5 billion total for an average of $426 million a year, or enough to wipe out the state's "rainy day" fund in a single year.

Most states depend on a "three-legged stool" of income, sales and property taxes, OpenSky said, each with its own strengths and weakenesses, but evening out to create a steady revenue stream. While some states can replace one of those legs with revenue from mineral wealth or tourism, Nebraska is not one of them, OpenSky contends.

New fees on nursing homes, hospital stays, prescription drugs and medical equipment would mean higher Medicaid costs and less money for education and other state priorities, says OpenSky.

It also says higher sales tax would create a $109 million annual windfall for the Department of Roads, which gets a portion of sales tax, but less money for other purposes from the general fund.

Plus, businesses that qualify for tax credits under existing incentive programs would have to be paid entirely out of sales tax revenues, to the tune of $900 million.

Of all the arguments against the plan, the need for the balance of a "three-legged stool" seems the most persuasive. Putting more of the weight of state government on sales tax would mean instability with fluctuation of the economy, not to mention the drag any transaction tax would apply to economic activity.

Yes, Nebraska's tax system needs to be reformed, but not without a thorough review of all the options and consequences.