At first glance, Nebraska’s tax system appears competitive. Cornhusker State residents pay $1,181 per capita in state and local individual income taxes, making it the 17th best state in the nation for taxpayers, according to the Tax Foundation. However, Nebraska’s tax rates remain much higher than those facing residents in nearby states. Nebraska’s top individual tax rate of 6.84 percent is higher than the rates in Colorado, Kansas, Missouri, and Oklahoma, and it’s much worse than the neighboring zero-income-tax states: South Dakota, Texas, and Wyoming. Nebraska’s corporate tax rate of 7.81 percent is higher than neighbors Colorado, Missouri, Oklahoma, South Dakota, and Wyoming.
Over the past year, Nebraska lawmakers have considered imposing a tax increase for high-income Nebraskans, a reform commonly referred to as a “millionaire’s tax.” For example, one proposed bill, which was defeated, would have added a new 7.84 percent rate tax bracket for married couples who earn $200,000 or more and single taxpayers who earn $100,000 or more in taxable income. Alongside this new bracket, an additional 1 percent rate would have been applied to taxable income in excess of $1 million, and an additional 2 percent rate would have been applied to taxable income of more than $2 million.
Although many residents appear to believe a millionaire’s tax would be beneficial, the tax would likely produce several negative economic effects in the Cornhusker State. Higher taxes drive wealthy taxpayers out of the state, taking their income, capital, and tax revenues with them. The revenue-generating results of millionaire taxes have been mixed at best. In fact, many states that increased taxes on the upper brackets, including Maryland, New Jersey, and New York, have allowed their tax hikes to expire. Relying on a fluctuating tax with a small base—like the millionaire tax—can lead to large budget deficits. In many cases, states with broader and flatter tax systems generate more revenue in a consistent and predictable manner.
Millionaire taxes are an unreliable source of revenue. Scott Hodge, president of the Tax Foundation, notes millionaire status is both temporary and fluid. Many taxpayers achieve millionaire status only once in their lifetime. In addition, the number of millionaires fluctuates based on the business cycle. Many supporters of a millionaire tax may agree with a hike because they feel they will not be paying the tax, but these taxes have a tendency to gradually cover more taxpayers, including the middle class. Although income taxes are often described as a tax on the rich, they rarely remain that way. Income taxes almost always expand over time to cover other taxpayers, due to government’s insatiable need for tax revenue, which it uses to fuel out-of-control spending.
Instead of increasing taxes on the most productive Nebraskans, elected officials should focus on making the Cornhusker State more attractive to businesses and workers, a goal that would best be accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.
Nebraska’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, encourages capital to flow into a state, and bolsters job creation.
The following documents provide further information on millionaire taxes.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-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
http://taxfoundation.org/article/building-success-guide-fair-simple-pro-growth-tax-reform-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.
A Twenty-First Century Tax Code for Nebraska
https://taxfoundation.org/twenty-first-century-tax-code-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.
Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/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
http://heartland.org/policy-documents/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.
Taxing the Rich Will Bankrupt Your State
http://heartland.org/policy-documents/research-commentary-taxing-rich-will-bankrupt-your-state
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
Should We Raise Taxes on the Rich?
http://spectator.org/archives/2012/11/14/should-we-raise-taxes-on-the-r
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.
Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
http://heartland.org/policy-documents/long-run-macroeconomic-impact-increasing-tax-rates-high-income-taxpayers-2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.
Seven Myths About Taxing the Rich
http://heartland.org/policy-documents/seven-myths-about-taxing-rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.
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 Arianna Wilkerson, Heartland’s state government relations coordinator, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
