Get the facts about Nebraska’s high tax burden
Two factors determine a state’s overall tax competitiveness. The first factor is the total tax burden, measured as a portion of state income. The second factor is the structure of the state’s tax code – the manner in which those revenues are collected. The goal for tax competitiveness in Nebraska, then, is to maintain a reasonable tax burden as a portion of state income, and to collect those revenues in a way that causes minimal disruption to economic growth and decision-making.
New research from the Tax Foundation reveals that Nebraska’s total tax burden is the highest of neighboring states. Tax Foundation’s Burdens study details each state’s total tax burden as a portion of state income, and exposes that Nebraska currently has one of the highest tax burdens in a relatively low-tax region.
The total state tax burden, which includes all the major taxes state and local governments levy, range from a low of 4.6% of state income in Alaska to a high of 15.9% in New York. About one-fifth of each state’s tax burden is exported to residents of other states when people commute and work across borders, spend money in other states, and consume energy whose extraction and production is taxed by other states. Alaska’s exceptionally low tax burden is driven in part by the fact that Alaska exports its tax burden to energy consumers in other states. Yet Nebraska is an average tax exporter, with four-fifths of all state and local taxes paid by Nebraskans going to Nebraska governments, and one-fifth going to governments in other states.
When you add up all state and local taxes paid by Nebraskans, it comes out to 11.5% of state income. That puts Nebraska with the 38th most competitive total tax burden. By comparison, Wyoming has the 2nd most competitive total tax burden (7.5%), South Dakota is 4th (8.4%), North Dakota is 7th (8.8%), Missouri is 13th (9.3%), Colorado is 19th (9.7%), Kansas is 33rd (11.2%), and Iowa is 34th (11.2%).
A high total tax burden pulls resources away from relatively more productive firms and families and instead allocates those resources through less efficient government processes. Thus, all else being equal, a lower tax burden results in better economic growth as more resources are left with firms and families to save, invest, and consume. It is certainly true that solid government services, infrastructure, and institutions provide value to the state and its economy. Yet those public goods should be provided for as efficiently as possible with respect to the taxpayer’s pocketbook. Nebraska’s position in the tax burden rankings show that it is not operating as efficiently as other states.
Furthermore, a high total tax burden often results in a poorly-structured tax code. The reason for this is simple – when you collect more in taxes, you have to find more creative ways to collect taxes. Simplicity is a virtue in taxation, and a broad base with low rates is the ideal. Yet simplicity is hard to maintain in the context of high tax collections, which in part explains why Nebraska’s top income tax rate and property tax rate will remain the highest in the region even after Gov. Ricketts signs the income tax cuts of Legislative Bill 873 into law.
The good news for Nebraskans is that tax competition incentivizes nearby states to converge on levels of taxation, especially when those states have politically-similar governments. Nebraska’s Unicameral responded to tax pressure by cutting rates this year, and Nebraska has little choice but to continue to respond to the competitive pressures on its borders, including the historic tax reforms Iowa enacted this year.
Going forward, lawmakers should focus on controlling the total tax burden and restructuring the way taxes are collected in Nebraska. Reforms that result in lower taxes and a more efficient tax code will create a win-win for political leaders and taxpayers in the state.