In the 1980 Popeye movie starring Robin Williams and Shelley Duvall, shortly after Popeye climbs out of his little boat onto the dock in the town of Sweethaven, he is immediately met by the Tax Man. After a brief introduction, the Tax Man promptly proceeds to impose a “docking tax” of 25 cents, a “new-in-town tax” of 17 cents, a “rowboat-under-the-wharf tax” of 45 cents, a “leaving-your-junk-lying-around-the-wharf tax” of $1, and a “question tax” of 5 cents.
If the new EPIC Option Consumption Tax initiative petitions get on the ballot, as expected, and are approved by Nebraskans in November, welcome to Nebraska’s version of Sweethaven.
This article is offered as part of the ongoing debate about whether the EPIC Option is the right solution to Nebraska’s tax burden.
What Is the EPIC Option?
The EPIC Option website describes what the EPIC Option is intended to do: “EPIC Option will Eliminate all Nebraska Property, Income (/Inheritance), and Corporate taxes.”
The EPIC Option website states that the EPIC Option will be achieved in two steps:
“Step 1: Vote of the people to amend the Nebraska State Constitution on the November 2024 Ballot.”
“Step 2: Vote of the Legislature.”
The EPIC Option consists of two separate petitions filed by their sponsors on Oct. 14, 2022. These are detailed below.
While the EPIC Option website describes in detail how the EPIC Option would be implemented, as well as the scope and proposed tax rate, this is all pursuant to legislation that, while already proposed, would apparently not be fully debated, designed, drafted, and approved by the Nebraska Legislature until after Nebraska’s voters approve the EPIC Option Nebraska Constitutional Amendments. (See pending LB 79 at https://nebraskalegislature.gov/bills/view_bill.php?DocumentID=50183.)
In addition, since the EPIC Option is divided into two separate petitions, the possibilities are that neither is adopted, both are adopted, or one is adopted and one is rejected.
Scope of This Article
If either of the EPIC Option Constitutional Amendments is adopted, this would pose a variety of major impacts on every Nebraska citizen.
Such an analysis is beyond the scope of this one article. Other organizations have already provided, or are in the process of providing, a fiscal impact analysis. For example, the March 2, 2023, OpenSky Policy Institute “Policy Brief: Consumption Tax” concludes that if the EPIC Option is enacted as proposed in LB 79, it would result in a $7.4 billion annual tax revenue loss and a tax rate of 22.1% would be required for EPIC to be revenue neutral—that’s nearly three times greater than what is proposed in the EPIC Option bill. (Read the full “Policy Brief” at www.openskypolicy.org/wp-content/uploads/2023/03/20230302ConsumptionTaxBrief.pdf.)
Instead, this article will focus on the legal issues and potential roadblocks posed by the brief, problematic language of the two EPIC Option initiative petitions.
What Does the EPIC Option Language Actually Mean?
As is often said, “The devil is in the details.”
In drafting any type of document, whether it be a constitution, a statute, or a contract, balance is needed between succinctness and verbosity. The sponsors of the EPIC Option have chosen to be very succinct, replacing the several thousand words in the current Nebraska Constitution regarding taxation (see the Nebraska Constitution, Article VIII) with 82 words in the EPIC Option initiative petitions.
Below is the short version of our analysis of the succinct language in the EPIC Option initiative petitions. As fellow Nebraska residents, we submit this as to what might be considered by the proponents and opponents of the EPIC Option.
Review of Proposed Section 14
This is the first of the two petitions. It states:
“To add a new section 14 to Article VIII of the Nebraska State Constitution: VIII – 14 Notwithstanding any other provision of this Constitution, beginning January 1, 2026, no governmental entity in the State of Nebraska may impose taxes other than retail consumption taxes or excise taxes.”
Our comments on this new Section 14 include the following:
“Notwithstanding any other provision of this Constitution.” By stating that this new Section 14 applies “notwithstanding any other provision of this Constitution,” this section now becomes, in effect, a super-section under the Nebraska Constitution. This is a common drafting provision when an overall superior provision is intended. By the nature of this statement, it would supersede all other sections of the Nebraska Constitution that exist not just with respect to taxation, but also with respect to any other constitutional provisions that may be built into other portions of the Nebraska Constitution that may get in its way.
