4 Smart Ways Blueprint Nebraska Fixes Our Tax System
Nebraska’s tax system funds critical government services. Though few people enjoy paying taxes, it’s worth tolerating a certain level of grumbling—and a certain level of sacrifice—to meet our commitments to the common good.
But for a long time, many different groups of Nebraskans have been trying to tell their leaders they’re not happy with the current approach to taxes. This unhappiness stems not merely from the cost of taxes, but from the way the tax system impacts our ability to succeed in Nebraska and grow the state.
So, today we’ll discuss 4 smart ways we can bring Nebraskans together and fix our tax system through Blueprint Nebraska’s tax modernization framework.
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To use a highly technical term, tax debates have the tendency to make people go bonkers. But there’s also a ton of under-appreciated agreement in the area of tax policy that Nebraskans can tap into. Here are four approaches we’ve used in the process of developing a tax reform plan through Blueprint Nebraska:
- Bringing people together to create a plan for and by Nebraskans.
- Making Nebraska’s tax system much more competitive without reducing our current strengths.
- Replacing incentive policies with student loan relief and support for research & development.
- Taxing the wealthiest Nebraskans in ways both progressives and conservatives can support.
Let’s start with how Blueprint Nebraska is:
1) Bringing people together to create a plan for and by Nebraskans.
In 2018, the Blueprint Nebraska campaign launched with the goal of identifying solutions to the state’s most challenging economic problems.
While taxes are not the only difficulty facing the state, consistently, Blueprint Nebraska participants said reducing or eliminating taxes is a Top 3 concern for Nebraska’s economic vitality.
In a bit, I’ll discuss the details of the tax reform plan that came out of this process, which was created with input from Nebraskans like you. Blueprint Nebraska used surveys and public forums across Nebraska to better understand what Nebraskans thought were the state’s most urgent shortcomings on tax policy. The Blueprint Taxation & Incentives Industry Council then used this feedback to create a nonpartisan plan that benefits both rural and urban communities.
No state has a perfect tax system, and it’s harder yet to create an alternative to the status quo that everyone will agree is perfect. But when we’re looking at a strategy for competing with other states, Nebraska is out of step with most of the country because it imposes heavier taxes on people earning paychecks, on owning property or housing, and investing in businesses and technology.
This matters because these are the very same resources nearly everyone agrees our state needs more of to achieve its fullest economic potential.
But even if we begin to recognize the problem of making Nebraska’s tax system more competitive, we have to navigate other values at stake with tax policy—making the system fairer for different groups of taxpayers, sustaining the commitments we’ve made to public services, and being strategic in ways that are larger than dollars and cents.
So, is there a way to balance these concerns, while truly making Nebraska a better place for taxpayers?
Absolutely.
As much as politicians may pit Americans against each other on tax issues, there’s a remarkable level of agreement among Nebraskans about the importance of tax reform and its relationship to economic growth and opportunity.
And when it comes to the hard work of using that agreement to create solutions, there are so many states, red and blue, that offer helpful examples for modernizing Nebraska’s tax system.
In a Platte Institute poll conducted in December 2021, 69% of likely Nebraska voters said high taxes were a part of the reason the state struggled to retain and attract workers, and that reducing taxes would help Nebraska compete with other states.
And 70% of these same voters agreed that eliminating state income taxes on the first $50,000 individuals earned would give Nebraska a better chance to address our workforce shortage.
As it happens, that idea is just one of the proposals included in the Blueprint Nebraska tax modernization plan. Stay tuned to future episodes, where we’ll share more results from this poll.
Focusing on just these two questions today, we can see a tremendous amount of agreement among Republicans, Democrats, and independents.
Now, Republican and independent voters may sometimes be more absolute in their belief that taxes should be lower—no matter what—than Democrats. Out of the gate, 54% of Republicans and 45% of independents said they strongly agreed high taxes were a reason for the state’s migration and workforce challenges, while about another quarter of their party members agreed somewhat. This compares to 26% of Democrats who strongly agreed with that statement.
But just because many Democratic voters have a more moderate disposition when asked about taxes, that doesn’t mean they don’t care about taxes. About as many Democrats were in the Somewhat Agree column as Republicans and independents.
In total, 54% of Democrats did agree that tax policy is a factor for the state’s economic prospects, with 39% disagreeing, and less than half of those voters disagreed strongly.
When it comes to eliminating state income taxes on the first $50,000 individuals earn, Nebraska Democrats like that idea even more. 57% of Democrats agree that making these paychecks free of state taxes would help Nebraska compete, joining 79% of Republicans and 66% of independents.
If these numbers were translated into votes in the Nebraska Legislature, there would be a solid, nonpartisan supermajority for tax modernization.
