NTF Issue Paper: Bus1

NTF Issue Paper: Taxplan18. 11-04.

NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:

NEBRASKA BUSINESS TAX CLIMATE IS POOR.

BACKGROUND. Tax freedom day for businesses in 2000 was August 27. Companies paid almost twice as much in total taxes as they kept in net income after taxes in 1999. Tax freedom day for businesses is far later in the year than for individuals who pay income taxes, on April 25.1 Businesses, too, need tax relief. Besides 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.

BUSINESS TAX COMPARISONS. Businesses examine the overall tax climate of a state when scouting places to locate subsidiaries, branches, new plants, etc. The Small Business Survival Committee has ranked Nebraska 34th out of 51 (1^st being highest) in its ranking of business tax climates in the 50 states and Washington, D.C.2 This gauge 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 top rate higher than that in Missouri, Iowa, South Dakota, and Wyoming, raises the cost of working, saving, investing, and taking risks. The NE maximum income tax rate is 7.81%, higher than all neighboring states except Iowa. Over 90% of businesses file personal income taxes rather than corporate income taxes. Our capital gains tax, its top rate higher than that of Missouri, South Dakota, 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, South Dakota, and Colorado (Wyoming has no corporate income tax), spurns investment and location in our state.3 Our property tax, its rate higher than that in Kansas, Missouri, Iowa, and South Dakota, has influenced businesses to locate elsewhere because of the onerous burden on transferees who would move to Nebraska residences. Nebraskans pay higher state sales taxes than residents in all 6 neighboring states.4 The combined maximum rate is 7%. 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 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 beyond the federal tax. 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 to leave family hands or face closure or borrowing. Our health insurance tax rate is higher than that in Wyoming. It raises the cost of insurance further, increasing the number of uninsured workers, and poses another disincentive to starting or locating a business here. Our state and local tax burden ranking is 13^th of 51 states and D.C. Of the surrounding states, Kansas is next highest at 21^st.6 All surrounding states offer tax incentives to businesses to expand and locate operations in their states, so NE must compete against these states, other states, and foreign nations.7 NE has more government bureaucrats at the state and local level per 100 population than Missouri, Kansas, Iowa, and South Dakota. Streamlining and consolidation/merger would make our government run more efficiently. The more regulators, the more regulations, which raise the cost of conducting business.

SMALL MANUFACTURERS. Rural Nebraska has many family owned small manufacturers that each employs about 12 people and had gross sales of about $5 million in 2004. Total state taxes after credits, refunds, and abatements show that, in comparison to adjacent states, NE has the 2^nd highest franchise, property, and sales taxes. Urban NE also has many family owned small manufacturers that each employs about 12 people and had gross sales of about $5 million in 2004. Total state taxes after credits, refunds, and abatements show that, in comparison to adjacent states, NE has the 2^nd highest franchise, income, sales, and property taxes.8

PERSONAL DISINCENTIVES. The estimated tax burden of major taxes in large cities for a family of 4 earning $25,000 finds Omaha at 7.2% of income, lower only than Des Moines and Kansas City, MO. At $50,000 income, the Omaha burden is 8.4% of income, again lower only than Des Moines and Kansas City, MO. At $75,000 income, Omahans pay 9.4% of income, lower only than Des Moines. At $100,000 income, Omahans pay 9.7% of income, lower only than Des Moines. At $150,000 income, Omahans pay 10.3% of income, lower only than Des Moines.1 Comparing NE total income and property taxes paid by company executives with adjacent states, NE ranks 2^nd behind Iowa. Comparing NE total income and property taxes paid by CEOs with adjacent states, NE ranks 2^nd behind Iowa.1 Note that key execs consider personal financial impact while deliberating on business location and expansion decisions.

TAX EXEMPTION FOUL. The abuse of the tax exempt status in Nebraska has financially 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 has announced plans to build a new facility in Valley, NE., housing a gym, health and wellness area, and natatorium with combination leisure and lap pool. Upon completion, this facility will become the 7^th YMCA branch in the Omaha Metro area, offering activities that directly compete with private health centers and gyms. The $4.7 million dollar center on 45 acres will pay 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.

CONCLUSION. NE cannot compete with surrounding states without tax incentives, and we must simplify the administrative and reporting requirements needed to obtain such incentives. NE should join the many states that permit local governments to negotiate property tax abatements with businesses.

SUGGESTIONS. 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 2000, the federal government received more 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 in the NTF network project to lobby and monitor our state senators to lower personal and business taxes and to cut wasteful spending instead. Call (402) 551-0921 or write NTF, P.O. Box. 6452, Omaha, NE. 68106-0452.

Research, analysis, and documentation for this issue paper done by Doug Kagan and Lee Mimms. This material copyrighted by Nebraska Taxpayers for Freedom, with express prior permission granted for its use by Citizens for Local Control, Cherry County Taxpayers, Dawes County Taxpayers, and other groups in the Tax Freedom Network. 11-04. C

8 KPMG NE Tax & Business Incentive Report, 2004.

1 KPMG NE Tax & Business Incentive Report, 2004.