Nebraska Needs Real Income Tax Reform

Published December 14, 2013

Although at first glance Nebraska’s tax system may appear competitive nationally, it lags behind its regional neighbors, who are its primary competitors for attracting new businesses to the state.

Nebraskans pay around $3,853 per capita in state and local taxes, 17th highest in the nation according to the nonpartisan Tax Foundation. Nebraska’s top individual tax rate of 6.84 percent is higher than those of Colorado, Kansas, Missouri and Oklahoma and much worse than the zero income tax rates of South Dakota, Texas and Wyoming.

Nebraska’s corporate tax rates are unnecessarily high as well. At 7.81 percent, Nebraska’s top corporate tax rate is higher than those of neighbors Colorado, Kansas, Missouri, Oklahoma, South Dakota and Wyoming. At that high rate, Nebraska does not collect as much revenue per capita as many other states in its region. The Tax Foundation attributes this deficiency to the tax incentives given to businesses to counteract the higher rate and persuade some companies not to leave the state.

States across the country have experienced dramatic economic improvement, with population and job growth, by lowering or eliminating their income taxes. Personal and corporate income taxes are generally considered to be the most destructive taxes because economic growth arises from production, innovation and risk-taking, which are stunted when individual and corporate income taxes take dollars out of the hands of businesses and individuals. Although building of useful infrastructure can help the economy, exempting big businesses from high tax rates only hamstrings smaller businesses, which are the biggest job-creators.

Nebraska’s state government relies heavily on personal income taxes, which compose 41 percent of its tax revenue. This reliance on income tax dollars can have a strong negative effect on a state’s economy, which is why several reforms have been proposed in recent years. Although the Legislature has taken several positive steps in reforming Nebraska’s tax system, including the repeal of the state’s alternative minimum tax and new limits on cell phone taxes, more substantive reforms are needed.

This year, Gov. Dave Heineman attempted to make a wide-ranging change to the tax system with two bold reform proposals that would have eliminated one or both of the major state income taxes while eliminating billions of dollars of sales and personal property tax exemptions. Unfortunately, neither proposal made it out of committee or received serious consideration from the Legislature.

A new series of proposals was recently introduced in a joint report from the Tax Foundation and the Platte Institute. Their primary plan would reduce income tax rates while cutting tax incentives and broadening the tax base. The plan also would simplify how the tax is administered and provide additional tax relief by increasing the earned income tax credit and personal exemption and indexing tax rates. Additional variations of the plan would take the income tax rates even lower.

The Tax Foundation/Platte Institute plan, which is designed to be revenue-neutral, would move Nebraska toward a tax system that keeps dollars in the pockets of taxpayers and encourages new companies to enter the state, creating more jobs. Nebraska could be the next state to benefit from such sound tax policies.

[Originally published in the Lincoln Journal Star]