NTF Issue Paper: Taxplan18. 9-14.

BACKGROUND. Businesses, too, need tax relief. Besides corporation income taxes, they pay payroll taxes, property taxes, sales taxes, worker compensation taxes, unemployment insurance taxes, insurance taxes, import duties of $18 million annually, fuel taxes, and utility taxes. Nebraska business taxes discourage business expansion and employment.

BUSINESS TAX COMPARISONS. The 2014 report Best & Worst States To Be a Taxpayer states that only New York and California residents pay more taxes than Nebraskans. Our citizens suffer an average state and local tax burden of $9,450, 36% higher than the national average. Nebraska ranks 34th in the 2014 Tax Foundation State Business Tax Climate Index that compares states in 5 areas of taxation that impact business, corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property tax. Comparing to our neighbors, South Dakota ranked 2nd, Missouri 16th, Kansas 20th, Colorado 19th, and Wyoming 1st. Only Iowa ranked worse, at 40th. Businesses examine the overall tax climate of a state when scouting places to locate subsidiaries, branches, new plants, etc. This index measures and compares how state governments treat small businesses and entrepreneurs. In our increasingly mobile and competitive national economy, differences in state government-imposed costs of conducting business make a large difference between whether a state grows or declines economically. Our personal income tax, its relative top rate higher than all adjacent states, raises the cost of working, saving, investing, and taking risks. The NE maximum income tax rate is 6.84%, higher than all neighboring states except Iowa. Over 90% of NE businesses file personal income taxes rather than corporate income taxes. Our capital gains tax, its top rate higher than that of Missouri, South Dakota, Kansas, Colorado, and Wyoming, is a direct levy on investment and ideas, the originators of economic growth. High capital gains taxes restrict access to capital and quash or direct elsewhere the risk-taking. Our corporate income tax, its top rate (7.81%), higher than that of Missouri, Kansas, and Colorado (Wyoming and South Dakota have no corporate income tax), spurns investment and location in our state.1 Nebraska ranks 33rd for older corporate headquarters environment. Because of NE sourcing rules for services, 100% of firm profits fall subject to the state corporate income tax. Thus, this operation has the 10th highest income tax burden of this firm type in the nation.2 Comparing NE total income and property taxes paid by CEOs with adjacent states, NE ranks 2nd behind Iowa.3 Note that key execs consider personal financial impact while deliberating on business location and expansion decisions. Our median property tax, its rate higher than that in Colorado, Kansas, Missouri, Iowa, Wyoming, and South Dakota, has influenced businesses to locate elsewhere because of the onerous burden on transferees who would move to Nebraska.4 Our sales tax per $100 of personal income, higher than that in Iowa, serves as a disincentive to vigorous economic activity. Nebraska businesses pay higher local, state, and federal combined fuel excise taxes on their company vehicles than businesses in all 6 neighboring states.5 Kansas, Missouri, and Wyoming limit their death taxes to the federal pick-up credit. Nebraska adds more to this tax, 18%, higher than the Iowa 15%. No state death taxes in the 5 other adjacent states. Families pay taxes on business income over lifetimes, then face a tax on total assets of a company at the time of owner death. Our tax climate forces wasteful expenditures on tax avoidance, estate planning, and insurance and forces many businesses out of family hands or face closure or borrowing. Our health insurance tax rate is higher than that in Wyoming. Nebraska also raised hospital and health care taxes. Companies that transact business in Nebraska must pay a tax to the Director of Insurance on or before March 1 of each year, in lieu of any other intangible property tax, of 1% of the gross amount of direct written premiums received by it during the preceding calendar year for business done in Nebraska; except that (1) for group sickness and accident insurance, the rate is .05%; and (2) for property and casualty insurance, excluding individual sickness and accident insurance, the rate is 1%. In 1993, a law created 2 new taxes on the gross amount of worker compensation insurance premiums. The first is a 1% tax, the proceeds of which transmits for credit to the Worker Compensation Court Cash Fund. The second tax, .04%, transfers for credit to the Workplace Safety Consultation Program Cash Fund. Such raises the cost of insurance further, increasing the number of uninsured workers, and poses another disincentive to starting or locating a business here. 6 NE has more government bureaucrats at the state and local level per 10,000 population (301) than Missouri, Kansas, Iowa, Colorado, and South Dakota. Only neighboring Wyoming has more, 450.7 Streamlining and consolidation/merger would make our state government run more efficiently. The more regulators, the more regulations, which raise the cost of conducting business. NE ranks 32nd for new retail operations. A firm suffers from our state high income tax and the property taxes on inventories.

Nebraska ranked 25th of all states in the Chief Executive magazine 2013 Best & Worst States for Business Ranking, 37th in the American Legislative Exchange Council’s Rich States, Poor States ranking, and 39th in the Small Business & Entrepreneurship Council’s U.S. Business Policy Index.
Note: A rank of 1 is more favorable for business than a rank of 50. Rankings do not average to total. Report shows tax systems as of July 1, 2013 (the beginning of Fiscal Year 2014). Source: Tax Foundation.

