LB452 – Income Tax Reforms and Sales Tax Base Expansion
Good afternoon, Chairman Smith and members of the Revenue Committee. My name is Jim Vokal and I am the CEO of the Platte Institute.
LB452 builds upon the strong foundation offered by LB337 and provides many valuable elements the Legislature should consider including in its final tax reform efforts this year. LB452 closely aligns with recommendations the Tax Foundation made in its report: “A 21st Century Tax Code for Nebraska.”
The personal income tax reforms in this bill are structurally the same as LB337, but go further in reforming the state’s two bottom tax brackets. The bottom two income tax brackets would be immediately replaced with tax rate of 3.1 percent, cutting the tax rate on incomes earned between $3,000 and $18,000 for an individual, or up to $37,000 for joint filers.
The bill also aims to simplify and unify the entire state income tax system. By eliminating unneeded tax brackets, LB452 would eventually create a standard top tax rate for all businesses in Nebraska, whether they file as pass-through entities or C-corporations.
Our neighbors in Colorado are a good example of a state that already does this through their flat tax.
To offset this personal and corporate income tax relief, LB452 would close a set of loopholes in our sales tax base, modestly increasing the number of services and goods that would collect sales tax. The Tax Foundation has noted that the exemption of services from sales tax is an accident of history. Sales taxes were largely established in the United States when most businesses only provided goods for sale.
Today we have an increasingly service-based economy, and the sales tax base needs to be updated to account for this change. Including more services in the sales tax base makes the sales tax fairer and raises state and local revenue that can be used to address other fairness or efficiency concerns in the tax system.
This principle of including services in the sales tax base is agreed to across the philosophical spectrum among tax policy experts. Where the disagreement begins is when deciding what to do with the new revenues.
Research shows that taxes on income are generally more harmful to wealth creation than taxes on consumption. Of the five states that have gained the most income from Nebraska since 1992—Texas, Florida, Arizona, Colorado, and Missouri—all have lower top marginal income tax rates.
Missouri is working to lower its personal income tax rate to 5.5 percent on a trigger, and Arizona has just completed a phase-in to reduce its corporate income tax rate to 4.9 percent.
LB452 provides many tools for building a tax system in Nebraska that collects needed revenue for core government services at the lowest possible rates. By closing loopholes and reducing rates, the Legislature can provide a sound argument for resisting future attempts at tax carve-outs.
The tax reforms included in LB452, which broaden bases, lower rates, and treat similarly-situated taxpayers the same, can help remove barriers to economic growth in Nebraska. By reducing the price government imposes on working, investing, and participating in entrepreneurship in our state, the Legislature can help improve Nebraska’s economic competitiveness.