Nebraska’s competitive sales tax and historic 2023 income tax reform must be protected

As Platte Institute wrote in National Review last year, Nebraska achieved the best tax reform in the country in 2023, delivering long-overdue income tax reform and dramatically enhancing the state’s competitiveness. It was the type of achievement that lawmakers wait a whole career to accomplish. 

The 2023 income tax reform will phase in over several years during which time income tax rates will be consolidated and slashed by over 30%. It’s a reform Nebraska built towards for more than a decade. 

Unwinding, delaying, or otherwise complicating the implementation of Nebraska’s income tax reform would be a setback for a generational tax reform achievement. And any such setback would introduce tremendous uncertainty into Nebraska’s tax regime. 

That’s why it’s unfortunate that the Nebraska Examiner reports that Nebraska lawmakers may be considering changes to the 2023 income tax reforms. The problem cited by the Examiner is that lawmakers want to use allocate more funds (through Legislative Bill 388) to subsidize the spending of local governments in the hopes that local governments will enact property tax relief.  

In other words, LB 388’s controversial plan to raise the sales tax rate by 1% in order to subsidize local government spending has met significant political headwinds, and so policymakers are looking for another way. And if so, the sales tax rate increase is being rightly discarded. Raising the sales tax rate would worsen one of the most competitive parts of Nebraska’s tax code and diminish a strength instead of building upon it. Furthermore, a sales tax rate increase could induce “border bleed,” or consumers shopping in other states. And it would certainly worsen “tax pyramiding” that businesses endure when they are taxed multiple times throughout a production cycle.

Policymakers are considering changes to the income tax to create more state revenues. Yet an income tax change to create more state revenues is, of course, and income tax hike.

While lawmakers are right to reject a sales tax increase in LB 388, an income tax increase is an even worse pathway to take. High income tax rates create more economic harm than sales tax rates. And to be clear, a change to underlying law that results in higher income tax rates than are currently scheduled in law is an income tax increase. 

Furthermore, the proposed income tax increase would not just make Nebraska less competitive, it would introduce a new wave uncertainty into Nebraska’s tax regime that will not be quickly extinguished. Only one year out from a landmark 2023 tax reform achievement, lawmakers are discussing unwinding or delaying that reform. After spending years enacting reforms and building up certainty around tax relief, tax certainty will be dashed. And the message voters will receive is that there is something wrong with Nebraska’s 2023 tax reform when in fact it was the single best reform in the country! Changing the 2023 reform without an unforeseen revenue failure would damage policymaker credibility. 

This uncertainty is the opposite of what businesses and families look for when they do long-term planning. While lawmakers could argue that a pause in the income tax would be a one-time episode, the history Nebraskans would look at is the very brief history of an income tax reform enacted a year ago that is already being adjusted.  

In 2023, no lawmakers expected to pause the income tax reforms that they enacted. The 2023 changes to the state tax code were an implicit agreement with the public as to what the tax regime would look like going forward. And so in 2024, any delay in the income tax reform will be viewed with skepticism. If long-developed tax reforms are immediately put up for grabs and put on the table for renegotiation, the regime certainty of Nebraska’s tax code will be undermined for a decade.  

Short of an unforeseen revenue crisis, Nebraska lawmakers should not adjust the 2023 tax relief reforms in any way other than to accelerate them. The 2023 reforms are a generational accomplishment. They should be preserved and protected with a lawmaker pledge that they will be kept in code as they are currently written, or accelerated for more immediate relief.