Budget Season: Keep Eyes on the Prize of Tax Competitiveness

As the tail end of the legislative session approaches, it’s important for Nebraska lawmakers to keep their eyes on the prize of state tax competitiveness. Revenue uncertainty requires that lawmakers redouble their focus on fiscal discipline and tax competitiveness.  

For Nebraska, tax competitiveness isn’t just a national issue, it’s a neighborhood issue. Since the year 2000, Iowa has lowered their top income tax rate by a startling 5.18 percentage points, cutting by more than any other state in the nation. South Dakota and Wyoming have no income tax, while Colorado (4.4%) and Missouri (4.7%) have lower rates than Nebraska’s current 5.2%. 

Nebraska isn’t sitting still. In fact, LB 754, enacted in 2023, reduced Nebraska’s income tax from 6.84% to the current 5.2%, and Nebraska’s top rate is required to reduce to 4.55% in 2026 before hitting 3.99% in 2027. All-in-all, LB 754 was the best tax law in the country in 2023, passed with an overwhelming majority of the Unicameral (39-2-4), and constituting a promise to get Nebraska’s top rate to 3.99% by 2027. 

Advancing Nebraska’s performance and competitiveness also requires managing against overcorrections during budget challenges. The leading principle for making a final budget should be to avoid any missteps that worsen Nebraska’s competitive position. With that in mind, no changes should be made to the income tax cuts that were set in law in 2023.   

The April 15th release of the American Legislative Exchange Council’s (ALEC) annual Rich States Poor States report emphasizes the importance of ongoing state competition. ALEC considers 15 different metrics for competitiveness and economic results, and tax policy is a key input that drives economic outcomes. In fact, even though Nebraska has improved in the rankings from #32 to #31, the Cornhusker State was leap-frogged by Iowa, which moved from #34 to #30.  

Similarly, Iowa has outpaced Nebraska in Tax Foundation’s 2025 State Tax Competitiveness Index. Even though Nebraska has recently improved to #24, Iowa’s reforms have boosted the Hawkeye State to #20. 

 In other words, competition is the law of the land for state tax and fiscal policy. With Nebraska seeking to close a budget gap, state competitiveness must remain front of mind. Lawmakers should consider these fiscal principles: 

Preserve the 2023 income tax cuts. Slowing or halting the 2023 income tax cuts option is the most harmful option. The 2023 income tax reforms are the most successful fiscal reform Nebraska has made in decades. Any other option is better than pausing or slowing these tax cuts. 

Control state outlays, including subsidies to local governments. State spending must be brought down in line with slower revenues and caution should be applied to further use of state revenues to mask high property taxes. There remains no substitute for fiscal discipline. Lawmakers should tread carefully on further attempts to offset local property tax burdens by increasing state taxes.  

Avoid new reliance on unstable revenue sources. As Platte Institute previously covered, “sin” taxes make unstable revenue sources that have precipitous declines in further-out years. In addition, income taxes are more volatile than sales and property taxes, which is another good argument for continuing to prioritize the 2023 income tax reforms over other fiscal priorities. 

Dodge the “tax and spend” trap. Other new taxes should also be shunned. Pausing income tax reforms would be a tax increase. Hiking volatile sin taxes would also be a tax increase. Still more new taxes, such as expanding the sales tax to new transactions, are also under consideration. Nebraska should avoid trying to tax its way out of this problem. Even though sales tax expansion is an appropriate way to fund tax rate reductions, lawmakers should not leverage a sales tax expansion to fill a gap caused by overspending. 

Prepare for federal changes. President Trump and Congress will likely enact a renewal and extension of key provisions of the 2017 Tax Cuts and Jobs Act (TCJA). Insofar as possible, the Unicameral should anticipate whether federal changes will drive higher or lower collections at the state level. Furthermore, lawmakers should prepare so they are not left holding the bag if federal lawmakers roll back subsidies for the Obamacare Medicaid expansion to able bodied adults.  

Consider whether cash reserves are appropriate. Lawmakers should consider whether revenue slowdowns are cyclical or structural. Cash reserves should be considered in the event of a cyclical slowdown if lawmakers expect revenues to catch up later. Applying this reasoning to the present situation of a nearly $300 million state budget gap, it may be prudent to consider a combination of spending cuts and rainy-day funds to cover the shortfall before seeking out new tax revenues.  

Nebraska’s fiscal picture continues to evolve as new revenue updates are factored into year-long projections. With the close of legislative session within sight, lawmakers should craft a final budget with these fiscal best practices in mind.