5 Essential Steps to Reform Taxes in Nebraska
Do you ever wonder why Nebraska doesn’t seem to have its act together when it comes to taxes?
Politicians want you to think it’s a red or blue problem. It’s not. It’s a lack of vision problem.
That’s why I’m sharing the five essential steps to reform Nebraska taxes. Stay tuned until the end to learn what leading experts say the result would be if Nebraska took these steps.
Now, we all must pay taxes to fund government services we want, but the way taxes are designed impacts the ease of getting a job, starting a business, and the amount of required paperwork. All this red tape takes away valuable time from the rest of our lives.
Nebraska’s tax system is often arbitrary and is designed around an early 20th century economy that no longer exists.
Historically, Nebraska’s economy is quite stable. That can make it tempting to think the status quo is OK, but everyone knows Nebraska isn’t growing like a lot of other states. Whether you want the government to be big or small, everyone knows we aren’t as competitive on taxes like other states.
When it comes to creating economic opportunity, there are better and worse ways to pay for and track government expenses. None of what I’m about to say is theoretical or pie in the sky.
Right now, red and blue states all over the country are reforming taxes this way. If we take these five steps, Nebraska will have a more welcoming economic climate in urban and rural communities, Nebraskans will be able to keep more of what they earn, and our state will be more attractive for the workforce and entrepreneurs we need.
Here are the five essential steps to reform Nebraska’s taxes:
- Replace property tax relief with property tax reform.
- Flatten the income tax.
- Modernize the sales tax.
- Make local government transparent.
- Reduce or eliminate outdated local taxes.
Now, let’s look at each one more closely.
#1. Replace property tax relief with property tax reform.
There is a difference. Right now, Nebraska spends about 3/4 of a billion dollars each year attempting to pay you or local governments for the cost of property taxes. That amount doesn’t include state education aid or homestead exemption, which they do with money you pay through your sales and income taxes.
This might be OK if it resulted in lower property taxes. However, since 2007, the state has spent well over $2 billion on so-called “tax relief” and property taxes still increased about $2 billion a year. The underlying problem is still getting worse.
Why are Nebraska property taxes so high? Let’s put spending aside for now and talk about how our property tax is structured.
There are legal limits on how high property taxes can be in Nebraska, but those limits are extremely permissive. In 2021, the effective property tax rate in Nebraska is the country’s eighth highest. For example, school district property taxes in urban areas usually cost more than 1% of market value every year. That’s a lot of money when you’re talking about real estate.
Let’s compare that to someone living in Salt Lake City, Utah. The same house might cost much more than Omaha, but the property in Utah might only be paying an effective rate of half of a percent in taxes or less. This is because the tax rate, and assessment allowed under the law, is lower than Nebraska.
For decades, Utah has required Truth in Taxation notices and hearings. This keeps local taxpayers informed about property tax increase proposals. Nebraska has to adopt stronger limits on property taxes because paying for tax relief isn’t working. It’s crowding out the state’s ability to pay for other services or fix its own tax code.
That’s where reform comes in. “Reform” means changing the way we approach the property tax all together. There are a lot of different ways to reform the property tax system, some better than others. The main idea is that the state must limit how much local governments are allowed to tap into property taxes.
This doesn’t mean we have to harm local government finances. However, local governments shouldn’t be allowed to double dip by taking state money, and then continuing to raise property taxes by applying high tax rates to rising valuations. They usually raise these taxes faster than the state and taxpayers can pay for them.
Polling of Nebraskans consistently shows most voters favor stronger limits on property taxes. In 2019, we asked voters in eight different state legislative districts if they would support a state law tightening levy or valuation requirements.
- 62% favored stronger lids
- Only 17% were opposed
In 2021, we asked voters in a statewide poll if they would favor replacing Nebraska’s current property tax relief programs with lower property tax levies or valuations. Basically, that local governments would get all the money that’s being spent now on tax credits. However, they would truly have to lower property taxes in exchange. Again, most favored this approach:
- 71% of Republicans
- 67% of Democrats
- 72% of independents
- 11% were opposed
No matter what you do, you’ll probably find at least 11% who aren’t satisfied. Reforming the property tax is also important because high property taxes are often used as an excuse not to fix Nebraska’s other tax problems.
#2. Flattening the income tax.
That simply means all taxable income is treated the same way: taxed at one single rate. Right now, in Nebraska, personal and corporate income tax rates rise as taxable income increases.
If you’re used to thinking about a graduated federal income tax, a flat tax might sound theoretical. But most states already have some kind of flat tax.
Given that corporations are easy political targets, it might surprise you to hear that most states have a flat tax for corporations. There’s a simple reason why: a corporation’s income isn’t the same thing as income of the people who own the corporation.
