Legislative Testimony for LR284CA: Constitutional amendment to eliminate the state income tax over a four-year period

The concept behind Sen. La Grone’s proposed amendment aligns with policies used in many states that are gaining economic opportunities at Nebraska’s expense.

The top states Nebraska loses income to are Texas and Florida, which have no personal income tax. The rest of the leading states, Arizona, Colorado, and Missouri, have lower income taxes. Last year, 5 of the 10 fastest growing states in terms of numerical population, and 4 of 10 fastest growing states in terms of percentage population growth, were states that did not have personal income taxes.

Clearly, if voters approved LR284CA, the Legislature would need to provide an alternative funding source for the state. For example, over four years, the Legislature could implement a broad-based sales tax of the kind used by South Dakota, which has no personal or corporate income tax.

There are two states where voters have passed amendments prohibiting personal income taxes. In Texas, 74% of voters approved a constitutional ban on personal income tax, and 66% of voters in Tennessee approved a similar measure. Other states, like Washington, Nevada, and North Carolina have constitutional provisions prohibiting or limiting income taxes.

It should be noted that these prohibitions are easier for states to adhere to if they never adopted a personal income tax to begin with.

There are also cultural and economic differences between Nebraskans, Texans, and Tennesseans that may cause them to have different views on the usefulness of state income taxes. In 1968, 64% of Nebraska voters opposed an amendment somewhat like LR284CA, and while times have certainly changed, that may indicate that this measure would not necessarily be guaranteed to be approved by voters in Nebraska.

Nonetheless, it’s worth considering the relative economic and fiscal performance of states that adopted income taxes around the same time as Nebraska, and afterward, compared to states that never got on board with income taxes.

You might say Nebraska has been relatively lucky, since our peers are states including Illinois, New Jersey, Connecticut, and Rhode Island, while Texas and Tennessee’s peers include Florida, Nevada, and Washington. The difference in taxation, migration, and fiscal strength between these states is stark.

Many of our peers adopted income taxes with the promise that property taxes would be reduced, and now, most of these states rank among the highest for taxation overall and suffer from outmigration.