Legislative Testimony for LB680: Change the corporate income tax rate
We support LB680 because it follows the general principles of sound tax policy. Specifically, LB680 follows neutrality because it creates parity between the top corporate and personal income tax rate. Taxes should neither encourage nor discourage personal or business decisions, and the way the tax code is currently, there is a disincentive for businesses who file through the corporate income tax.
Right now, Nebraska ranks 31st nationwide on the State Business Tax Climate Index for corporate income tax. We are sure this reform will help improve our ranking on that index if enacted because our rate is one of the highest west of the Missouri River.
This high rate gives us a regional disadvantage as well. South Dakota and Wyoming do not levy a corporate income tax. Our other neighbors, Missouri and Colorado, have some of the nation’s lowest rates (4% for MO and CO at 4.55%).
Empirical research has determined that a state’s ability to attract, retain, and encourage business activity is considerably affected by its structure of taxation. Subsequent research found that tax increases significantly impede economic growth and that business taxes have a negative impact on start-ups. Another consensus among academics is that taxes negatively affect employment levels, with corporate income taxes having the most significant negative impact.
There are 44 states that levy a corporate income tax, yet only Nebraska and 13 others have a graduated-rate system. Thirty states have a single-rate corporate tax system. The reason for this is because there is no meaningful “ability to pay” concept in corporate taxation like with the personal income tax.
Opponents to this bill believe that the corporate tax adds a measure of progressivity to an otherwise regressive tax system. However, graduated corporate tax rates are inequitable because the size of a corporation bears no relation to the income level of its owners. Many studies by both practitioners and academics have found the tax falls primarily on workers in the form of lower wages and consumers in the form of higher prices.
This is why the Platte Institute would like to see LB680 go a step further. Nebraska should replace the graduated-rate progressive tax with a flat rate tax, ideally set at 5% to become more competitive within the region. Moving to a single-rate system minimizes the incentive for firms to engage in economically wasteful tax planning to mitigate the damage of higher marginal tax rates.
Given that corporate income tax revenue only accounted for $423 million, or 7.6% of the state’s total tax revenue in 2019, I think moving to a flat rate of 5% would not alter the state’s revenue in a significant way, yet would create a more competitive tax code with more economic growth.
In closing, reducing our corporate income tax rate is necessary to stay relevant on the nationwide scene. Florida, Georgia, Indiana, Mississippi, Missouri, and New Jersey all lowered their corporate income tax rates during 2020. In 2021, we have already seen rate reductions in Arkansas, Colorado, Indiana, Iowa, and Mississippi with more expected as legislative sessions continue.
Nebraska needs LB680 because if we do nothing, we will be left behind and our state’s economy will pay the price.