LINCOLN — Omaha's controversial new tax on tobacco, enacted to benefit construction of a $370 million university cancer center, is coming under more fire from a state senator.
State Sen. Bob Krist of Omaha, who has criticized the use of city taxes for the state project, recently asked the City Council to put off collection of the tax until July. He wants to give the Legislature a chance to weigh in on the issue and eventually rescind the tobacco tax.
The idea of putting off the tax's collection brought a cool reception from City Council President Tom Mulligan. He said that while he has asked for a legal opinion on the ramifications of postponing the tax ordinance, which went into effect Tuesday, tax collections have already started.
“As far as I'm concerned, we're moving forward,” Mulligan said. “I believe and the majority of the council believes the right thing to do is help the (University of Nebraska) med center with this new cancer research center.”
The exchange sets the stage for another fight in the Legislature over an unpopular local tax in Omaha.
Two years ago, state lawmakers moved quickly to rescind a controversial wheel tax the city was planning to impose on people who worked in Omaha but lived outside the city.
Now, Krist has drafted a bill that would bar Omaha and other cities by 2015 from using occupation taxes to benefit another political subdivision, such as UNMC, the site of the proposed cancer research and treatment center.
The senator's proposal would go further by preventing cities from imposing occupation taxes as a percentage of a sale. If his bill became law, it would force cities such as Omaha, Lincoln and Grand Island to either drop or re-enact occupation taxes levied in that way, which would include current taxes on restaurant bills, lodging and telephone services.
Krist said that occupation taxes, which are levied on businesses, are, in many cases, a de facto sales tax on customers.
“This is not about stopping Omaha from funding the cancer project. It's about stopping a (taxing) vehicle and how we abuse it,” the senator said.
Krist emphasized that he supports the cancer center project, but he opposes occupation taxes that are not approved by voters and that target a small minority of taxpayers.
Krist said he believes he has the support of enough senators to pass his proposal and will have the backing of the governor.
Occupation taxes have been around since cities were first established in the state, and they have become a key revenue source for Omaha and many other cities.
But they've become a target of increasing criticism from some conservative groups and lawmakers as a “hidden” tax that can be enacted without a vote of the people.
Last year, the Legislature passed a law that bars cities from enacting occupation taxes that generate revenue of a certain amount without a vote of the people. In Omaha's case, it was $6 million a year.
That law, Legislative Bill 745, forced the City Council to trim its tobacco tax proposal so that it would not require such a vote.
In October, the council approved the ordinance on a 5-2 vote. It imposes a 3 percent tax on the sale of all tobacco products, lower than originally proposed taxes of 7 percent and 4.5 percent. The tax is scheduled to end after 10 years and generate $35 million in revenue for the cancer center.
The city's contribution, plus $5 million from Douglas County and $50 million from the state, would assist the university's efforts: $160 million in private fundraising and $120 million in bond financing.
Supporters of the ordinance, including Mayor Jim Suttle, praised the move as a long-term investment in the city, due to the high-paying jobs and additional development the cancer center would bring.
Detractors, who included Gov. Dave Heineman, expressed surprise that NU was seeking money from other government entities. Heineman said it was unfair to tax tobacco users twice for the project — once with their state taxes and a second time when buying a pack of smokes — and that voters ought to approve such taxes.
Assistant City Attorney Tom Mumgaard said this week that he is preparing a formal legal opinion on Krist's request to delay collecting the tobacco tax.
He said that while the City Council could vote to halt the tax, he sees one sticky issue: The city cannot forgo the collection of a tax that's already imposed. That means tobacco vendors would have to pay a few weeks of tobacco taxes even if the council eventually voted to suspend the tax.
Mumgaard added that levying occupation taxes based on a percentage of sales has been done for decades and has been viewed as the fairest way to determine what venders should pay.
Under Krist's bill, Omaha would have until Jan. 1, 2015, before the tobacco tax would go away. Krist said the city could seek alternative ways to finance the cancer center, mentioning an increase in local sales taxes by a vote of the people as one option.
Omaha Sen. Brad Ashford, a candidate for mayor and a key vote on issues involving the city, said that he has backed off on his proposal to seek $40 million in state funds to replace the city's tobacco tax pledge because “it's time to move forward.”
The council, he said, was put in a “very difficult spot” when asked to help fund the cancer center project, and he respects its decision.
The League of Nebraska Municipalities, which represents cities and towns across the state, is already expressing concerns about the potential unintended consequences of Krist's bill.
The organization held a conference call with 30 municipalities Thursday to discuss the proposal, according to Lynn Rex of the league.
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