Michael Lucci on Making Nebraska Taxes More Competitive

Michael Lucci on Making Nebraska Taxes More Competitive

Platte Institute Senior Policy Advisor Michael Lucci tells Jim Vokal an increasingly mobile workforce is prompting more states to take bold action on tax reform. A transcript of this episode is available below.

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Episode Transcript

Jim Vokal: On this podcast, we bring you conversations with state senators, policy and business leaders, journalists, and economists who are making a difference in Nebraska. But today, I want to shine some light inward with our talented team here at the Platte Institute and introduce you to someone that can help make a big impact on the issues I know so many Nebraskans in our audience care about. Joining me now is Michael Lucci, who recently joined the Platte Institute as its new Senior Policy Advisor. Now, Michael, you’re someone I look to for policy insight on tax modernization and fiscal issues, and you’re certainly an expert who I want more Nebraska leaders to get to know.

But before we dive into the issues, I think it’d be good for our audience to learn more about your background. You weren’t, certainly, looking to become a policy wonk early in your career. So how did that happen, and where did your interest in economics end up taking you prior to the Platte Institute?

Michael Lucci: So, thank you very much, Jim. My path to public policy was not a direct one, as you mentioned. When I came out of the university, I wanted to see the world, and so for me that meant taking a job in Korea, so I could see Asia. I didn’t know anything about Asia. It gave me the opportunity to travel four or five times a year to see different countries in Asia. And the most stark thing you can see in South Korea is actually the border. So, you could go with the United States military to go see that border, and that’s where you really see—on the one hand you have a more free society—on the other hand, you have essentially a dystopia. And so that kind of elevated the issue of public policy in my mind, you know, quite significantly to see a border like that.

But I was there as an educator, and I moved back to Chicago because of a growing interest in economics. I studied some economics in Chicago and then I became an options trader. I figured that’s what you do if you think a lot about economics. But I retained an educational part. So, I would teach at night, because my options market closed relatively early, because we’re on eastern hours, but we’re in the Central Time zone. So, I would teach at night, and the issue for me became leverage. And what I mean by that was I would teach one-on-one with a lot of other teachers who are actually graduate students at the University of Chicago.

We’d teach in a pretty rough neighborhood. We would have, you know, largely tutoring one-on-one, one-on-two type tutoring, and it was almost always remedial. So the kids in this neighborhood, they were universally behind where they should have been. I would test every kid who came into our school, and my normal kid would be a 7th, 8th, or 9th grader, and would test into about the second grade level of math. So it was always about catching them up. So it’s a very good mission to do a school like that, but it became clear that there was a more fundamental problem in Chicago, and that problem was related to public policy. And so that’s why I say it was about leverage, is to be able to leverage a better outcome.

It’s really important for entrepreneurs to start businesses to solve a lot of these problems, but also you have to get the public policy right. And that’s what became clear to me and that started moving me towards public policy pathway.

Jim Vokal: And you worked for the Illinois think tank, our counterpart in Illinois, and the Tax Foundation, correct?

Michael Lucci: That’s right. So I started at the Illinois Policy Institute a little bit less than three years later. The governor of Illinois picked me up to be his policy chief, and when our term ended, I ran the Tax Foundation’s state team out of Washington, DC.

Jim Vokal: Well, we’re fortunate you’re on board here as the Senior Policy Advisor, and if folks out there want to get in touch with Michael about a tax policy issue in Nebraska, you can reach him at mlucci@platteinstitute.org.

OK, we discussed in a recent episode, Michael, that Iowa is rapidly headed towards a complete tax policy turnaround. Projections show that they might leap 20 rankings ahead of Nebraska to have the country’s 15th best state business tax climate. Now, Michael, how important is it for Nebraska policymakers to have this on the radar, and is Iowa a sign of more changes to come?

Michael Lucci: Yes, so I want to answer that question in two ways. I think it’s a really interesting question. Iowa’s very much a sign of things that are occurring across the country and more things to come, but the first thing I would say is Iowa should be an indicator of what to expect out of Iowa. And what I mean by that is once states get going on tax reform, once they create a culture of tax reform success, they tend to come back to it every couple years. And let me give you sort of the gold standard model on this, which is North Carolina. In 2013, they had a legislature and governor who really wanted to deal with the tax code. They did substantial reforms, came back did more in ‘15, more in ’17, and actually just in the middle of last year they did a another massive tax reform in North Carolina. So just to give you one example, North Carolina went from having the highest corporate income tax in its region before this started in 2013, to now they’re not going to have a corporate income tax. That’s not the only tax that they addressed, either.

