Research & Commentary: Nebraska Tax Reform Package Would Move State Toward Improved Economy
In this Research & Commentary, Matthew Glans examines a tax reform package being considered in Nebraska that would lower income taxes using tax revenue triggers.
At first glance, Nebraska’s tax system appears competitive. According to the Tax Foundation, state residents pay $1,128 per capita in state and local taxes, making the state the 16th best in the nation for taxpayers. However, despite the state’s success compared to other parts of the country, Nebraska’s tax rates remain much higher than nearby states.
Nebraska legislators are now considering an ambitious tax reform plan that would cut top individual and corporate income tax rates while changing the way agricultural and ranch land are valued for property tax purposes.
The first major reform would cut the state’s individual and corporate income tax using tax triggers determined by state tax revenues. A tax trigger requires the state government to give refunds or tax credits or to reduce certain tax rates if tax revenue reaches established benchmarks. The idea behind such legislation is government should not be allowed to keep excess tax revenue if it has sufficient funds. Tax triggers have become increasingly popular, because they allow legislators to pass tax cuts without the fear of a huge revenue shortfall.
Nebraska’s top individual tax rate of 6.84 percent is higher than the rate in Colorado, Kansas, Missouri, and Oklahoma, and its much worse than the neighboring zero-income-tax states: South Dakota, Texas, and Wyoming.
The proposal would reduce the four brackets currently in place—with rates ranging from 2.46 to 6.84 percent— to three by combining the bottom two brackets into a single rate of 3.25 percent in 2019.
In 2020, the state would begin an annual process of determining whether its income tax will be lowered. In years the state revenues are projected to grow above 3.5 percent, the personal income tax would be reduced by 0.11 percentage points, until it reaches 5.99 percent. This would not occur until 2027, at the earliest.
Nebraska’s corporate tax rate of 7.81 percent is higher than neighbors Colorado, Kansas, Missouri, Oklahoma, South Dakota, and Wyoming. The rate would decrease by 0.2 percentage points in years that state revenues grow by more than 4 percent, until it hits 5.99 percent.
Personal and corporate income taxes are generally considered to be the most destructive taxes because they disincentivize production, innovation, and risk-taking. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.
The third major tax change would be an increase in Nebraska’s Earned Income Tax Credit (EITC), which would move from 10 percent of the federal credit claimed by a taxpayer to 12 percent over two years. The EITC is designed to increase employment, stimulate spending in the economy, offset the burden of Social Security taxes, and encourage existing workers to stay employed. Michael Saltsman, a research fellow at the Employment Policies Institute, cited a study from economists at the University of Alabama and East Carolina University that found “2.5 times more Americans would have been lifted out of poverty if there had been an expansion of the federal EITC between 2007 and 2009 instead of an increase to the minimum wage.
The new reforms would divide agricultural and horticultural land into new property classes and assess taxes based on these new classifications. The current system uses the land’s market value. Jared Walczak of the Tax Foundation argues the new system may unnecessarily increase the tax code’s complexity.
A state’s tax policy should focus on bringing in enough revenue to cover the costs of necessary functions of government in the least economically distorting way possible. Income taxes are among the most disruptive factors affecting economic growth. Lowering income taxes removes a burden from businesses and individuals and encourages capital to flowing into a state and bolsters the creation of new jobs.
According to the Nebraska Department of Revenue, all the changes would lower taxes by about $12 million during the two-year budget period ending June 30, 2019. These changes could go a long way toward making Nebraska a more competitive state.
The following documents examine state tax reform in greater detail.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Building on Success: A Guide to Fair, Simple, Pro-Growth Tax Reform for Nebraska
This report from the Platte Institute and Tax Foundation presents several tax reform possibilities developed specifically for Nebraska. These options would reduce the state’s high top individual income tax rate (from 6.84 percent to 5.5 percent), lower the uncompetitive corporate tax rate (from 7.81 percent to 5.5 percent), offer more meaningful relief from excessive property tax increases, and provide options for difficult sales tax reform.
An Outline of Nebraska’s Tax Reform Package
Jared Walczak of the Tax Foundation examines a new tax proposal that was recently approved by the Nebraska Unicameral Revenue Committee. It includes revenue-contingent individual and corporate income tax reductions and agricultural property tax relief. “Nebraska’s LB 461 represents significant tax reform, reducing the state’s above-average individual and corporate income tax rates. It also provides property tax relief for agricultural land, albeit in a nonneutral way. Further analysis will follow, but [Legislative Bill] 461, which adopts many of our recommendations from last year, takes great strides in making Nebraska’s tax code more modern, and far more competitive,” wrote Walczak.
A Twenty-First Century Tax Code for Nebraska
In this paper, the Tax Foundation and the Platte Institute examine how Nebraska can responsibly reform its tax code to meet the challenges of the 21st century. “Responsible tax reform would eliminate the “sticker shock” of the state’s high top marginal rates, enhance tax neutrality, maintain revenue stability, and give Nebraska a competitive edge,” the report concludes.
State and Family Budgets Grow with LB461 Tax Reform
Sarah Curry of the Platte Institute analyzes the new tax reform proposal and how it could affect Nebraska’s economy and family budgets. Curry argues the revenue triggers limit the chance the tax cuts could lead to budget shortfalls. “While a reduction in personal and corporate income tax rates and an increase in the Earned Income Tax Credit would come as a relief for many, opponents are concerned whether the state will have the revenue to pay for core government functions such as education, criminal justice, and road maintenance,” wrote Curry. “However, through the use of revenue “triggers,” LB461 is designed to prevent tax cuts from taking place unless ample revenue is also available to fund government services.”
Tip Sheet: State Income Tax Reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.
Tax Efficiency: Not All Taxes Are Created Equal
Jason Clements, Niels Veldhuis, and Milagros Palacios identify the least-costly and least-economically damaging ways governments can extract tax revenues in order to improve economic performance.
Using the EITC to Help Poor Families: New Evidence and a Comparison with the Minimum Wage
David Neumark and William Wascher evaluate the effects of the earned income tax credit (EITC) on poor families. Exploiting state-level variation in EITCs, they found the EITC helps families rise above poverty-level earnings. This occurs by inducing labor market entry in families that initially do not have an adult in the workforce. Their results suggest that the EITC is more beneficial for poor families than is the minimum wage.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at firstname.lastname@example.org or 312/377-4000.