Can Nebraska shed its destructive, high tax rates without jeopardizing state or local budgets? Experts from the Tax Foundation attended the Platte Institute’s 2016 Tax Reform Summit to say that the definitive answer is yes.
The Tax Foundation’s mission is to lead the tax reform debate to smarter, simpler policy. They show governments how to raise money while doing the least harm to the economy.
Unfortunately, Nebraska’s tax system misses the mark on many principles of sound tax policy, which include simplicity, transparency, neutrality, and stability.
In their new report, A Twenty-First Century Tax Code for Nebraska, the Tax Foundation made these recommendations to modernize Nebraska’s tax system:
- Lower and flatten individual income tax rates and apply sales tax to more services
Tax Foundation research shows that income taxes are the most harmful to economic growth.
Nebraska can lower tax rates in a way that protects state revenue. Adding more services to the sales tax base can help pay for a lower, flatter rate structure. Sales taxes can also provide greater budget stability than income taxes, particularly as the service sector of the economy continues to grow.
Contrary to what you might assume, this change would make Nebraska’s sales tax less regressive, since many services purchased by higher-income taxpayers are currently exempt.
- Introduce a single-rate corporate income tax by scaling back tax incentive programs
Even some traditionally high-tax states have lower corporate tax rates than Nebraska, where rates are high enough that policymakers depend on incentive programs to offset the burden and retain investments.
It doesn’t have to be this way.
In 2013, Nebraska offered $155 million in corporate tax credits. If in that year, the two largest incentive programs — the Nebraska Advantage Act and the Employment and Investment Growth Act —were instead replaced with a 5 percent tax rate for all corporations, the state would still have raised the same amount of revenue. While our treasury would be no worse off, Nebraska would have one of the lowest corporate tax rates in the country, lower than even Arizona and Florida.
- Reduce reliance on tangible personal property tax
Nebraskans are overwhelmingly unhappy with real property tax, but there is yet another property tax fewer people know about that also harms their pocketbooks. Tangible personal property tax applies to business equipment that helps create a more productive, higher-wage workforce.
According to Creighton University economist Ernie Goss, capital investment per worker in Nebraska is $78,371, while our neighboring states average $105,605 or $122,736 nationally.
Six Midwestern states, including two of our neighbors, exempt all or nearly all tangible personal property from this tax: Iowa, Illinois, Minnesota, North Dakota, Ohio, and South Dakota. Indiana and Michigan are also moving away from these taxes through gradual reforms.
There are several possible approaches for this type of property tax reform. The state could make tangible personal property tax a local option, as a part of our sales tax is today. If the sales tax base is expanded, some local governments may find they can reduce or eliminate tangible personal property tax.
Alternatively, the state could gradually increase the existing $10,000 exemption for personal property or require that new equipment be exempt. Over time, either would have the effect of reducing reliance on tangible personal property tax or phasing out the tax.
- Learn from unsuccessful and successful tax reforms
Opponents of tax relief may be surprised to know that the Tax Foundation warned about the structure of the Kansas tax plan from the beginning, recommending that a key part of the tax cut be reversed.
But the country’s leading tax research organization also says Nebraska doesn’t need to be paralyzed by Kansas. Instead, they suggest North Carolina and Indiana as successful models, where broad-based policies are generating strong revenues, and enabling further reductions in tax rates.
In 2017, Nebraska’s tax structure will commemorate its 50th anniversary. The current system is no longer serving the needs of our economy and is well overdue for an upgrade. With no shortage of compelling reasons for reform, or the necessary knowledge of options for pursuing it, the last piece that must fall into place is sustaining the will of elected officials to make it happen.