So Iowa is now kind of taking its second bite at the apple. They did some tax reforms a couple years ago, a bigger package now. Normally what happens is a state will let that tax reform settle in, make sure the revenues come in as projected, that everything’s stable on that front, and then a couple years later you’ll have lawmakers and the governor want to come back at it again. So I would anticipate that that’s a real possibility in Iowa. They’re getting more competitive now, but I would expect them to come back again later once that success creates a hunger for more success.

Now, North Carolina just did big tax reform last year there are other states considering big tax reforms, and then dozens of states are looking at trimming their income tax rates with revenue surpluses that lots of states are seeing right now.

Jim Vokal: So what does Iowa’s rates mean for Nebraska from a regional competitiveness standpoint?

Michael Lucci: Well, Nebraska’s rates aren’t going to be competitive with Iowa, so Iowa’s gonna have a flat income tax structure—top rate, I think, will be just under 4[%]. North Carolina’s actually headed in a very similar place. So, Nebraska’s top rates are going to be uncompetitive with Iowa’s. Iowa also has, you know, addressed some of their tax bases that they don’t want to tax anymore, that’s something that Nebraska should look at also. But whenever you have a border that’s doing a lot of reform, it really behooves you to look at doing the same thing within your state. And Nebraska is looking at trimming some rates, but I would say there’s a difference between kind of treading water, to you know, sort of stay in the game, versus getting out ahead in a race or competing in a race to be very competitive. And so right now, Nebraska’s doing a little bit more of treading water, whereas Iowa is trying to really get out ahead of Nebraska and its peers and border states.

Jim Vokal: Yeah, I appreciate that perspective. We talked just a few minutes ago that you began your public policy career in a very tough legislative and fiscal environment in Illinois, and then you had the chance, as we talked, to work with legislators around the country as a Vice President at the Tax Foundation. When you compare Nebraska’s current approach on tax and fiscal policy to other states, you just touched on that a little bit, what is your overall assessment at this point, and where do you think the state can position itself for the years ahead?

Michael Lucci: So, Nebraska lawmakers, the Nebraska governor, they inherited a tax code that they didn’t create. This is the situation in every state. You know, every state tax code… one of the great quotes I heard about state tax codes is it would be wonderful if a state tax code looked like it was designed for some reason, instead of being sort of a hodgepodge of different taxes from different eras in the state’s history. Most all states are that hodgepodge, so Nebraska is not unusual in inheriting a tax code that was created decades ago, generations ago—doesn’t necessarily make sense today. Nebraska has been a little bit slower in fixing that and modernizing that, and you’re seeing more states take up that mantle of wanting to modernize their tax code. So, Nebraska’s tax code can stand in the way of success, can stand in the way of folks wanting to locate in Nebraska. And now more than ever, it’s important for states to reform their tax code. There are two reasons for that. State tax reform is more important now than it’s been in generations. One reason is because the federal government is not letting you deduct as much state and local taxes against your federal income taxes, so it used to be if you had high state and local taxes, at least you could deduct that at the federal level, so that that would, you know, offset a little bit of your tax burden. The second reason is, you know, a bit of a product of the pandemic. We were moving towards a world of more remote work, but the pandemic really accelerated that. Like, that’s my life and my wife’s life also. We got into a situation where we could decide where we want to live, and so we were able to move, and taxes were a consideration in that. So you’re going to see enhanced tax competition. That’s part of why a lot of states are looking at their income tax now, is that is something that people are going to be sensitive to when they move between states. Nebraska has an advantage of a lower cost of living than a lot of other states, and that’s something people take really seriously, but the tax code is not as competitive as other states, including border states.

Jim Vokal: All right, let’s talk a little property taxes now. We just spoke that there’s a lot of focus, justifiably, on income taxes because so many states are making income tax reforms. But Nebraskans, you’ll find out, care a whole lot about property taxes, and the Legislature is starting to spend big bucks on property tax credit programs. How would you assess these programs and how property taxes fit into tax modernization in Nebraska?

Michael Lucci: So when you do tax reform, it’s best to simplify. Make the tax code simple, easy to understand, straightforward. And when you create credits, that can make the code a little bit less transparent. It can make the code a little bit less simple. So basically, what’s happening is, Nebraska has high property taxes, so they’re creating a credit against your income taxes to sort of offset the property taxes. It would be better to go a direct route of lowering property taxes. Now, maybe that means enhanced state aid to local governments, but making sure that the local governments are actually ratcheting down their property taxes during that. One example is, you know, there’s a proposal right now in Nebraska to create a property tax credit or to have a tax credit for property taxes for community colleges. And the value of that credit, I mean, how much state money is going to go to fund that credit is nearly enough to just get rid of that community college property tax altogether.