Personal finance website WalletHub examined 8 categories of taxation, ranging from corporate income taxes and sales taxes on consumer items to taxes on food and alcohol. It analyzed how state and local tax rates compare to the national median in the 50 states and D.C. and then determined which states have the highest and lowest tax rates and which states offer the best business tax rates after adjusting by the cost of living index.Statista-the Tax Portal, ranks several Midwest states in order of friendly business tax climate as follows: Wyoming, South Dakota, Missouri, Colorado, Kansas, Nebraska, and Iowa, the latter 3 below national average. 4 states, including Wyoming and South Dakota, have no corporate income tax or personal income tax. Some states impose a franchise tax for the right to conduct business in a state, usually a flat fee or amount based on net worth. Nebraska has a franchise tax called a corporation occupation tax, paid every other year. If income from a business passes to one personally, that income is subject to taxation on a personal state tax return. If a business started in or resides in another state but generates income in NE, it falls subject to NE taxes.

Indexation of the Tax Code. Many states have multiple-bracket corporate income tax codes. It is important to index the brackets for inflation to prevent tax increases on the nominal increase in income because of inflation. An inflation tax results in higher tax burdens on businesses without their consent. All 16 states with graduated corporate income taxes fail to index their tax brackets, including: Iowa, Kansas, and Nebraska.

Income Recapture. New York, Nebraska, and Connecticut apply the rate of the top income tax bracket to previous taxable income, after a corporate taxpayer crosses the top bracket threshold. Income recapture provisions are poor policy, because they cause dramatically high marginal tax rates at the point of entrance. They are non-transparent, because they hike tax burdens substantially without reflection in the statutory rate.

+Maximum Capital Stock Tax Payment. Eight states mitigate the negative economic impact of the capital stock tax by placing a lid on the maximum capital stock tax payment. Nebraska is one.

+UNEMPLOYMENT INSURANCE TAX RATES. States with the best score on this index are Arizona, Nebraska, Loui­siana, Georgia, and South Carolina. Generally, these states have low minimum and maximum tax rates on each schedule and a wage base at or near the federal level. MINIMUM TAX RATE. States with lower minimum rates attract more business. The minimum rates in effect in the most recent year range from 0% in Iowa, Missouri, Nebraska, North Carolina, and South Dakota to 2.43 % in Pennsylvania. RESERVE TAXES. These taxes hit employers, deposited in a reserve fund separate from the unemployment trust fund. Interest earned on the $$ often transfers to funding for job training. Four states have these taxes: Nebraska, Idaho, Iowa, and North Carolina.

COMMUNICATIONS TAXES. Wireless phone customers in NE since 2007 pay 24.5% shocking total taxes and fees to use their cell phones, 18.67% in state and local taxes, 5.82% to the feds, the highest in the nation. One reason for this high total tax is our 2nd highest in the nation Universal Service Fund surcharge, meant to subsidize companies to extend and maintain cell phone and related service, like Internet connections, in isolated, rural parts of our state. There are exorbitant sales and local taxes and fees on telecomm service, plus occupation taxes charged by several cities like Omaha, which charges a 6.25% occupation tax on cell phone service, Lincoln 6%, Papillion and La Vista 5%, and Nebraska City 3%. Having to collect these taxes dampens business initiatives to locate or expand.

NUISANCE TAXES. Occupation taxes on hotel rooms, rental vehicles, and arena seats and a 2% restaurant tax in Omaha also discourage business development.

TAX EXEMPTION FOUL. The abuse of the tax exempt status in Nebraska financially has placed private enterprises in non-competitive positions. Tax exempt entities pay no taxes, no matter how high the taxes climb or how many facilities. For example, the YMCA built a new facility in Valley, NE., housing a gym, health and wellness area, and natatorium with combination leisure and lap pool. This facility is the 7th YMCA branch in the Omaha Metro area, offering activities that directly compete with private health centers and gyms. The $4.7 million center on 45 acres pays no property taxes locally or state corporate income taxes. Private establishments offering the same or similar services do pay local and state taxes; in addition, they subsidize these tax exempt centers. Private companies thus face unfair competition for their profits, and communities that host tax exempt facilities drive out or keep out private competitors.

TAKE ACTION NOW. Gov. Dave Heineman strenuously attempted to reduce business taxes, but the Legislature continued to shun his efforts. Our state progressive business tax structure is complex and inefficient, causing businessmen to pay more in individual and corporate taxes than businesses in adjacent states. Flat corporate taxes would simplify our tax structure and invite additional people and businesses to invest in our state economy. More than 20 nations and 6 states have instituted a corporate flat tax system. With the added efficiency of collection and compliance with flat tax codes, several localities and states have witnessed a 7.5%-9.5% of Gross Domestic Product increase in tax revenues, which translates into cuts in the tax rates. We suggest that all companies publicize their tax burdens by posting in their annual reports and in their advertising their taxes per share of stock compared with earnings per share and total amounts of taxes by category per year. Grand totals of taxes should appear in bold lettering. Companies should figure in costs of government regulations and costs to comply with the myriad of tax laws. Remember that businesses must collect personal income taxes from employees and excise and sales taxes from customers. They should compare the overall burden of taxes to their operating revenues. Shareholders pay the price of high business taxes. In 2010, the federal government received more money than shareholders from companies. Thus, shareholders should press management to collect and report this confiscatory tax information. Business leaders and business owners must become actively involved with NTF to lobby and monitor our state senators to lower personal and business taxes and to cut wasteful spending instead.

Email or call (402) 551-0921.

Research, analysis, and documentation for this issue paper done by Nebraska Taxpayers for Freedom. This material copyrighted by Nebraska Taxpayers for Freedom, with express prior permission granted for its use by other groups in the NE Conservative Coalition Network. 9-14. C

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