If Omaha's sales tax goes up, will folks shop elsewhere?

Maggie O'Brien

May 28, 2009 (McClatchy-Tribune Regional News delivered by Newstex) -- Many Omaha businesses are giving the cold shoulder to the idea of raising the local sales tax rate to help address the city's police and fire pension woes.

Bob Batt, vice president of Nebraska Furniture Mart, said he fears that boosting the sales tax by a half-penny could encourage consumers to shop for furniture and appliances elsewhere.

After all, Batt said, half his customers live outside Omaha. He also worried that more people would buy furniture from online competitors.

"We have hundreds of thousands of people from outside the city of Omaha who come shopping with us," Batt said. "If our tax rate is higher than in Papillion or Council Bluffs, people will say, 'I'll shop there.'"

Batt said Omaha needs to take another look at reducing spending and making budget cuts before raising taxes.

Sheila Christ, owner of the upscale She-la clothing boutique, said the economy is too shaky right now to be talking about raising the sales tax.

"In an economic climate as difficult as it is right now," Christ said, "it's going to cause people to think one more time before they lay out cash."

Other businesspeople interviewed suggested alternatives, such as expanding the existing sales tax to include groceries and temporarily lowering the sales tax to boost the economy.

Talk of an increase comes at a time when the City of Omaha has seen sales tax receipts drop so far this year. The decline has contributed to an $8 million shortfall in the 2009 budget. Mayor Mike Fahey has made $6.2 million in cuts to address the shortfall.

Last week, Fahey's pension task force unveiled a proposal to address the $500 million shortfall in the police and fire pension fund. A half-cent sales tax increase was recommended as the best way to put money back into the fund, which could run dry in about 20 years and eventually bankrupt the city.

Two other options were higher property taxes or a new garbage fee.

The city now levies a 1.5 percent sales tax. Combined with the state's 5.5 percent rate, shoppers pay a 7 percent sales tax in Omaha. That's the same rate as in Papillion, Lincoln and Grand Island, Neb. Shoppers in Hastings, Neb., pay 6.5 percent.

Any proposal to raise Omaha's sales tax would require approval from the Nebraska Legislature and from voters.

David Brown, president of the Greater Omaha Chamber of Commerce and a member of the task force, said that while business leaders prefer no tax increases at all, a sales tax increase "ends up getting a whole broader spectrum of people to pay for it."

A property tax increase would be more unpopular with businesses, Brown said.

The task force looked at but rejected alternatives to raising taxes. They included cuts in spending or the sale of municipal assets such as parking garages and parking meters.

"The city can't cut expenses enough" to make up for the pension shortfall, Brown said. "It seemed logical that the money would have to come from somewhere."

Count Creighton University economist Ernie Goss among the skeptics when it comes to raising the sales tax.

Goss said a higher sales tax could cause the city to lose part of its tax base, because some shoppers would opt to make their purchases -- especially big-ticket items -- outside Omaha.

For example, raising the local sales tax in Omaha to 2 percent would add $25 to the cost of a $5,000 flat-screen TV.

"Revenues will go up, but they will not get as much as they are hoping for," Goss said. "The tax in and of itself will cause some individuals to go outside the city, and it also may encourage businesses to locate outside the city."

Maybe not, if consumers think they have to drive too far to save a few pennies -- especially if gas prices continue going up, said Alicia Peters, marketing director for Papillion's Shadow Lake Towne Center.

Said Jane Nielsen, president of the Sarpy County Chamber of Commerce: "I can't see somebody driving 15 or 20 minutes" to shop outside Omaha. "People's time is worth money, too."

Fahey's task force concluded that a higher sales tax would generate an extra $45 million a year, of which $15 million would be used annually to plug the pension hole. The rest could be used to pay off debt from the Qwest Center Omaha, lower the city's property tax rate, build up cash reserves or address other needs.

The task force also recommended that police and firefighters agree to pension changes, including later retirements, that would result in $15 million in annual savings to the pension fund.

A selling point of a higher sales tax would be using some of the proceeds to lower property taxes, Brown said.

"The fact that you can counterbalance it with a decrease in property taxes made it more acceptable than other choices."

The World-Herald contacted several local businesses for their views on whether the sales tax should be raised.

One car dealer said it would make little difference, even though customers usually face a large sales tax bill when they buy autos. Bret Huber, owner and manager of Huber Automotive in Omaha, said dealers are trying to woo money-conscious consumers with discounts and other incentives.

A provision in the federal economic stimulus plan allows car buyers to deduct sales taxes on purchases of new vehicles. Huber said the deduction would probably reduce the impact of a higher Omaha sales tax.

But Mickey Anderson, a partner in the Performance Auto Group, said the city should lower the sales tax rate, at least for a while. Anderson said that would encourage people to shop and thus generate more tax revenue.

Greg Cutchall, CEO of Omaha-based Cutchall Management Co., said the city should instead start taxing grocery purchases to deal with the pension problems. Food bought at grocery stores is exempt from sales tax, but restaurant meals are not.

Grocery stores "are probably our biggest competitor," said Cutchall, whose company owns and operates about 35 restaurants in Omaha, Lincoln and elsewhere, including several Famous Dave's, Paradise Bakery and Sonic locations.

"I think taxing the grocery stores would be a more fair alternative," he said, "and it would still accomplish the end goal."

The owner of a longtime family-owned restaurant said that if Omaha were to go bankrupt, his business would suffer more than it would from a sales tax increase.

"I would be for it to keep the city from going bankrupt," said Alfie Cascio, owner of Cascio's Steakhouse. "Without our police and fire, what do we do?"

--Contact the writer: 444-3100, maggie.obrien@owh.com

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