Nebraska Tax Myths, Part 1

State senators have begun discussing changes to the state’s tax code that could reduce barriers to creating higher-paying jobs in Nebraska, but opponents to these discussions have been publicizing many unhelpful myths about tax reform. 

 

It is clear from research that Nebraska needs to make changes to grow economically, and that our tax structure imposes higher, more counterproductive taxes than states we compete with for businesses and hardworking individuals. Let’s identify some of these dangerous myths that stand in the way of making Nebraska a better state for taxpayers.

 

    People will live and work in Nebraska regardless of the tax rates.

 

    There is a direct relationship between taxation and migration.  IRS data published in How Money Walks visualizes the migration of Americans and their income across state lines.  Nebraska lost a total of $3.07 billion in annual adjusted gross income (AGI) between 1992 and 2014. The largest beneficiaries of these losses are states that do not tax income such as Texas ($475.94 million AGI lost) and Florida ($433.21 million AGI lost).  By their nature, income taxes increase the cost of working and investing in a state.  Nebraska cannot reverse this trend of outward migration of residents and income by failing to address, or increasing, the very taxes these Nebraskans are fleeing.
 

    Tax reform leads to cuts to public services and therefore, priorities in the budget won’t get funded.

 

    Recent tax reform discussion by Nebraska lawmakers involve only improving the way the state collects tax revenue, not changing how much revenue is collected.  This is commonly referred to as ‘revenue-neutral’ tax reform.  It is not necessary to cut services in the state’s budget if reductions in Nebraska’s costly tax rates on working and investing are offset with removing outdated loopholes in the state’s tax code.
 

For example, there are billions of dollars of sales exempted from Nebraska state sales tax such as newspapers, professional services, movie rentals, repair labor, and certain floral deliveries.  If these types of exemptions were eliminated from the tax code and charged sales tax – the state would see an increase in sales tax revenue without increasing tax rates.  The state could then reduce income tax rates.  When the revenue from all tax sources is totaled, it would be the same, if not more, than it was under the prior system.
 

    Nebraska’s tax reform proposal will end up just like Kansas’ tax cuts.

 

    Nebraska’s tax reform discussions are in support of a fully-funded plan.  Kansas, however, adopted sweeping tax cuts without offsetting the loss of revenue with revenue increases elsewhere, and did not use triggers to ensure revenue stability.  After the tax cuts, Kansas continued to increase spending at rates much higher than inflation, compounding the problem.  But most importantly, opponents of tax reform regularly fail to mention the key difference between Kansas’ tax plan and many other states that have succeeded with tax reform.  Kansas carved pass-through business income out of the state’s individual income tax base entirely, creating a tax loophole that provided substantial opportunities for tax arbitrage for more than 300,000 taxpayers. This growing loophole made it difficult for Kansas to make reliable revenue projections. Tax reform discussions in Nebraska focus on expanding, not shrinking, the state’s tax base.

 

    The “three-legged stool” system for funding government is the best method.

 

    There is no academic research supporting the belief that state and local government should be supported by equal amounts of property, sales, and income tax collections.  The vast majority of economic literature on taxes and economic growth sharply disagrees with this popular, but baseless urban legend.  Taxes on work and investment are more harmful to economic growth and job creation, and less stable, than taxes on consumption.

On average, state and local governments across all 50 states rely more heavily on sales tax, which is more stable than income tax.  Recent tax reform discussions have focused on an expansion of sales tax bases, and a reduction in income and property tax.  This guiding foundation is used because individual and corporate income taxes, as well as property taxes on business equipment, are the most detrimental to a state’s economic growth.  Tax reform will help Nebraska align with other states in the country.


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