Nebraska’s 2022 Tax Agenda with Tax Foundation’s Jared Walczak
The Tax Foundation’s Annual State Business Tax Climate Index tracks which states offer the most competitive tax codes. Vice President for State Projects Jared Walczak joins Jim to discuss Nebraska’s unfinished business in 2022. A transcript of this discussion is available below.
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Jim Vokal: Jared Walczak is joining us today from the Tax Foundation and he serves as the Vice President of State Projects. He is also the lead researcher for the Tax Foundation’s annual State Business Tax Climate Index, which helps Nebraska compare itself with other tax systems. Jared, welcome to Nebraskanomics.
Jared Walczak: Well, thank you for having me.
Jim Vokal: If you’d like to get more conversations like this, please like and subscribe to our video on YouTube or follow Nebraskanomics on your favorite listing platform. Let’s get started, Jared. The Legislature resumed for 2022 this week and the governor and the Revenue Committee are already determined to devote as much of that $412 million revenue surplus as possible for cutting taxes. Your State Business Tax Climate index for this year mentions that Nebraska has some unfinished business from last session which the policymakers I just mentioned obviously have acknowledged.
Just for the sake of argument, though, after all the money that has been set aside for property tax relief, and several tax-related bills that passed in 2021, why do you still think it’s important for Nebraska to do more?
Jared Walczak: It’s a great question, and there’s two different ways that you can approach tax relief. One is the very simple, and I think very compelling idea, that people should have more in their pockets, the government should be frugal, and government should make sure that people aren’t paying too much. And I think a lot of the relief that we’ve seen in Nebraska thus far, especially the effort on property tax relief, has been to keep burdens low for individuals. It hasn’t necessarily been well-targeted for growth, however. It hasn’t been designed to ensure that Nebraska is a place where businesses can grow, and create more jobs, and the more investment will flow into the state. That structural side has largely been missing, and again yeah, it’s wonderful to make sure that people have more money in their pockets. But it’s important to make sure that the structure is actually right as well to attract the investment so that people stay in Nebraska, come to Nebraska, that there’s a strong future for all Nebraskans.
Jim Vokal: We’re going to talk about the structure later on, but do you want to maybe highlight some of the deficiencies that we have in Nebraska compared to some of the other states that are growing their state with tax reform?
Jared Walczak: There are a number of things. Obviously, the rates are a little high. There’s been relief in a variety of ways, but the corporate income tax rate is actually substantially higher than the average corporate tax. The individual income tax, you know, where it is now we think “Okay, well, maybe that’s sort of the norm.” And I think 20-30 years ago, if you’re in the high-sixes, that’s not that unusual. That’s not where we are now. The median states’ individual income tax top rate is 5.3[%] this year, and that’s trending down, you know, just based on enactments that are already in place. It’s going to 5[%] in the next couple of years, and then there are just provisions within these codes, you know, the way that Nebraska has treated the income of multinational businesses over the last few years, the treatment of investment income, and that’s something where if Nebraska is not careful, Nebraska and a lot of states can inadvertently reverse some progress that has been made, because the federal government unfortunately is about to reverse some progress, and Nebraska is in line to just go right with them, and eliminate the first-year expensing of capital expenditures, making a significant increased tax cost on the choice to invest.
So, these are opportunities to try to get out in front of this, to try to say Nebraska is a destination for investment.
Jim Vokal: I appreciate that. Let’s shift now to talk a little bit about Census migration. You have a piece on TaxFoundation.org that took notice of some of the same trends that we saw at the Platte Institute with migration numbers out of the U.S. Census Bureau. And here in Nebraska we saw a loss of about 3,000 residents to migration during the most disruptive times of the pandemic, while some lower-tax states saw a surge of population. This has always been a tough issue because there’s a lot of reasons why people move, but is there anything different to note from this time at looking at these numbers?