“Beginning January 1, 2026.” Prudently, the proponents have given the Nebraska Legislature the year 2025 to design, draft, and enact the legislation that would be needed to implement this section.
While this effective date provides enough time for the Legislature to act, it does not necessarily provide enough time for the highly likely court challenges to play out with regard to the EPIC Option itself or the implementing legislation. This could leave Nebraska in the position of having repealed all of its existing property, sales, income, inheritance, and other taxes while being left with an unenforceable or unconstitutional replacement under the EPIC Option. This would be an extreme, yet potential, result which would, of course, have disastrous effects on Nebraska (which can be discussed further elsewhere).
The Nebraska Supreme Court and Eighth Circuit Court of Appeals have demonstrated that they are fully willing to strike major Nebraska tax systems when the court finds them in violation of Nebraska or U.S. Constitution or federal statutory mandates. (See cases mentioned below.)
“No governmental entity in the State of Nebraska.” Section 14 does not define what a “governmental entity” is, nor does it define what “in the State” actually means. While, generally speaking, the term “governmental entity” is capable of being reasonably interpreted by the Legislature, the term “in” poses an issue. For example, the question would be whether the state of Nebraska itself is considered to be “in” itself. If not, then this entire prohibition under Section 14 would not apply to the state of Nebraska. The result would be that the state of Nebraska may impose whatever taxes in whatever manner it may choose to impose, based on the pre-existing provisions of the Nebraska Constitution.
“May impose taxes.” This does not prevent any governmental entity from imposing other types of charges, such as user fees (like some of the “taxes” in the Popeye movie). Since the term “taxes” is not defined by Section 14, it would be up to the Legislature to define this. However, the Legislature would not be free to define this term without regard to the commonly understood meaning of a “tax” as compared to a “user fee.”
“Other than retail consumption taxes or excises taxes.” This section does not define these terms. This is discussed next with regard to Section 15.
Review of Proposed Section 15
This is the second of the two petitions. It states:
“To add a new section 15 Article VIII of the Nebraska State Constitution: VIII – 15 Beginning January 1, 2026, the State of Nebraska shall impose a retail consumption tax or an excise tax on all new goods and services, and the Legislature may authorize political subdivisions to do the same. There shall be no exemptions from such taxes except for grocery items purchased for off-premises consumption.”
Our comments on this new Section 15 include the following:
“The State of Nebraska shall impose.” This is mandatory. It is not optional. Under this proposal, the state must do this (even if Section 14 does not apply to it). This is not self-executing. The Legislature and the Governor would presumably implement such a mandate.
“A retail consumption tax or an excise tax.” This language contains both clarity and ambiguity.
Clearly, the word “retail” only refers to the “consumption tax” and not the “excise tax” because of the presence of the words “a” and “an,” respectively, in front of each. The term “or” seems to say that the state has to make a choice. It appears that this choice must apply for “all” of the “new goods and services.” In other words, could the Legislature choose to apply the state retail consumption tax on some new goods and services and the excise tax on other goods and services? Perhaps not.
Neither of these tax terms is defined. While the Nebraska Legislature would seek to include definitions within its legislation, that legislation would have limits based on the ordinary meaning of these words in the context of case law, which can be found in various cases throughout the country. (For some discussion of the meaning of these terms, see the Dec. 7, 2022, report from the Congressional Budget Office titled “Impose a Tax on Consumption” at www.cbo.gov/budget-options/58637.)
“On all new goods and services.” Grammatically, there are no exceptions when the word “all” is used. Also, grammatically, the word “new” applies to both goods and services.
While the Legislature would need to define the terms “new,” “goods,” and “services,” it would be limited to only taxing those that are considered “new” with respect to the ordinary meaning of this word.
“No exemptions from such taxes.” No exemption means no exemption, meaning none. This seems pretty clear and is consistent with the requirement that the tax be imposed on “all,” as stated above. Section 15 does allow an exemption for “grocery items purchased for off-premises consumption.” This might be read to say that this is either an exemption the Legislature is authorized (but not required) to enact or this is a mandatory exemption the Legislature must enact.
