Legislative Testimony: LB 936, Change Inheritance Tax Rates & Exemptions

Thank you Chairman Gloor and members of the Revenue Committee, my name is Jessica Herrmann and I am testifying in support of LB 936 on behalf of the Platte Institute for Economic Research.

Over the years, our staff has testified before this committee about a lot of different ways we can improve Nebraska’s tax system.

One of the most important principles we have tried to introduce into Nebraska’s tax discussion is the need to not impose taxes on Nebraskans that make our state’s tax climate uniquely burdensome.

Having an exotic tax type like an inheritance tax is a clear example of a tax that can cause our state to lose more in the long-term than we gain from the tax in the short term.

Much as when the Legislature successfully repealed the estate tax, Nebraska is among a shrinking group of states that still has an inheritance tax. Currently, only six states still levy this tax. Over recent years, Kansas, Indiana, North Carolina, Ohio, Oklahoma and Tennessee repealed their state inheritance taxes.[1] These states have recognized that an inheritance tax is not only an unfair double taxation on income, but also negatively impact family businesses. Families without cash on hand are often forced to sell their home or business in a desperate attempt to pay the taxman. This is particularly true in Nebraska, as our state has the country’s highest possible inheritance tax rate with very low income thresholds to which the rates are applied.[2]
 
The Tax Foundation reports that inheritance taxes are among the most hostile to economic growth and have high compliance costs. A 1993 study by George Mason University found that states would gain more revenue in the long run by eliminating the inheritance tax due to its economically destructive impact on capital formation and investment.[3]

Conceptually, the research shows Nebraska will be much better off economically the day it ends the inheritance tax. Practically, as with all of the taxes that fit into this category of singling Nebraska out, we think Nebraska should take whatever incremental steps it needs to — through spending restraint — to achieve that goal.

Being on a very long-term path to ending a destructive tax is far preferable to leaving things the way they are. As with any phase-out we can look around the country for states that have taken those same steps. Indiana set out to eliminate their state inheritance tax over ten years. In their case, they were able to accomplish a full repeal in only about two years, while cutting other taxes as well.

Taxpayers are making plans for decades to come, and if Nebraska can show that it is doing the same, we will be putting our best foot forward for potential residents and entrepreneurs who are tax sensitive.

I appreciate that some committee members, and certainly local officials, may not be satisfied with the simple answer that local inheritance taxes should be phased out through spending restraint, so let me be clearer. While property taxes are too high in Nebraska, the inheritance tax is an even bigger drag on our state’s prospects for long term economic prosperity.

All of our other tax bases will grow more if Nebraska does not have an inheritance tax. The more generous our inheritance exemptions are; the fewer families and businesses will be deterred from staying here and building wealth in Nebraska.

LB 936 is a step in the right direction, even if the rates or exemptions need to be amended downward or phased in over a longer period of time. We should take any step we can as a state to raise needed revenues in the least economically destructive manner.