Economic Barriers May Threaten Nebraska’s Future
Nebraska’s economy performed relatively well through the Great Recession and the sluggish recovery that followed, but national policy rankings continue to raise red flags for the state’s long-term growth. In its annual Rich States, Poor States economic competitiveness index, the American Legislative Exchange Council (ALEC) projects that Nebraska will fall behind most of the country. The index evaluates states on past economic performance, as well as future outlook.
ALEC’s report comes after the Tax Foundation’s annual Business Tax Climate Index, which places Nebraska behind most of the country and our neighbors, and a ranking by the Mercatus Center showing Nebraska as one of the states hardest hit by federal regulation.
ALEC has no axe to grind against Nebraska particularly. They’ve ranked our past economic performance a strong 16th. Compare that to Michigan, which was mired in recession long before and after the rest of the country — it ranks 50th. But a series of economic policy factors calls into question whether our current level of prosperity will remain.
Looking ahead, Michigan is 22nd in economic outlook, while Nebraska ranks ten places lower at 32nd. Neither ranking is best or worst, but for Michigan it would be a marked improvement, and for Nebraska, a serious setback.
This is not the first year the ranking cast doubts on Nebraska. Since 2009, ALEC has ranked Nebraska no higher than 29th on the outlook index. How can it be that our future is considered less bright than a state that until very recently had double-digit unemployment and still faces many serious challenges?
The answer may be found in how Michigan responded to adversity. While Nebraska has also experienced a net out-migration of domestic residents in recent years, Michigan’s population and income losses were so dramatic that the state could no longer rest on its laurels.
The recession forced changes to tax policies that impact investment and growth. Lawmakers ended a harmful business tax that had to be paid even when enterprises lost money. The reform built consensus around eliminating many tax incentives and implementing a flat corporate tax rate that is lower than in most states.
Michigan took action to phase out personal property tax on business equipment. In the 90s, the state replaced its inheritance tax with an estate tax and then eliminated the estate tax in recent years. Michigan also began to unwind its many occupational licensing barriers, and continues to do so.
Nebraska, meanwhile, has a sharply progressive income tax system with rates that are higher than most states, and for which major corporations demand incentives. The state still allows personal property tax, remains one of a few states levying inheritance tax, and is also among the most cumbersome for job licensing.
The relative size of government payrolls each state needs to fund are also a factor. For every 10,000 Michiganders, about 441 works for government, while 630 of every 10,000 Nebraskans collect paychecks paid with tax dollars.
These costs and trade-offs add more bricks to the barriers to growth. Since 1992, out-migration has caused $3 billion of annual adjusted gross income, and the people who created it, to leave Nebraska.
The work of removing these barriers will be the subject of a new Platte Institute policy brief series based on research by Dr. Russell Sobel, Professor of Economics and Entrepreneurship at The Citadel. Dr. Sobel’s work analyzes the policy approaches of Nebraska’s competitors: states where Nebraskans move and take jobs and income with them.
Nebraska and Michigan are not competitors in that sense. But the two are losing out to similar states, making the comparison even more valuable.
Michigan is no tax haven, nor does it have a tradition of limited government. It’s not one of the states without income or sales tax, and it doesn’t spend like one either. Before the recession, Michigan spent more on schools per pupil than Nebraska.
Instead, Michigan provides a good example of the changes a higher-tax Midwestern state has to make to return to growth when its policies no longer benefit enough of its citizens. Though the Nebraska Legislature is now entering the interim, when it comes to securing the state’s future, there’s no shortage of work to be done.