In addition, the Section 15 drafters chose to use the term “grocery items” rather than the exemption utilized by Nebraska Statute which exempts “food.” The common meaning of the term “grocery” is not limited to just food but instead includes food and other items or supplies that you purchase in a food or grocery store or supermarket (and the reference to off-premises “consumption” is the same word used in the permitted “consumption tax,” so consumption here isn’t limited to that which can be eaten).
EPIC Issues With the U.S. Constitution
All state tax systems need to run the gamut of, and comply with, the U.S. Constitution limits and prohibitions. These include the Import-Export Clause, the Commerce Clause, the Equal Protection Clause, the Due Process Clause, the Privileges and Immunity Clause, and the Supremacy Clause. Certain federal statutes also must be satisfied. This is an analysis for another day.
For some cases in Nebraska’s history which show the willingness of the courts to apply these limits, see, for example, Trailer Train v. Leuenberger, 885 F. 2d 415 (8th Cir. 1988), MAPCO Ammonia Pipeline v. State Bd. of Equalization & Assessment, 238 Neb. 565 (Neb. S. Ct. 1991), Kellogg Co. v. Herrington, 216 Neb. 138 (Neb. S. Ct. 1984), Natural Gas Pipeline Co. v. State Bd. of Equalization & Assessment, 237 Neb. 357 (Neb. S. Ct. 1991), and Jaksha v. State, 241 Neb. 106 (Neb. S. Ct. 1992).
EPIC Issues With Its Own Language That the Legislature Cannot Fix
Because the EPIC Option would be part of the Nebraska Constitution, certain provisions, if problematic, cannot be fixed by the Legislature. In addition to the issues discussed above, some of these also include the following. (In this article, we are not addressing whether or how the pending LB 79 addresses these.)
The Scope. Since Section 15 mandates the tax on “all new goods and services” (other than “grocery items”), the tax would apply to goods and services purchased by, as well as goods and services provided by, the private sector (companies and individuals), the U.S. government, the state of Nebraska, all Nebraska agencies and local governments, all churches, all nonprofits, all health care providers, etc. The North American Industry Classification System (NAICS) identifies several hundred types of services, which is a start on what would now need to be identified and taxed.
Tax Rate Uniformity. Section 15 says the state shall impose “a” retail consumption tax or “an” excise tax. It doesn’t say plural taxes. This wording indicates a singular tax at one rate, which may prohibit using multiple rates of tax for different goods or services.
Or it might be construed that Section 15 does not specify that a single rate of “tax” must be imposed on the new goods and services. So, the Legislature might decide to enact a variety of rates, depending on the particular goods and services (which may be open to U.S. Constitutional challenge if Section 15 actually means only one uniform rate).
Lack of Tax Policy Options. Throughout the history of taxation, governments, for the welfare of their citizens, have sought to design their tax systems so that the brunt of taxation does not overly burden certain groups of people, certain types of organizations, or certain types of goods and services. Other than the “grocery items” exemption, and because of the apparent “one tax rate fits all,” the EPIC Option will be one of the most regressive tax systems we’ve seen.
Lack of a Way to Compete. Like it or not, the state of Nebraska exists in an international business world built on competition. Often, in order to keep or attract companies, jobs, and talent in and to our state, the state needs to offer something in the form of tax exemptions or incentives in order to win. The EPIC Option ignores this reality and therefore reduces Nebraska’s ability to compete.
Isolation. Companies and individuals face many state and local tax systems around the U.S. While these can be complex, they are generally workable because each state mainly has a combination of income, sales, and property taxes. This relative uniformity helps the national economy function with some degree of efficiency. The wholesale and complete swap of Nebraska’s income, sales, and property tax system for an entirely new, unique, broad, and vague EPIC Option is highly likely to wreak havoc on the lives of Nebraska’s citizens and companies (and cause Nebraska employers to just leave or not come).
Who Pays and on What Event. Section 15 says the state is to “impose” the stated tax “on” the stated goods and services, but it doesn’t say who it is to be imposed on or what event (such as a sale or use or mere ownership) it is to be imposed on (unless one can conclude these answers are to be determined by the nature of the “retail consumption tax” or the “excise tax” itself).