Jared Walczak: There is. And whenever I talk about location decision-making, I think it first is very important to acknowledge, like you said, there are lots of different things that drive migration. People move for jobs, quality of life, cost of living, be close to family, not just the economic climate. Sometimes the literal climate. Some of the people moving to Florida and Arizona in their retirement years care less about the taxes than what the weather is. All of these things matter. But we do know that people follow a strong economic climate. Taxes are a major part of that, and taxes are something that’s within the control of the Legislature, which makes it really important. You can’t add mountains, you can’t change your weather. You can, in fact, change your tax code, and this has both direct effects, people moving because they’ll pay less in taxes, and the indirect but very important second-order effects—a stronger, more robust economy, creating the jobs, creating the opportunity that brings people to a state.
And we’ve seen a much clearer picture since the start of the pandemic of migration that really is fitting that tax pattern. Certainly, for years, for decades, we’ve seen migration into lower-tax states, in particular states with really low income taxes have seen significant in-migration. But the map is really stark right now. You know, all of the states basically that have significant population growth over the last year-and-a-half are states with very low taxes, and all of the states that are experiencing the opposite are states with high taxes. In fact, if you take the top third of states versus the bottom third of states, the average top marginal rate for income taxes in the top third is about 3.5% and in the bottom third I believe it’s like 7.6%. You know, there’s a huge gulf between these, and one of the reasons pretty clearly is people have more mobility now.
In the past, maybe it was relatively difficult, a lot of friction to pick up and leave, to say “Sure, maybe I’d prefer to be in a state with lower taxes, but I’d have to start over.” I’ve got to find a new job, I’ve got to decide, you know, all of these things. Now, often, that job’s portable. You have the mobility to continue to work for the same employer, or find a new employer anywhere in the country that is willing to hire a mobile worker. So, you know, we’re seeing people just really exercise that voting with their feet in a way that we hadn’t at the same level before. I think it’s only going to accelerate as, you know, we get into a future where probably many higher-paying white collar jobs in particular really can be worked from anywhere in the country within an internet connection.
Jim Vokal: That’s a great discussion about the landscape there, appreciate that. Next week it looks like the Nebraska Legislature is going to hold floor debate on reducing the county inheritance tax with Senator Clements’ LB310. This tax has been around for 120 years. Previous governors and legislators have tried to end the tax. Unfortunately, there hasn’t been traction. Meanwhile, our neighboring state Iowa just started the process of repealing their inheritance tax, and we have a lot of reasons and some polling that we’re going to release to show that Nebraskans really want to end this tax altogether. What are your thoughts as we go into this debate?
Jared Walczak: Yeah, inheritance taxes are old taxes. And I mean that both that they’ve been on the books for a long time, and also they’re taxes that most economists and public finance scholars would not recommend creating now if you were about to do it. I think they sometimes have this sort of instinctual appeal. You know, wealthy people transferring property, and estate taxes and inheritance taxes have often been justified on, like, breaking up property intentionally. But especially with the inheritance tax, you’re one of only six states that has an inheritance tax. It’s not really about large estates, and it’s not really about where the decedent is. It’s about the beneficiaries, and you’re basically penalizing Nebraska-based beneficiaries, you know, for living in Nebraska, and that is not something you want to do. There is estate planning and also beneficiary tax planning that goes around this and it’s not to a state’s benefit. Nebraska has the highest of the inheritance taxes in the country, again only six, so we’re dealing with a pretty small sample, but highest top rate and the rates are differentiated by class, so linear heirs aren’t paying a whole lot, you know, those who aren’t related are paying a lot. Some of the people who aren’t related, though, would be business partners. So sometimes businesses have to be liquidated to pay an inheritance tax, and that’s really not what you want to accomplish. And at the federal level, when we used to have the federal estate tax, and in many of the states that have estate taxes, they fixed that problem for farms and businesses on their estate tax. They put large thresholds they try to address the whole “we don’t want to have to liquidate the company or the family farm to pay the estate tax.” Still bad taxes—but they’ve solved that problem. Inheritance taxes kind of fundamentally have that issue, especially for businesses where there might be partnerships or there might be people who are not as closely related that are part of the business ownership group. Changing that is worth doing and you’re gonna be one of five in a few years, I think it’s going to continue to go lower. It’s slow progress, but it has been the continual trend we’re seeing fewer and fewer of these every couple years—another state gets rid of an estate or inheritance tax. It’s time to seriously consider that you don’t want to break up capital for no reason, you don’t want to discourage family businesses and closely held businesses, and you don’t want to penalize someone for choosing to live in Nebraska rather than most of the other states where they wouldn’t get hit with an inheritance tax.