That would be a simpler approach, is just get rid of a tax if you’re going to use that much money for the tax, rather than creating—you know, here’s a credit over here to deduct over here. You want the tax code to be less taxpayer-active, and by that I mean don’t make it work for taxpayers to get their tax relief, just make it straightforward. If we’re going to give you tax relief, we’re going to get rid of this tax, or we’re going to directly reduce this property tax instead of having, you know, a high tax over here that you get to deduct over here.

Another example on property taxes, there are parts of Nebraska’s property tax code that are very anachronistic. This is normal, especially in agricultural states, because at the beginning—early America— the only thing we really taxed at the state level was property. So we taxed all sorts of property that we shouldn’t. One example of that is Capital Stock Tax that exists in Nebraska, that is largely an idea from before we could tax business income. We tax kind of their net worth, so that would be a good one to get rid of. Tangible personal property is another example. You don’t really want tax things that can be moved out of the state. TPP is an example of that, and TPP is also very taxpayer-active, which is, if you just have a little bit of equipment at your business, you’re gonna have to start figuring out how much tangible personal property tax you owe. And that puts the onus on the taxpayer to do more work rather than just having a straightforward tax bill based on your property, your land, and your structures, which is a more straightforward program for taxing businesses for their property. So, the property tax code is one of the ways in which Nebraska is definitely anachronistic, but going at it through credits is an indirect way. It’d be better to just go directly after certain parts of the property tax code that are problematic, and the overall burden is high. Just go after that directly and force local governments to ratchet down their property tax burden if they want to achieve state relief, basically. Also allowing voters to have more say in preventing property tax increases would help control that tax burden.

Jim Vokal: Very well put. These credit programs certainly do nothing to lower the, I think, 8th highest rates in the country and the rising valuations that we see, and the spending that’s associated with it. So, appreciate that perspective. All right, we’ve talked, Michael, about some of the top issues Nebraskans hear about a lot. But we are always reminded in recent years, and we have been in recent years, that there are always events that might seemingly come out of nowhere and change everything in the public policy arena. Is there anything you’ve learned in examining tax and fiscal policy nationally that is less talked about, but that might end up being really important in Nebraska in the future?

Michael Lucci: Yeah, so I would watch the federal government. Because the federal government creates changes to the federal tax code that flow through in the state tax codes. This has been an issue for Nebraska in particular with the taxation of what’s called Global Intangible— it’s called GILTI—it’s low tax income that’s basically earned abroad. Nebraska was taxing that for a while, so Nebraska was taxing income that was earned in France, for example. States shouldn’t do this. States shouldn’t be taxing outside their borders. It’s questionable whether it’s legal, but really the problem there was the federal government created change, and there are more changes that are being faced in the next couple years from the federal government, and the states need to be very proactive and aggressive in preventing any tax hikes from occurring because the federal government is changing the tax code. That’s going to persist. That’s going to be an ongoing issue. States could be a little bit more casual about this for a while, because we hadn’t had a major tax reform. The last major tax reform was in the 80s. [In] 2017, the Tax Cuts and Jobs Act under President Trump was a systematic tax reform at the federal level. A lot of that flowed through to the states, because the states conform. That means they just take certain parts of the federal tax code and they make it part of the state tax code. So if this piece of the federal code changes, that means pieces of your state code change, unless you do something about it. So that’s the thing I would watch for. There are already changes that are scheduled to phase into the federal code that will affect Nebraska, does affect Nebraska, and I would watch for the feds to perhaps take on tax reform again, and make sure to react very quickly and proactively to that.

Jim Vokal: Michael, anything else you want our listeners to know about Nebraska’s taxes or the tax landscape across the country right now?

Michael Lucci: I would reiterate that state tax competitiveness is more important now than it’s been in generations. A lot of state leaders are aggressively taking an opportunity to reform their tax codes. They understand that it’s more competitive. Again, you have less ability to deduct your state taxes against your federal tax burden, so that means state competition is more important, and also states are competing for remote workers—often high paid remote workers—in a way that they were not doing. The magnitude of remote work is going to be multiples of what it was before the pandemic, so whether you like those things or not, competition is the name of the game in state taxation. So you have to get in that game because other states other states are. Iowa’s doing it, other states around Nebraska are becoming more competitive, so it should be front and center, and it’s not going to go away. I mean, remote work’s not going to go away. Issues with federal changes are not going to go away. So it’s good to be proactive and ahead of these things rather than more reactive and trying to tread water. Just get out ahead of these things and be very competitive as a state.

Jim Vokal: Platte Institute Senior Policy Advisor Michael Lucci was our guest today. Michael, I’m thrilled to have you on our team and I appreciate you joining me on Nebraskanomics.

Michael Lucci: Thank you, Jim.

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