What Is “New.” Section 15 requires the taxation of all “new” goods and services. “New” is not defined. Generally, the word “new” refers to something recently made, grown, or built, or recently found, invented, or discovered. Just this concept alone will generate years of litigation to address, for example, when something is, isn’t, or no longer is new.
An illustration would be an ongoing software license or real estate rental (which are either a good or service, “all” of which must be taxed if “new”). Those in effect at the effective date of EPIC would not be “new,” so they should not be taxed. Likewise, the ongoing renewal of these would arguably not be “new” goods or services. So, this means much of the existing tax base would either disappear or never come into existence. This likely impacts the EPIC fiscal (and tax rate) assumptions. It also means a challenge under the U.S. Constitution Equal Protection Clause would be likely and possibly successful. (See cases cited above.)
Free Goods and Services. EPIC does not distinguish between services that impose a price or which are free. Instead, “all” “new” services must be taxed. The Legislature is not given the prerogative to tax some and not others. Typically, all tax laws will express the base on which the tax rate is to be applied and will also express the unit of measuring the base (i.e., the price paid for a sales tax). For those goods and services that are “free” (e.g., Google searches and various government services or charitable goods), the present Nebraska sales tax system would normally not impose a tax. However, under EPIC, Nebraska “shall impose” a tax on “all.” So, to avoid such a nontax situation being considered a prohibited “exemption,” the state of Nebraska will apparently need to come up with a system to determine the tax base (i.e., some artificial deemed price or value) on which the tax rate will now be imposed on this vast array of free services.
The History of Taxes
The EPIC sponsors chose their name well. We believe EPIC will become a disaster of truly epic proportions.
In Charles Adams’ book “For Good and Evil: The Impact of Taxes on the Course of Civilization,” the author offers several historical lessons on government taxation and spending. Near the end of his book, he leaves us with this observation:
“Taxes have often been the fuse that ignites the powder of human discontent, but once the explosion occurs, we seldom take notice of the fuse. Even with the civilizations lost from history, of which we know so little—if their silent temples and ruins could speak, what tax tales would they tell? The ancient Mayan civilization, according to one scholar, ended when taxpaying citizens simply disappeared into the jungle instead of paying taxes.”
The EPIC Option Destiny
The Tax Man in Popeye continued throughout the movie to impose various taxes on all kinds of things. He imposed a “bathtub tax,” a “refrigerator tax,” and a “household and appurtenances maintenance tax” on a family totaling $121,212.12. He imposed a “going-to-an-illegal-sporting-event tax” of 62 cents, an “up-to-no-good tax” of 50 cents, a “hamburger tax” of 5 cents, an “unlicensed-baby tax” of 89 cents, and an “embarrassing-the-tax-man tax” of one sunflower.
Ultimately, Popeye had had enough. When the Tax Man sought to impose on Popeye a “movin’ in tax” of $5.25 and a “movin’ out tax” of $4.25, Popeye pushed the Tax Man down a long loading shoot into the water, prompting a celebration by the townspeople.
The debate of the EPIC Option can be expected to become even more intense over the next few months, both within the Legislature (as state senators look to address various tax proposals) as well as in public forums, meeting places, and cafés across Nebraska.
Let’s hope Nebraskans and our elected officials choose the right course in these major tax policy debates we now face. Let’s not become Sweethaven and let’s not prompt a response like that of the Mayans.
Nick Niemann and Matt Ottemann are partners with McGrath North Law Firm. As state and local tax and incentives attorneys, they collaborate with CPAs to help clients and companies evaluate, defend, and resolve tax matters and obtain various business expansion incentives. For more information, go to www.NebraskaStateTax.com and www.NebraskaIncentives.com. For a copy of their full publication, “The Anatomy of Resolving State Tax Matters” or their “Nebraska Business Expansion Decision Guide,” please visit their websites or contact Niemann or Ottemann at (402) 341-3070 or at nniemann@mcgrathnorth.com or mottemann@mcgrathnorth.com.
