Nebraska’s peer states are cutting income taxes

Nebraska’s peer states are cutting income taxes

Every state has a peer group they look to. Typically, it includes neighboring states. In Nebraska’s case, Missouri is a comparable peer. Some of the attributes we might look at are Missouri’s similar agricultural economy, but also their much lower property taxes. But when it comes to economics and growth, even states that are not nearby or immediately similar can be peers in other ways.

Arizona can be considered a peer, because Nebraska loses population and investment to Arizona.

Another commonality of peers like Missouri and Arizona is that both have recently cut their income tax rates to be even more competitive with states like Nebraska.

Arizona enacted a tax package that will levy a 2.5% flat tax for most residents, reducing the previous progressive rate structure that ranged from 2.59% to 4.5%.

This change was in response to voters in Arizona approving a surtax on earnings above $250,000 for single filers and $500,000 for married couples, which would have given the state a top rate of 8%. This would have been higher than all neighboring states except California, and even many non-bordering states Arizona is gaining population and income from, like Nebraska.

While Arizona’s legislature did not remove the voter-initiated surtax, the most recently enacted budget has a provision to ensure that nobody pays a top rate above 4.5%, the same as today.

Missouri has also recently enacted a cut to its top income tax rate which will eventually take the state’s 5.4% top rate down to 4.8%.

This year, the Show-Me State made a long-awaited change to begin collecting remote seller sales taxes for online transactions. Most other states made this change over the past three years. With the expected revenue this will bring in, Missouri is building upon previous income tax cuts passed in 2014, which rely on gradual tax reductions known as revenue triggers.

Triggers are only applied once the state meets certain revenue benchmarks. The 2014 bill included five triggers, but so far only two have been used. This new legislation adds two more triggers and requires an additional rate reduction in 2024.

The triggers require that Missouri’s net general revenues exceed the highest net general revenues collected in any of the past three fiscal years by at least $150 million before a rate reduction can occur. According to current estimates, the state expects to reach the 4.8% rate by 2028 or 2029.

What this means for Nebraska is that our neighbors are already planning ahead to have a more welcoming tax climate, and every year the Unicameral stalls on income tax reductions is another year we fall farther behind our competition. Of course, income tax is not the only tax that matters, but if a comprehensive tax package is to be introduced in Nebraska, income taxes should be part of the reforms.

Nationwide, there have been nine states that have passed legislation to reduce their individual or corporate income tax rates so far in 2021. This comes after voters in neighboring Colorado also cut their flat income tax in 2020. More states may see tax reductions next year, as state revenue collections continue to exceed expectations. Hopefully, Nebraska will be one of them.

Find out more about income tax reform with these Platte Institute resources:

5 Essential Steps to Reform Taxes in Nebraska

These 8 senators set Nebraska’s tax policy agenda

Compared to Rivals, Nebraska Takes More from Taxpayers



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