Next steps for Nebraska after nation’s best tax reform
Nebraska led the states with the nation’s best tax reform in 2023, overhauling its income tax and property tax in one fell swoop. Nebraska’s individual and business income tax will both fall to 3.99% in coming years, boosting the state’s competitiveness in the nation’s most tax-competitive region.
Nebraska’s fiscal accomplishments in 2023 will naturally leave lawmakers sketching out a plan for what comes next.
The hypercompetitive state tax world means that it’s never a good time to rest on one’s laurels, even after leading the nation in 2023. A state can fall behind by standing still as other states advance, so Nebraska should adopt a practical and sustainable approach to continuing tax reform in coming years.
The tax reforms for 2022-2023 should be secured through spending restraint over coming years. Furthermore, lawmakers can follow up with improvements to both state and local tax codes.
Tax reform is an ongoing process where success leads to success. This is best exemplified by North Carolina. The Tarheel State enacted major reforms to its tax code in 2013. Since then, North Carolina has consistently chipped away at its tax rates and structural deficiencies every year or every other year.
North Carolina’s general approach to ongoing, iterative tax reform should be adopted by Nebraska and the other states that have recently overhauled their tax codes. The three principles for progress, listed below, can serve as guideposts for Nebraska to advance.
Secure the 2022-2023 reforms through spending restraint
Spending restraint is the key to unlocking tax reform. Taxes can only be cut if government spends less than it takes in. Nebraska has developed admirable spending habits over the last decade which should be leveraged to secure the tax reforms of 2022-2023, and to prepare the groundwork for tax reforms in future years.
Colorado and Texas have codified strong approaches to tax and spending restraint. In short, Colorado’s Taxpayer Bill of Rights (TABOR) restrains tax revenue growth by a combination of inflation plus population. So, if inflation is 4% and population growth is 1%, Colorado allows tax revenues to grow by 5%.
Texas applies a similar principle to spending. The Lone Star State allows spending to go up by a combination of inflation plus population from one budget cycle to the next. Texas’ tax revenues naturally grow much faster than inflation plus population, which allows lawmakers to repeatedly cut tax rates out of surplus revenues. This year, Texas leveraged its excess revenues to enact an $18 billion school property tax cut.
Nebraska has an solid history of spending restraint as well. Lawmakers should set a disciplined target for spending growth, and excess revenues above that restraint should be deployed to ongoing tax reform.
Nebraska achieved significant state tax reforms in recent years. Now, local taxes should be on the docket for reform.
Repealing the inheritance tax should be the top priority for local tax reform. Only six states still levy an inheritance tax. These taxes have largely been abandoned as a revenue relic of a bygone era.
Revenues from Nebraska’s inheritance tax go to county governments. However, these revenues are highly irregular and an unstable source of funding for spending programs. Inheritance tax repeal would bring Nebraska’s tax code more up to date with 21st century taxing methods.
The tangible personal property tax should be reformed, as well, by creating a de minimus exemption that minimizes the number of firms subject to the tax at all.
Data from the Department of Revenue would help lawmakers determine an ideal de minimus exemption, with the goal being to knock as many businesses off the tax rolls at the least disruption to local tax revenues. Nebraska previously had a de minimus exemption of $10,000, but repealed the exemption in 2020. Restoring the tangible personal property tax exemption to $10,000 or higher would eliminate the tax burden for many businesses, relieving them of having to comply with the complicated tax.
Finally, rising property values have caused significant homeowner concern. Nebraska’s tax rates don’t automatically reset lower when valuations go higher. Nebraska can cap the allowable growth in property tax revenues, or require that rates automatically go lower to offset higher property values. The effect would be the same – to prevent windfall windfall collections home values go up.
Fix state tax structures
Nebraska completed its most important tax reform work in 2023 by making the state income tax more competitive. However, more can be done at the state level.
Two provisions were dropped from LB 754 (Nebraska’s 2023 income tax reform) due to revenue concerns. One was full expensing for in-state capital investments, and the other was improved treatment of remote and temporary workers who reside within Nebraska for a short period of time. Each of these reforms should be advanced, revenue permitting.
In addition, Nebraska retains an anachronistic capital stock tax (called the corporate occupation tax), which taxes businesses based upon their investments and net value in the state. Most states have moved away from capital stock taxes because they disincentivize capital formation, and Nebraska can do the same at a relatively low revenue cost.
Nebraska’s 2023 reforms are the biggest improvement to the Cornhusker tax code in generations. These changes will pave the way to a better business investment environment. Nebraska has much success to build upon from recent years. It should begin to do so by defining and accomplishing another set of practical tax and fiscal reforms in 2024.