Vokal is executive director of the Platte Institute for Economic Research in Omaha. Henchman is a vice president of the Tax Foundation in Washington, D.C.
Nebraska has much that makes other states jealous: Low unemployment, fiscally responsible state government, a diverse array of successful businesses, and a deserved reputation for honesty and hard work.
The state performs well — often in the top 10 — in a number of broad surveys of economic performance and quality of life.
Beneath that success, however, are anxieties: Worries about the future of agricultural prices, about the outward migration of young people and retirees, about the cultural perception of the Plains states and about heavy reliance on tax incentives.
A strong tax system can overcome these weaknesses. Unfortunately, Nebraska's tax code is middle-of-the-pack.
Nebraskans pay a top income tax rate of 6.84 percent, on income as low as $27,000 a year. Corporations pay an even higher rate of 7.81 percent, although many negotiate deals with the state to lower their tax bills.
The sales tax averages 6.8 percent, but an astonishing 67 percent of retail sales are tax-exempt.
Property taxes are the sixth-highest in the country, driven by high local spending growth and a messy business property tax system. No one would design such a system from scratch. Others have reached similar conclusions.
The last tax reform commission, in 2007, recommended changing what they called a “breathtakingly progressive” state income tax. Gov. Dave Heineman speaks often on the need to reduce the income taxes, as do many state legislators. Most taxpayers we have met with believe the rates are too high, the system is too complex and there are too many carve-outs.
Our new book (published at www.platteinstitute.org), proposes a menu of tax reform options that together would fix what's broken while raising about the same amount of revenue as today:
>> Income Tax. Families would pay no income tax on the first $22,500, with 4 percent paid on the next $35,000, then 5.5 percent above that. All other credits and deductions would be repealed, across-the-board. Most taxpayers would see a tax cut, except perhaps wealthy taxpayers who currently deduct away lots of their income.
>> Corporate Tax. The rate would drop to a more competitive 5.5 percent. With a lower rate, there would be reduced pressure for incentive packages. A lower rate would lead to more capital available for additional jobs, higher wages for existing employees and further investment in the state.
>> Sales Tax. Instead of only applying the tax to 33 percent of sales, we suggest expanding it to 41 percent of sales. We suggest options to expand it even further, which would raise enough revenue to drop the income tax rate down to 3 percent and the sales tax down to 4 percent
>> Property Tax. We suggest a strong cap on local property tax growth, which local voters could override at the ballot box.
Other options would cut tax rates even more, “triggered” when revenue exceeds a certain threshold.
Will cutting income taxes boost job creation and economic growth? We recently reviewed 26 academic studies on economic growth and taxation — 23 of those found that higher taxes were associated with lower growth. High income taxes leave less money in the pockets of small businesses, entrepreneurs and consumers, money that can be invested back into the Nebraska economy.
Why a property tax cap instead of just sending more state money to local governments? There's no guarantee that local governments won't just spend the money and keep property tax rates high, as has happened in other states. Nebraska tried this already, adopting an income tax and a sales tax in 1967 to reduce property taxes, but instead just ended up with higher taxes.
Cutting property taxes by even a modest amount, say 20 percent, would require raising the state income tax to over 9 percent to pay for it, which would be the fourth-highest rate in the country. The truth is, the only meaningful method of property tax relief is local spending cuts. A property tax cap would force these cuts to happen, except when local taxpayers vote to override them.
For Nebraska to remain competitive with other Midwestern states, income tax relief for all must be a priority in the 2014 Legislature. We hope the options we suggest help make that happen and enable Nebraska to keep building on its success.