Those people will pay personal income tax, or capital gains tax later on. Even if you buy into the idea that tax rates should be higher for people who earn higher incomes, you aren’t accomplishing that goal by graduating the corporate tax rate.
In fact, because the corporate income tax is a form of double taxation, many tax experts say it is among the most economically destructive taxes. Flat or single rate taxes are increasingly popular at the state level because they are,
- cheaper to comply with
- and generally harder to increase.
That’s because a much larger group of taxpayers must pay the tax. Currently, Nebraska has a top rate of 7.81% on corporate income and 6.84% on personal income. The Tax Foundation says these taxes are the 32nd and 21st most competitive, respectively.
How does this compare with Nebraska’s neighbors and competitors?
You can’t get much flatter than South Dakota or Wyoming, because they don’t have income taxes. This means they’re tied for #1. Colorado may be considered to the left of Nebraska, but they use the same flat income tax rate for both corporate and personal income. Their corporate tax is ranked 10th best and the personal tax is 14th best.
Missouri also has a flat corporate income tax, ranked third best. It’s worth noticing how Missouri ranks, despite still having a tax. We don’t always need the lowest taxes to be competitive, but we do need to avoid giving people and businesses sticker shock.
Our other neighbors, Iowa and Kansas, have graduated taxes like Nebraska. They rank about the same, or worse than we do. The Platte Institute recommends Nebraska adopts a 5% income tax, which is in the same neighborhood as a whole list of states, including:
- North Carolina
Some of these states are politically and geographically different, but they all use flat rate personal or corporate income taxes in this range. Voters tend to favor these taxes. In Colorado, voters approved a reduction to the flat personal and corporate income tax. Even in Illinois, voters rejected a proposal to replace their flat tax with a graduated tax.
How do you pay for these changes, so that the government is less reliant on heavily taxing things like housing, our workforce, and investing in Nebraska? This brings us to our next point.
#3. Modernize Nebraska’s sales tax.
Nebraskans tend to be more tolerant of sales taxes, probably because more people like the idea of feeling in control of when they pay taxes. That doesn’t mean Nebraska should just carelessly hike sales taxes. Nebraska can raise a significant amount of revenue for tax reform with the same sales tax we have today, or even potentially with a lower one.
If you pay careful attention to your receipts, you might notice most of the things we buy in Nebraska are completely exempt from sales tax (especially services). We wrote a whole paper on the subject that you can read here. Basically, the sales tax system is currently biased against goods and towards services.
- If you buy a lawnmower, you pay sales tax.
- If you hire someone to mow your lawn, you pay no sales tax.
In the 21st century, where most of our economy consists of services, there’s no economic reason to continue taxing this way. Having these sales tax exemptions means we all have higher taxes on everything else: from property to income, to even the sales tax itself.
It’s important to know that Nebraska is not the only state that exempts too much from the sales tax. We aren’t even the worst offender. However, there are states that do a better job structuring their sales tax overall. Remember South Dakota? They have one of the best tax competitiveness rankings in the country. They use a broad sales tax with far fewer exemptions. Just looking at services,
- Nebraska collects sales tax on 81 different kinds of services.
- Meanwhile, South Dakota includes 152 services in its sales tax.
A lot of people worry about the regressivity of the sales tax, but there are ways to address those issues without using sales tax exemptions. Many exemptions currently benefit wealthier taxpayers more, so states can:
- provide targeted tax credits,
- fund more programs that benefit low-income taxpayers, or
- reduce the sales tax rate.
Another advantage of modernizing the sales tax is that local governments can collect their own sales taxes. For example, cities (and counties to a lesser extent) are allowed to ask voters for approval to collect a sales tax. With fewer exemptions, local governments can rely less on property tax and other local taxes, or even collect the same amount of sales tax at a lower rate.
The bottom line is that in most of the world today, sales or consumption taxes apply broadly to goods and services alike. Nebraska can take a much bigger bite of the taxes that people are worried about, like property and income taxes, if it has this new source of funding for state and local government.
While modernizing the sales tax might help Nebraska find new ways to pay for local government, those dollars will only be put to good use if local governments use appropriate tax and budget practices.
#4. Making local government in Nebraska transparent.
Having a process that lacks transparency doesn’t automatically mean local governments are doing improper things. It does mean that it’s difficult to make sense of the decisions local governments make. I sat on the Omaha City Council for eight years. I know what it’s like to make tough decisions about,
- the budget,
- collective bargaining, and
It’s easy to criticize when you’re not the one making the decisions, but many of Nebraska’s current financial policies and practices incentivize local officials to make imprudent or uninformed decisions with taxpayer money.