And let’s not forget about bridging the generational divide. We need younger workers to stay in Nebraska and to come here from other parts of the country. There’s many approaches besides taxes that can help those efforts, and we’ll discuss some today. But some leaders believe younger residents don’t see taxes as an economic concern.
This survey shows that assumption isn’t true at all. Among voters age 44 and under, and the millennial generation is a large part of that group, 70% said reducing taxes would help Nebraska compete, and 77% agreed with eliminating state income taxes on the first $50,000 individuals earn. This was 13 points higher than middle aged voters, and 7 points higher than voters age 65 and up.
A mere 8% of voters 44 and under strongly disagreed that high taxes were holding Nebraska’s economy back, and only 3% strongly disagreed with eliminating state income taxes on the first $50,000 of income.
Again, this doesn’t mean these voters only care about taxes. But it does mean a thoughtful plan for economic growth that includes tax modernization can be very well received with the majority of voters among every age group and party affiliation—which is important, because we need policies with broad appeal if we want to successfully market and encourage more people to choose Nebraska.
Naturally, it matters to workers, businesses, and voters what the trade-offs associated with tax modernization are going to be. There are lots of ways to tinker with the tax system, but the Blueprint Nebraska plan includes an important advantage. That brings us to our second point:
2) Making Nebraska’s tax system much more competitive without reducing our current strengths.
It’s important in tax policy to first do no harm. In Nebraska, our primary taxes are state income taxes, a state and local sales tax, and local property taxes. Each of them could be better. Believe it or not, each of them could also be even worse.
In 2022, the Tax Foundation ranked Nebraska as 29th on individual taxes, 32nd on corporate taxes, 40th in property taxes, and 14th in sales taxes, with first place being the best. The goal should be to improve Nebraska’s rankings in as many of these areas as possible.
The Blueprint Nebraska tax modernization plan would give Nebraska a competitive income tax rate, fully eliminating state income taxes on the first $50,000 individuals earn, and add another $2 billion to property tax relief over the next decade.
Nebraska can afford to do all this without sacrificing funding for public services by removing sales tax exemptions, income tax deductions, and corporate tax credits. Because there will be fewer ways to avoid paying taxes, that money can be used to reduce taxes across the board.
And on the sales tax side, the Blueprint Nebraska plan keeps our sales tax exemption for food in place.
In short, Nebraska would be able to address its key disadvantages on tax policy without raising any tax rates. This approach has two economic benefits. The first is that policymakers can enact a major, noticeable change in our tax climate in a relatively brief period of time.
As you may know, the Unicameral often attempts to improve the state’s tax situation on a piecemeal basis, using currently available revenues. And while there’s inherently wrong with making incremental change, state lawmakers have struggled to keep up with other states that are taking more decisive action, and also losing ground as local taxes increase.
The second benefit of raising new revenue without raising tax rates is that Nebraska won’t risk worsening its ranking on any of its taxes. It also means Nebraska can modernize the tax code without sacrificing investments in public services that really do strengthen the Good Life.
The evidence shows Nebraskans are clearly willing to pay taxes, but don’t think the current structure sets them up for success. The goal of tax modernization is to create a system that pays our bills in the most favorable way for economic growth, making Nebraska a better place to earn a paycheck, own property, or start a business.
Just like voters might support paying a bit more in tax for a local school building or infrastructure, tax modernization will give the state the resources to make another important investment for the workforce talent we need to retain and attract.
This brings us to the third way the Blueprint Nebraska plan fixes our tax system:
3) Replacing incentive policies with student loan relief and support for research & development.
In the mid-to late 1980s, Nebraska created its largest tax incentive programs, which sought to retain large firms that leaders feared would leave for other states with more beneficial tax policies. For a time, these incentive programs worked to the state’s advantage in some ways, but in the long-term, they’ve also had some serious drawbacks.
A report by the Tax Foundation finds that while some corporations receive generous incentives that make the state’s tax system competitive, other businesses find the deck stacked against them. For example, a new capital-intensive manufacturing company may face more than twice the tax burden of a mature firm in the same industry.
And let’s not forget that virtually all Nebraska employers identify workforce as the top obstacle to growing their operations. A disadvantage of our heavy reliance on tax incentives has been that Nebraska hasn’t felt urgency to address the high tax rates paid by most people in the workforce.
In addition to broader tax reforms on paychecks, property, and investing in Nebraska, the Blueprint Nebraska plan would replace our current approach to tax incentives. Instead of focusing on firms, Nebraska would incentivize people, workforce talent, and innovation.
One of the ways to accomplish this goal is to appeal to workers who have the skills Nebraska needs. There are great careers to be had in Nebraska, but other states are also offering enticing opportunities for graduates in high-skill and manufacturing careers.
