State Senator Steve Erdman’s “Nebraska’s tax system needs fixing” was published in the Star Herald, January 23, 2021 and there are a few points worth addressing.
Erdman begins by asserting that the property tax, among others, is bad, Nebraska being the “seventh worst state.” This begs the question of which is the best, or least-worst, tax. I agree that “Nebraska’s tax system needs fixing.” The question is, how best to overhaul the state’s tax system?
Erdman’s proposed legislation would repeal the state income tax, the state sales tax, the state inheritance tax and all property taxes, and replace them with a consumption tax, which would actually be a sales tax that exempts used goods. It is called the “EPIC Consumption Tax Act,” meaning the Elimination of Property, Income and Corporate taxes.
In economics, “consumption” means the using up of economic value. If one buys firewood and then burns it, the fire uses up the wood, thus using up its value, assuming the ashes have no value. Why tax this using-up? Consumption is the purpose of an economy. To live, and live well, we consume goods such as food, utilities, transportation, housing services, and energy. To tax this using-up of value is to destroy the very purpose of the economy!
Taxing production is also bad, since the purpose of production is consumption. So, if we should not tax production or consumption, what should we tax? We should tax what human beings do not produce: natural resources like land, which includes space and natural materials. Many states tax the extraction of oil, coal, and minerals, a tax known as a “severance tax.” As to space, real estate consists of buildings and spatial land. The property tax on the buildings is indeed a bad tax, but a tax on land value is actually beneficial, as it promotes the best use of land.
Erdman’s consumption tax would be levied on services and new goods, and not on used goods. So, it is not a tax on all consumption. If you buy a new car, it would be taxed. The consumption of a car is its annual depreciation. If you buy a used car, it has been partially consumed. Thus, if you pay a tax on the new car, which you then sell, the tax is not on the full consumption of the car, but on the purchase – like a sales tax.
Erdman says this consumption tax “is the one tax that the taxpayer can control.” If you don’t like a tax on food, don’t eat. If you don’t like a tax on fuel, don’t drive or ride. But contrary to this proposition, there is another tax that one can control: the property tax. If you don’t like paying a tax on real estate, don’t own a house. However, we all need to eat, and we need utilities such as water, so we don’t have much of a choice in such necessities.
An advantage of a consumption tax, says Erdman, is that it “ties government taxation to the economy.” But so does a tax on income, as well as a tax on land value.
Similar to a proposal for a national sales tax, misnamed the “fair tax,” EPIC would provide “a monthly allowance or pre-bate, which covers a person’s consumption taxes up to the federal poverty level.” There is already a similar system in the income tax, in which low-income workers receive a tax credit, and if their income is so low that they pay no income tax, they receive a negative tax, i.e. a payment. This allowance would, in effect, be a basic income to all residents, a good idea even with no sales tax.
Erdman claims that “The consumption tax would make Nebraska the envy of the nation!” That reward now goes to New Hampshire. That state has only a limited sales and income tax, and relies on the property tax. New Hampshire would do even better if its property tax was only on land value and not on the value of buildings.
A sales or consumption tax reduces consumption and increases the cost of living. A consumption tax indirectly taxes wages and other income that are used to pay for consumption. We should examine why we would seek to tax the very purpose of an economy, when there is a better alternative: land value. Since tenants already pay rent to their landlord, a tax on land value would not fall on renters if the landlord is already charging what the market can bear. If the landlords raised the tenants’ rental beyond this, they would be stuck with vacancies.
Taxes on production and consumption create a “deadweight loss,” a waste of resources by reducing the amount of production and consumption. Since the amount of land is fixed, a tax on land value or rent has no deadweight loss. The replacement of other tax with a tax on land value would therefore increase production, consumption, and growth.
Most of the land value is in the cities, so farmland would not be burdened. If implemented smartly, an efficiency tax shift could be designed to avoid burdens to existing owners of real estate. Since farmers also pay taxes on income, goods, and improvements, many would see a tax reduction.
Tax reform should be a comparative systems approach – look at all options to select what is best. Economists from Adam Smith to Milton Friedman have concluded that a tax on land value is indeed the best. Nebraskans, and all others, should take heed.
