Nebraskanomics: Taxes That Lose Money for Nebraska

Tax attorney Tom Yamachika of the Tax Foundation of Hawaii explains how the types of taxes states have, or the way they are designed, can cause states to lose revenue or to impose higher tax rates than necessary. A transcript of the discussion can be found below.

You can watch the video on YouTube or listen to the podcast episode on Apple Podcasts or Spotify.

Mentioned on this episode:
Tax Man: Can raising a tax actually lead to losing money?
Tax Foundation of Hawaii

Jim Vokal: My guest today is Tom Yamachika, “The Tax Man” from the Tax Foundation of Hawaii. Aloha, Tom.

Tom Yamachika: Glad to be here, Jim.

Jim Vokal: Good to have you. You recently, Tom, published an article on a UC Berkeley paper that looks at death taxes, particularly estate taxes. And a lot of people in Nebraska may not realize that we don’t have a state estate tax here in Nebraska anymore. It was eliminated in the 2000s. The recent paper said that if Nebraska would reinstate an estate tax, we might actually lose more tax revenue as a consequence. You hail from the great state of Hawaii which is one of the other states that was also said to be at risk of losing income and revenue, help us understand how that could happen.

Tom Yamachika: Well, what the study did is it followed what they call the Fortune 400, or some of the wealthiest individuals in the country, as measured by Fortune magazine. And through, you know, various statistical methods they tried to determine the probability that such a person would move domicile – i.e pack up and jump on a plane,  or you know, or a car or something in response to higher taxes in the state that he was living in–or she. And what they found is that there is a cost for a state that increases its estate tax rate in the form of not only not getting the estate tax revenue but also losing the revenue it presently gets from such things as income tax, sales tax, liquor tax, you know, whatever else that person may buy, these consumption-based taxes.

So my state was one of the ones identified as losing money if this were to happen. We already have an estate tax. We’re tied for the highest rate in the nation at 20%, we also have a very high income tax, our top rate is 11, which I think is more than double what you have at the at the moment. So we’ve got our share of problems.

Jim Vokal: Well, I appreciate that perspective, and even though we don’t have a state estate tax here in Nebraska, we do have an inheritance tax, which is collected by county governments. And people often confuse those two taxes. The big difference is unlike estate taxes, which impacts total assets of very wealthy people, inheritance taxes can be imposed on regular Nebraskans. In fact, if your property is worth as little as $10,000-$40,000 that can be taxed when anyone other than the spouse inherits it. And even though now just a few states have inheritance taxes anymore, we’ve had this tax for more than a century in Nebraska, and the economic and fiscal impact often isn’t very well understood. Can your research or this recent paper that you referred to shed any light on what trade-offs might be happening as a result of Nebraskans taxing inheritances?

Tom Yamachika: The study that I was writing about didn’t really distinguish between inheritance taxes and estate taxes, but I mean, they they they do have some similarities in that they’re both imposed upon death, and they are a burden on the people who are going to receive what otherwise would be the the wealth of the decedent that would otherwise go to them. So there’s there’s a tax burden on that, you know, whether it’s taxed to the decedent or tax to the receiver.

It’s, I think, economically very similar. Now what the study did, was it measured a couple of different things or tried to, and that is the impact of imposing a tax only on very very wealthy individuals, you know so-called “billionaires’ tax,” and it then measured a broader base of people, but still in the Fortune 400. What the study didn’t do was it didn’t measure the behavior of average average citizens, which may or may not be different from what the wealthier persons do. Maybe wealthier people have more proclivity to move out somewhere else if they don’t find the tax environment to their liking, because they have more assets to jump on a plane or other mode of transportation and pick up the family and move it somewhere else. But by the same token, what the study did was it took the the narrow base tax, and the broad-base tax, and at least for us, we’ve got the same conclusions out of it, the tax would still lose money.

Jim Vokal: I always enjoy having tax experts from other states on to see what’s working in your state and what isn’t. So let’s shift now to a different type of tax, and people may not know this, but Hawaii is sort of unique for having a very broad-based consumption tax known as the General Excise Tax or the GET. It’s not really a true sales tax from what I understand, but right now there’s a lot of conversation in Nebraska about how to broaden our own sales tax system to enable tax reforms, so what lessons can be taken from Hawaii’s experience with the GET?

Tom Yamachika: Well, I think one thing that I have been saying about our G-E-T, or GET as you call it, is that it’s perversely fair. And the reason why I say that is because it’s applied to all kinds of stuff, like services, it’s applied to royalties, applied to interest, you know, many many things that traditional sales taxes typically don’t reach. And, you know, there’s an argument to be made that the fact the traditional sales taxes don’t hit services for example, royalties you know, gives the services sector or the licensing sectors of the economy a leg up over sales of tangible personal property, which because of the differential treatment, could be seen as unfair. And it turns out that when you when you broaden the base, you can make the nominal rate smaller, and still generate lots of money. So, we have a nominal rate of 4%, and we generate from that tax, with our small size, about $6 billion dollars a year.

To do the same thing with a conventional sales tax would require a a nominal rate of 10 or 11%, or if we exempted food, maybe 14%. So you can get a lot of mileage out of broadening the base.

Jim Vokal: Absolutely, and that certainly can enable other types of tax reform, which is the hope of our state and our organization, the Platte Institute. All right, your state obviously is a paradise, Tom, and a lot of Nebraskans would figure we can’t compete with other states that offer natural features, like Hawaii, that we just don’t have. And yet, both of our states actually struggle with domestic outmigration. Our populations are growing because of immigration and local birth rates, but not because people are actually moving here from other states. As someone engaged in the state policy arena, what insights do you draw from that landscape that I just described?

Tom Yamachika: Well, I don’t think our experiences are that different. Both of our states are in competition, and they’re in competition for people. We have certain things that you don’t have and then you you have certain things that we don’t have, like we have natural resources and, you know, better health environment. But there’s a price for it. Those who come here to live know that there is what has been you know termed by some authors, not me, a “price of paradise,” in terms higher and broader taxes, among other things. I mean there are other disincentives, personal freedom or economic freedom. We have more regulation, lots of things that people with different kinds of political philosophies may disagree with, and we have financial burdens, of course, in terms of regulation, licensing, user fees, and that kind of thing.

And both of us are struggling with outmigration, so both of us are losing the fight. Both of us need to take stock of, you know, where we are. What our competitive strengths are what our competitive weaknesses? And we do need to compete for people, because otherwise who’s going to pay the darn tax, right? A government costs money, and if there are more people to to divide the costs among, then supposedly the unit price could should go down somewhat. So, I think really, it’s a continuum. It’s a competitive continuum that both of us are experiencing, and that’s what we have to deal with.

Jim Vokal: Do you believe through your experience and your research that there’s a correlation between a state’s tax structure and the net migration of population?

Tom Yamachika: We do think so. I have a colleague in another nonprofit who has been assiduously keeping track of people who have outmigrated and he’s been talking to them and getting their stories. And a lot of them say the same thing over and over again which is, “Geez we just couldn’t afford to make ends meet.” You know, it’s no fun to live in a nice place if you got to do it by taking two or three jobs just to stay afloat.

Jim Vokal: Well, Tom, this has been a great discussion. I appreciate you joining us today on our episode of Nebraskanomics, and I hope things are well in your beautiful state of Hawaii.

Tom Yamachika: I hope the same for you in the great state of Nebraska. Thank you so much for having me on.