Courtesy Photo­Image Dave Heineman

Gov. Dave Heineman delivered his State of the State address Tuesday, calling for the elimination of both individual and corporate income taxes.

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Heineman would replace the loss of state revenue with more sales taxes.

“Today, we are operating in a technology-driven, global free market economy,” Heineman said. “Our current tax system needs to be modernized and transformed. It’s been nearly five decades since Nebraska had a serious debate about our overall tax system. Life has changed drastically since the 1960s."

“Nebraska has good schools, affordable homes, a strong work ethic and a low unemployment rate, but taxes are too high,” he said. “High taxes impede economic growth. High taxes aren’t attractive for entrepreneurial growth and high paying jobs.”

Heineman proposed:

· No individual income tax for working Nebraskans.

· No taxing of small business income.

· No taxation of Social Security income.

· No taxation of military retirement income.

· No taxation of any retirement income.

· No corporate income tax.

Heineman said his proposal will be budget- and revenue-neutral by reducing some of the state’s business sales tax exemptions. He said the exemptions have been enacted over the last 50 years, since the state sales and income taxes were first introduced in the 1960s.

He said the state exempts $5 billion in sales taxes annually, while collecting $1.5 billion a year.

Sales tax exemptions are granted to businesses, individuals and agriculture. To make up for less revenue from income taxes, nearly half of the sales tax exemptions will need to be eliminated.

The Governor made it clear that a sales tax on food would not be part of his proposal, which he said he will present in a week or two.

Heineman believes businesses will approve of the change.

“In recent months, I have asked business leaders if they would give up their sales tax exemptions if we could eliminate the individual income tax and the corporate income tax or at least lower the individual and corporate tax rates,” said Heineman. “They want simplicity and fairness. They want a modern tax code that rewards productivity, profits and job creation rather than having their lawyers and accountants spending time mining the tax code for exemptions. Our tax system shouldn’t favor one industry over another.”

Twenty-three states exempt a portion of or all retired military pay, but not Nebraska, he said. Likewise, 43 states exempt a portion of or all Social Security income.

Nebraska’s top personal income tax rate is 35th of 50 states and higher than all the neighboring states.

The Tax Foundation Business Tax Climate ranks Nebraska 31st out of the 50 states. That is a respected index that businesses rely on when choosing where to locate a business, Heineman said.

“Being in the bottom half of all states is mediocre, at best," he said.

The Small Business and Entrepreneurship Council states in their 2012 U.S. Business Policy Index that “A high personal income tax rate raises the costs of working, saving, investing, and risk taking…the personal income tax influences businesses far more than generally assumed because more than 92 percent of businesses file taxes as individuals and therefore pay personal income taxes rather than corporate income taxes.”

Nebraska's personal income tax generates about $2 billion for the state each year. Corporate income taxes generate far less -- about $0.365 billion, according to an analysis by the Nebraska Press Association.

During this Legislative session, Heineman said he will have legislation introduced to eliminate the individual and the corporate income tax, or at least lower those rates.

This report was updated with more information at 7:30 p.m. Tuesday.