One of them I’ve talked about on another Nebraskanomics episode already. Historically, the public notice requirements for raising property taxes didn’t hold local governments accountable. Most people were unsure about where they had to go to express their concerns about property taxes and local officials could adopt automatic property tax increases with little scrutiny.
Fortunately, Nebraska’s taken steps to increase the transparency around this process. Over time, it can make a difference if taxpayers use these tools and get involved. Perhaps an even bigger problem, is a lack of uniform accounting standards for most Nebraska political subdivisions.
I know accounting sounds super boring, and maybe even irrelevant to average Nebraskans. Here’s why it’s not: a lot of people serving in local governments are just average people, too. Some are even volunteers, and they often don’t know how to interpret the financial statements that influence how much money they’re bringing in with taxes. This means they can’t tell how much they should spend every year.
Some Nebraska local governments are so small, they don’t have staff dedicated to financial oversight and they receive waivers from the state for having their finances audited. Most local governments in Nebraska do not adhere to Generally Accepted Accounting Principles (GAAP), or the kind of accounting standards most businesses in the private sector use. A few local governments use GAAP voluntarily, but unlike most states, there’s no law in Nebraska requiring local governments to use these standards.
What this means is that there’s a greater potential for financial mismanagement, or outright fraud, at almost every level of government in Nebraska. There is also a wider berth of plain incompetence.
The city of York, Nebraska provides a prime example. York did not use a GAAP-compliant accounting system. Over a period of years, city council members were receiving an inflated sense of the city’s budget by misreading their own financial statements. As a result, officials found out years later that they had spent away York’s reserve funds, forcing major cuts to services and local tax increases.
York doesn’t deserve to be picked on especially, of course. Financial errors, issues with excessive debt financing, and nepotism in local contracting are all problems that are caught too late under Nebraska’s currently unstandardized local accounting system. The state auditor is often the one to find these problems.
Nebraska is usually known as a state that avoids debt, but local governments in Nebraska currently have $9.6 billion in outstanding debt. If we want to avoid risky errors that cause taxes like the property tax to be higher, Nebraska has to require standardized accounting. It should also invest more significantly in its auditing of local governments. One of the benefits of standardized accounting and reporting is that we will know what local governments are actually doing with our tax dollars.
#5. Reduce or eliminate its outdated local taxes.
In the state where real estate taxes take all the air out of the room, local governments have often adopted an attitude that any tax is better than property tax. I don’t like property taxes any more than the next person, but there are taxes that are even worse for economic growth and opportunity. These include:
- taxes on business equipment,
- the inheritance tax, and
- so-called “occupation taxes” (basically privilege taxes for running a business).
These are all marketed by local governments as alternatives to property taxes. Yet somehow, they never succeed in reducing property taxes. They just add to the list of taxes we pay.
In addition, these taxes are not very transparent. Unlike local sales taxes, occupation taxes don’t require voter approval. That’s how Nebraska ended up with one of the country’s highest cell phone taxes, which is partially an occupation tax. As I’ve discussed before, taxes on business equipment and inheritance taxes can ambush people and businesses, causing them to need outside help to pay the taxes.
Moving to standardized accounting practices will require local governments to report on how they’re using these many different taxes. This will give Nebraskans and state officials the chance to decide if these taxes are worth the tradeoff of the red tape and lost opportunity.
What Would Happen If We Implemented These Steps?
The Tax Foundation’s report, “13 Priorities for Pro Growth Tax Modernization in Nebraska” tells us what would happen if we embarked, even partially, on these steps. It would involve,
- Modestly broadening the sales tax to many, but not all personal services.
- Cutting income taxes closer to 6%.
- Replacing property tax credits with lower property tax levies.
- Introducing reforms to some of the smaller miscellaneous taxes.
Right now, Nebraska’s overall business tax climate ranks 28th. If we took just these steps, which is not even everything I mentioned here, we would jump to 18th place. We would leap in front of several fast-growing states including Colorado, Arizona, and Idaho. We’d even be in close competition with Tennessee, which is a state that doesn’t even have a personal income tax.
When it comes to fundamentally reforming Nebraska tax code, a little would go a long way. There are solutions out there that can win the support of Republicans, Democrats, and independents. Don’t you want to make Nebraska a better place to live, work, and start a business?
If you want more economic freedom in Nebraska, please visit www.PlatteInstitute.org to make a donation to help fund our research and advocacy. Or you can subscribe to our newsletter and learn about today’s most important issues facing Nebraskans.
It’s time to stop the status quo. Let’s remove economic barriers and make Nebraskans proud.