#PlatteChat Column: Budget Picture Strengthens Case for Tax Reform

Revenue Picture Makes Stronger Case for Comprehensive Tax Reform
State Government Currently Relies on Least Stable Revenue Sources

OMAHA, NE (July 20, 2016) – Headlines say that state tax collections came back lower than projections. But revenue projections are more than sufficient to cover the state budget, and decades of evidence point to 2017 being a great year for comprehensive tax reform.  

In this week’s #PlatteChat column, Platte Institute Policy Director Sarah Curry writes about the state budgeting process and the stability of the revenues the state collects. An online version of the column may be viewed here.

The weekly #PlatteChat column may be republished with attribution to the original author.

“Year after year, the state is collecting more from taxpayers than is really needed,” writes Curry. “The Legislature has been cautious in overestimating the cost of government, so cautious, that the state has budgeted $240 million more annually on average than what is actually spent. In Fiscal Year 2015, the difference nearly reached $400 million. While having breathing room in the budget is commendable, this becomes a problem when revenue projections are tied to inflated budget figures, making it look like the state needs more money than it actually does,” Curry writes. 

Policymakers concerned about future state budget stability should support tax reforms that reduce the use of income tax and instead grow Nebraska’s sales tax base. Currently, the majority of Nebraska’s general fund budget relies on state income tax, which research demonstrates is among the least stable of taxes.

Research from Pew Charitable Trusts shows that from 1995-2014; state sales tax collections were less volatile than income tax not only in Nebraska, but across the country.

“One reason income tax is less stable is that income is more mobile than consumption… Further, many forms of income are earned on an irregular basis and vary with phases in the economic cycle,” Curry writes.

More on the Platte Institute’s take on this issue:

• When governments levy a tax on something, in absence of other options, people tend to produce less of it. The majority of Nebraska income lost to out-migration since 1992 relocated to Texas, Florida, Arizona and Colorado and Iowa, where taxpayers in those states pay 52% less in income taxes per person on average. Maintaining or increasing Nebraska’s reliance on income taxes exacerbates this out-migration of people, income, businesses and jobs, and makes Nebraska’s state budget more reliant on a less stable form of revenue than sales tax.
   
• Tax policy should not be used to pick winners and losers. Many exemptions or loopholes in the tax system require higher tax rates to raise the same amount of revenue, and benefit some taxpayers at the expense of others. A broad tax base with lower tax rates is more stable and provides a better environment for economic growth.
   
• While some exemptions to the tax base may be popular with certain taxpayers, they often don’t make sense from an economic or revenue standpoint and appear arbitrary. One small example mentioned in this week’s column among many are the taxes paid in Nebraska for cleaning clothing. Laundry detergent is taxed for the home buyer, but dry cleaning services purchased outside the home are not. Many other service transactions remain exempt from sales tax in Nebraska.

To arrange an interview with Policy Director Sarah Curry, contact Adam Weinberg at (402) 452-3737 or aweinberg@platteinstitute.org. 

The Platte Institute for Economic Research advances policies that remove barriers to growth and opportunity in Nebraska. To learn more about our research, view our recent articles, or subscribe to our weekly #PlatteChat column.