Jim Vokal: Exactly. Exactly. Couldn’t agree with you more. All right, let’s move back to talking about overall tax structures of states. We have a really well-received proposal in the Blueprint Nebraska tax modernization plan, Jared. It would dramatically reduce the income tax burden, especially for people making it under $50,000, it’ll add $2 billion to property tax relief over the next decade, and it would end the county inheritance tax that we just talked about. Obviously, doing something this big in a shorter amount of time would require more money than the $412 million that we talked about previously that the legislature’s sitting on. We need to change the tax code and get rid of the exemptions, deductions, and credits because they’re not serving our economic goals.
But with this already significant surplus, with the federal money pouring into the state, with inflation raising the cost of many purchases consumers make, there are headwinds to making the case for broadening the tax base. We’ve seen that momentum over the last five years at the Platte Institute. What can be done in a case like this where policymakers will generally be inclined to do what’s the easiest?
Jared Walczak: The thing is there is some real low-hanging fruit here for a lot of states and for Nebraska, with not only the current year surpluses but the expectation in Nebraska and revenue departments across the country that there is sustained recurring revenue growth right now that we’re seeing, that does permit tax cuts simply out of growth—returning some of that growth to the taxpayer. And that’s the easy thing, right? I mean, that’s good, we should do it. But that is the easy thing to do because it doesn’t require tinkering with tax code, no one’s ox gets gored, no one has to, you know, weigh the pros and cons, it’s just getting back to the taxpayer. We do need to have that more important, but also sometimes difficult conversation, about how you create a more neutral tax code—one that’s pro-growth because it gets out of the way. Taxes exist primarily to raise revenue. Ideally, they should not be affecting economic decision-making. We have a few taxes that are intended to do that, you know, gas taxes are intended to price the cost of using roads. We have some sin taxes that, you know, whether you agree with it or not the purpose many policymakers had is to discourage the use of certain products. But I don’t think anyone’s out there saying, “Let’s discourage innovation, let’s discourage investment,” but that’s what a lot of the features of our tax code do, because they put a thumb on the scale.
They pick winners and losers, they say this class of investment gets special treatment, and because of that, other forms of investment have to pay more. These individuals get a tax break because they fit a certain category, they meet the eligibility guidelines for a credit or some sort of program, and others who are also doing something that may have real economic benefits for themselves and for the state, they don’t get that. And fundamentally, you know, markets are dynamic and I trust the markets to figure out where the future growth sectors are far more than I do Nebraska’s Unicameral and that is not a slam on the Unicameral. I don’t trust any legislature to be able to figure out where all of the future growth sectors are. They’d be billionaires right now, they wouldn’t be in the Unicameral if they knew exactly where all the future growth was coming from. So, yeah, it’s tough. But we have to have that discussion about the credits, the exemptions, all of the things that pockmark state tax codes that aren’t about getting to structural neutrality, but are instead about favoring one industry or activity over another.
A neutral tax code is a more attractive tax code. You can get those, you know, the sticker rates down, you can get the state out of some of the economic decision-making, make the state more attractive for the long-haul. Hard to do sometimes—worth doing. And the states that have done it have really seen growth. We talked about some of the migration growth in recent years, you look at states like North Carolina or Utah that have pretty neutral tax codes, and look at the growth they’re experiencing right now, that’s a model you want to follow.
Jim Vokal: All right, Jared, final question. Tax Foundation and Platte Institute, we’re in the business of nonpartisan, good, sound tax policy. We know that legislation can be used as a proxy to position for and against candidates, it can get very political. How do we convince elected officials that a tax code that is simpler, more sustainable, and more supportive economic growth is a win-win endgame for them whether they’re Republican or Democrat?
