It’s a sign of what any tax reform effort will inevitably encounter.
“It was a bold idea from Nebraska’s popular governor leading a state with the country’s second-lowest unemployment rate — do away with the state’s personal and corporate income taxes,” Fox News reported on Wednesday. “But just weeks after announcing his plan, Gov. Dave Heineman was compelled to pull the plug on the plan and hope that a modified version might be resurrected in 2014. The short-lived push offers a window into how special interests can quickly derail a vision for tax reform.”
The governor’s plan would have made up for lost revenues by eliminating some sales tax exemptions. And that’s where he ran into trouble.
“For decades, Nebraska has offered scores of sales tax exemptions for various interests,” Fox explained. “Many churches are exempt from paying sales tax for their activities, as are florists. And out-of-state private airplane owners even get a break. But more significantly, there are a slew of exemptions for the state’s economic engines in manufacturing and agriculture… The powerful Nebraska Farm Bureau, state Chamber of Commerce and many other groups weren’t willing to take the chance that their favored protections would end and rallied support against the measure.”
“Critics argue that the North Carolina plan is regressive because consumption and sales taxes, which would be increased to replace the income tax revenue, disproportionately hurt the poor,” says Andrea Neal of the Indiana Policy Review Foundation. “The  Civitas study suggests that employment and income growth that accompany income tax repeal are of far greater benefit to low-income households than lower sales taxes.”
The Omaha World-Herald backs her up on this.
“World-Herald analysis suggests there would indeed be potential for more economic growth in eliminating income taxes,” the newspaper reported last month. “States with no income taxes have enjoyed markedly higher growth since 2000 than similar neighboring states that levied the tax — about 50 percent more population growth and more than double the job growth. The no-income-tax states also showed more income and gross domestic product growth, though the advantages were more limited.”
Of course, the newspaper went into detail about Texas, and our success in attracting new businesses, workers and retirees.
“No state is better known for its lack of an income tax,” the newspaper noted. “Texas is already booming. Since 2000, it has added 5 million people — roughly equal to the combined populations of Nebraska and Iowa.”
But it wasn’t enough to convince the Nebraska legislature — which is now considering raising the income tax rates for higher earners.
Heineman says he’ll try again, but those special interest groups aren’t going away.