Blueprint Nebraska proposes to establish a new student loan relief incentive with the goal of retaining or recruiting 12,000 high-skill and manufacturing graduates. This workforce development benefit will be available for individuals for up to five years, with both 4-year and trade school graduates eligible to participate.
Another way we can make Nebraska a better place to start firms or build a career is to invest in the research and development that leads to industry breakthroughs. Our key industries and the University of Nebraska System are well-positioned to facilitate these innovations, but we are not currently attracting as much venture capital in Research & Development as most other states. We’ve ranked 36th in business R&D and 35th in patents per capita, both of which are indicators that we can still provide more fertile ground for risk-takers.
And some of Nebraska’s economic problems can’t be solved by recruiting people alone. New technology is also needed in agriculture, manufacturing, and other fields, so that our existing workforce can produce more, earn higher wages, and have more reasons to keep strong roots in Nebraska.
While most business tax credits will go away under the Blueprint Nebraska plan in exchange for lower tax rates, we’re proposing to double Nebraska’s Research & Development tax credit. Investing in innovation will help to modernize Nebraska’s economy, improve our business climate, and accelerate brain gain and opportunity across our state.
But probably the biggest concern people have when it comes to tax reform is whether the end result will be fair. Everyone has a different idea of what fairness means, but I think most Nebraskans agree that the tax burden should be shared among all of us who have the ability to pay.
It seems obvious that people with more wealth have more ability to pay, but at the same time, Nebraska needs to encourage the creation of more wealth to grow. That’s why the Blueprint Nebraska tax modernization strives to add more balance to both our tax system and our economic policies with this fourth smart fix:
4) Taxing the wealthiest Nebraskans in ways both progressives and conservatives can support.
Independent research from Regional Economic Models, Inc. shows that the Blueprint Nebraska framework will reduce taxes by about 20% for taxpayers earning less than $50,000, while people making more than $1 million may pay as much as 29% more.
Now, we should want people of every income level and economic background to come to Nebraska, stay in Nebraska, and contribute to our prosperity. We should never seek to target or take advantage of people through the tax code.
But under the Blueprint Nebraska plan, the wealthiest Nebraskans will gladly pay more taxes than today, because our state will also become a much better place for earning and creating wealth.
The biggest reason for this incidental tax hike is that the wealthiest taxpayers will pay more when they’re buying services that were previously exempt from sales tax. That’s the money they spend after they already earn a profit.
Sales tax exemptions for services predominantly benefit wealthier taxpayers because they have more disposable income to hire people for tasks many other taxpayers opt to do themselves, or purchase more sparingly.
Also, the Blueprint simplifies the income tax system, meaning the wealthiest taxpayers will have fewer ways to claim deductions or credits.
Both progressive and conservative tax policy experts agree that this is an appropriate and economically favorable way to raise needed revenue.
But wealthy taxpayers won’t miss those benefits, because they’ll no longer pay higher tax rates when they make more money in Nebraska.
Under the Blueprint Nebraska framework, Nebraska’s personal and corporate income taxes will be gradually reduced to a top rate of 4.99%, which is increasingly the norm across the country. This would place us in roughly the same range as our neighbors in Missouri and Colorado, and make us dramatically more attractive than many high-tax states currently losing residents.
Charging a broader, flatter income tax removes disincentives to earn more in Nebraska, while still raising revenue we need through income taxes. It also reduces the impact of inflation on taxpayers and makes tax compliance easier.
People who own businesses need more than startup capital to make a profit, though. They also need talent. And since average wage-earners in Nebraska would pay little or no state income tax under the Blueprint Nebraska plan, investing in Nebraska firms will be a better idea for our wealthiest residents. Those employers will be better positioned to compete for workers when matched up against businesses in other states.
Finally, because the Blueprint Nebraska plan simplifies our tax code, families and businesses that have created wealth in our state won’t have to go through so much complicated tax planning to file their taxes or leave property to future generations.
To recap, today we discussed four smart ways Blueprint Nebraska fixes our tax system:
- Bringing people together to create a plan for and by Nebraskans.
- Making Nebraska’s tax system much more competitive without reducing our current strengths.
- Replacing incentive policies with student loan relief and support for research & development.
- And taxing the wealthiest Nebraskans in ways both progressives and conservatives can support.
Nebraska’s last major tax overhaul was in the mid-1960s, and was designed for a completely different economy. It’s hard to overstate how much has changed since then.
By taking stock of our current position relative to our peers, and using all we’ve learned in tax and economic policy over many decades, we can modernize Nebraska’s tax policies and become the best state in the region for the next century of economic opportunities.