Jared Walczak: Well, if we’re talking the politics of it, I think you only need to look at the political science literature. For incumbent retention, there’s nothing better than a good economy, so if you want to make sure that you as an elected official have a sound future, you want an economy that’s growing. But I think that most elected officials really care about their state and they have different priorities. They have different ways they weight different values that we all care about, and that’s important because policy is about trade-offs. There’s no perfect solutions anywhere, and we have to evaluate trade-offs. But I think there’s a lot of room in Nebraska and elsewhere to move the tax code in the right direction to find pro-growth reforms that can appeal to both Republicans and Democrats. And to some degree, when we talked a little about, you know, cleaning up some of the credits in the tax code, taking some of those incentives out, and I think that can appeal both to your, you know, really free-market Republicans who say “Why is government interfering with this?” This can also appeal to Democrats who say “Why is government giving a handout to business?” Because they are. And, you know, obviously and nominally —independent Unicameral, nonpartisan and that—but you know we have those different views, and I think there are areas of agreement here. There are opportunities and we can look at, you know, other states across the country where we’ve seen that divide bridged very recently. Bipartisan legislation in Louisiana to substantially overhaul their tax code, lowering rates, broadening bases, eliminating a lot of the deadwood in the code to make it simpler, fairer, more neutral. I think it’s going to be more pro-growth in the long run. You see that in North Carolina. A Democratic governor just signed what will ultimately be the repeal of the corporate income tax over a few years, lowering individual income taxes, making a number of other reforms. It was a long deliberation. That budget process dragged out, but they came to an agreement that, I think, everyone’s reasonably happy with. And then just to your west, you know, in Colorado you have a Democratic governor who’s been talking a lot about tax reform, and you got to watch that, because you have some neighbors who are very interested in being highly competitive who understand that taxes should not be interfering with economic decision-making and want that neutral tax code, want that simple tax code, and want the rates to be as low as they can within the constraints of providing appropriate services.
You know, we need taxes. It’s not really a question of, you know, are taxes good or bad. Taxes just are. They’re necessary, and we need to raise the revenue necessary to fund government. But within those constraints, doesn’t matter where you are left, right, or center, there ought to be an opportunity to say: “How do we do it in a way that really gives us better opportunity?” That keeps our graduates in the state, that attracts more people to the state. They’re not always easy conversations, but I’ve often found that serious, comprehensive reform discussions bring all parties to the table in a way that some of the simpler low-hanging fruit stuff doesn’t. You know, you just say let’s cut tax rates, and that may be good policy, especially with the surpluses the states are experiencing right now, but that quickly codes as partisan. Saying let’s modernize the tax code so that we’re ready for the next 50 years so, I think that has appeal to a lot of people, at least I hope it does.
Jim Vokal: Yeah, I hope it does, too. Anything else you want to talk about before I let you go regarding our Great State of Nebraska, Jared?
Jared Walczak: Well, you know, Nebraska’s tax code really was created in one year—1967. I don’t think you’re going to recreate a tax code in one year, but I think it is time to start thinking about if we did it once, what does it look like to recreate the tax code again? Because when that happened, there was a recognition, “We’ve got a tax code that’s really out of date,” that just doesn’t reflect the modern economy anymore. We need to change the provisions to make sure we’re reflecting the way that the economy works now. And we’re in another era of substantial change. I talked about remote work, I talked about the ways that our economy is changing. You know, people can work out of Nebraska for a company anywhere in the country, maybe anywhere in the world, and some of them are really going to want to. Because, you know, Omaha is a great city, and there’ll be a lot of people who say I can live in Omaha rather than in New York City or San Francisco, I’m willing to consider this. But there needs to be a compelling reason, because in some ways you’re not just competing with California or New York, you’re also competing with all of the other states they could go to, because they could go to Texas, they could go to North Carolina, or Utah, or lots of other places. You need to have a reason why they will either come to Nebraska, or for those who grew up in Nebraska, to stay home or come home, and I think there’s that opportunity. I hope Nebraska policymakers will seize that right now, because with the higher revenues, with the changes we’re experiencing, this is the right time to strike while the iron is hot.
Jim Vokal: Jared, you’re a good friend, Tax Foundation is a good friend of Nebraska. I appreciate your great advice and joining me on Nebraskanomics today. Thanks for joining us.
Jared Walczak: Thanks again for having me, anytime.
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