Memo for Sen. Davis regarding Estimated Potential Revenue from Intangibles Tax

Memo for Sen. Davis regarding Estimated Potential Revenue from Intangibles Tax

Date:  October 16, 2013

To:  Senator Al Davis

From:  OpenSky Policy Institute

Re:  Estimated Potential Revenue from Intangibles Tax

“Intangible property” is a large amount of the property owned in Nebraska, but is exempt from property taxation. Intangible property can include the value of things such as stocks, bonds, mutual funds, cash balances, accounts receivables, patents, and trademarks. Nebraska’s property tax applies only to certain tangible property such as homes, farms, and machinery. If intangibles were included in the property tax base, the state could significantly increase revenues or reduce property tax levy rates. This memo provides two estimates of the value of intangible property in Nebraska and the potential revenue impacts of taxing intangible property.

To our knowledge, data on intangible property are not available on a state-by-state basis. Nebraska’s share of total financial assets held in FDIC-insured banks is 0.41 percent.[1] Thus, for the estimates included here, that percentage is applied to national totals to estimate the amount of intangible property in Nebraska. We include here two estimates, one taking a very inclusive approach to taxing intangibles and one taking a much narrower approach.

Broad approach: The state of Oregon’s Tax Expenditure Report takes a very broad approach to estimate the revenue lost due to exempting intangible property.[2] That approach begins with total financial assets in the U.S. ($150.9 Trillion in 2010)[3], attributes a proportionate amount to the state, and applies the average property tax rate to the total.

Applying this methodology to Nebraska, Nebraska’s share of all financial assets would be about $613 Billion. If all of that property was taxed at the Nebraska average property tax levy ($1.94 per $100 of valuation in 2010), it could generate $11.9 Billion in property tax revenue. Alternatively, if the goal was to reduce levy rates rather than raise revenue, adding those financial assets into the property tax base (total value of taxable personal and real property in Nebraska in 2010 was $154 Billion) would increase the available tax base to $767 Billion, which could allow the average property tax levy rate to drop from $1.94 to $0.39, an 80 percent reduction.

This very broad approach is likely to be a dramatic overestimate compared to the amount of revenue that could be realistically collected. It includes financial assets owned by all sectors, including state, local, and federal governments. And it includes financial assets of all types, including government bonds, pension entitlements, retirement accounts, and tax-exempt securities.

Narrower approach: The state of Washington took a much narrower approach to estimate the fiscal impact of a 2009 bill that would have taxed particular types of intangible property.[4] This approach adds together only a select group of intangible asset types rather than starting with a grand total. For households[5] and businesses[6], IRS data were combined for a specific list of intangibles, thus excluding many items such as cash balances, tax-exempt securities, government bonds, and retirement accounts. The figure for businesses was also reduced by 70 percent to account for issues such as corporations being located in multiple states. The national total for households comes to about $5 Trillion, and the total for businesses to about $5.7 Trillion, for a total of about $10.8 Trillion.

Applying this methodology to Nebraska, Nebraska’s share of the selected intangibles would be about $11 Billion. If all of that property was taxed at the Nebraska average property tax levy, it could generate $856 Million in property tax revenue. Alternatively, if the goal was to reduce levy rates rather than raise revenue, adding those financial assets into the property tax base would increase the available tax base to $198 Billion, which could allow the average property tax levy rate to drop from $1.94 to $1.51, a 22 percent reduction.

Both of these estimates are rough approximations, but the narrower approach employed by Washington is more likely to be a realistic reflection of the revenue that might be gained from an intangibles tax in Nebraska.