Nebraska Must Defend Its Historic 2023 Income Tax Cuts
Nebraska’s 2023 income tax reforms are the Cornhusker State’s ultimate tax reform achievement of the last generation. Governor Pillen and Nebraska lawmakers secured a permanent, transformational reform that would qualify as a crowning achievement on any lawmaker’s legacy. It was the type of achievement that lawmakers wait a whole career to accomplish.
As Platte Institute wrote in National Review in 2023, Nebraska achieved the best tax reform in the country in 2023, a sterling accomplishment during a cycle of major state tax reforms. The long-overdue policy changes for an income tax overhaul finally landed in one fell swoop. These improvements will meaningfully enhance Nebraska’s competitiveness, and they will phase in over five years. Nebraska’s 2023 accomplishments must be defended, and lawmakers should not unwind or delay the income tax cuts Nebraskans were promised in 2023.
It is wise to phase in tax cuts so that rates are reduced in a measured way. And it is also wise to regard the scheduled rate reductions as a promise to families and businesses who are impacted by the tax law.
From 2023 to 2027, Nebraska’s income tax cuts will phase in. During this time, income tax rates will be consolidated and slashed by over 30%. The final top rate is scheduled to be 3.99%. It’s a reform Nebraska built towards for more than a decade, and one that is essential to fend off increasing competition from Iowa and other surrounding states.
The corporate rate reforms are even more significant. Nebraska’s corporate rate will also be reduced to 3.99% and will be one single flat rate.
Businesses and families like certainty when they plan. Unwinding, delaying, or otherwise complicating the implementation of Nebraska’s income tax reforms would be a setback for a generational tax reform achievement. Any income tax change that would slow rate reductions or otherwise raise new revenues is effectively a tax increase.
All taxation bears a cost of lost economic activity, but some taxes cause more economic harm than others. High income tax rates create more economic harm than other forms of taxation. On the margin, income taxes distort economic decision-making more than sales taxes and property taxes. Income taxation disincentivizes savings and investment, which has greater implications for economic growth that the sales tax, which disincentivizes consumption, and the property tax, which disincentivizes expanding the value of one’s home.
Securing income tax certainty is critical given its outsized weight in determining economic competitiveness. Last year, Iowa Governor Kim Reynolds signed legislation to lower Iowa’s income tax rate to a flat 3.8% effective January 1, 2025. Less than 10 years ago, Iowa’s top rate was an eye-watering 8.98%. Governor Reynolds has signaled interest in further rate reductions, and Iowa’s legislature has proposed constitutional amendments to make it harder to raise taxes and to guarantee a single-rate flat tax in the state constitution.
After years spent enacting tax cuts that finally culminated with the 2023 income tax overhaul, tax policy certainty must be preserved. Amendments to the 2023 reforms would introduce a new wave of uncertainty and dash tax confidence as other competitors, and especially Iowa, accelerate their tax reforms. Nebraska’s competitors are either holding the line on previously-enacted reforms, accelerating previous reforms, or enacting new rounds of reform.
Nebraska lawmakers delivered transformation tax relief in 2023. It is critical to continue to message to voters that these reforms are a tremendous accomplishment that will be protected, rather than something flawed that needs to be paused.
In the meantime, lawmakers should continue to consider applying the sales tax to a broader base of retail consumption. New revenues can be applied to structure fixes to eliminate Nebraska’s capital stock tax, to lighten the burden of tangible personal property taxation, and to enact full expensing. Still more relief can be guaranteed at the local level by tightening the cap on property taxation. After all, the property tax regularly polls as the greatest tax annoyance for taxpayers across the nation.
Nebraska lawmakers should not adjust the 2023 tax relief reforms other than to accelerate them, as neighboring Iowa has done. The 2023 reforms are a transformational accomplishment that should be considered a legacy achievement for all lawmakers involved. Rather than considering tax increases, Nebraska lawmakers should promote strong tax protections, such as a constitutional amendment to require voter approval for any income tax increase. That way voters will know that they have the final say in any changes to increase income taxation.