At first glance, Nebraska’s tax system appears competitive. According to the Tax Foundation, state residents pay $3,853 per capita in state and local taxes, ranking the state 17th highest in the nation and comparable to neighboring Colorado and Kansas. However, Nebraska’s tax rates are much higher than those in nearby states.
Nebraska’s top individual tax rate of 6.84 percent is higher than those of Colorado, Kansas, Missouri, and Oklahoma and far behind the zero income tax states of South Dakota, Texas, and Wyoming. Nebraska’s state government relies heavily on personal income taxes, which compose 41 percent of its tax revenue.
The state’s corporate tax rate is 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 prevent companies from leaving the state.
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.
The legislature has taken several positive steps towards reforming Nebraska’s tax system, including the repeal of the state’s alternative minimum tax and new limits on cell phone taxes. In 2013, Gov. Dave Heineman made two bold tax 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. Neither proposal made it out of committee.
A new joint report from the Tax Foundation and Platte Institute has proposed several tax reforms The 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 cuts even lower.
States across the country have experienced dramatic economic improvement, with population and job growth, by lowering or eliminating their income taxes. 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.
The following documents provide additional information on state taxes and their economic effects.
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
The Platte Institute and Tax Foundation present several tax reform possibilities developed specifically for Nebraska. These reforms 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 sales tax reform.
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
A Solid, Albeit Mild, Tax Reform Proposal
http://www.forbes.com/sites/taxanalysts/2013/10/11/a-solid-albeit-mild-tax-reform-proposal/
David Brunori of Forbes examines the Platte Institute and Tax Foundation’s tax reform proposals and finds the primary plan is revenue-neutral while reducing personal and corporate income tax rates, cutting special incentives, expanding the sales tax to more services, and simplifying administration. He says it is not a perfect plan but a good start.
Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”
Personalizing the Corporate Income Tax
http://heartland.org/policy-documents/personalizing-corporate-income-tax
In a Fiscal Fact article, Gerald Prante and Scott Hodge discuss the effect of corporate income taxes on individual households. They write, “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced.”
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 explain how governments can extract tax revenues in the least costly and economically damaging manner in order to improve economic performance.
State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth-0
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. Regression analysis is used to estimate the impact of taxes on economic growth in the states from 1964 to 2004. The analysis reveals higher marginal tax rates impose significant damage on economic growth.
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 tax topics, visit The Heartland Institute’s Web site at http://heartland.org, Budget & Tax News at http://news.heartland.org/fiscal, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
