Report rewards Nebraska’s peers moving to flat income taxes

Report rewards Nebraska’s peers moving to flat income taxes

Nebraska ranks 36th in economic outlook according to the 2022 Rich States, Poor States report. The annual report ranks states for economic competitiveness using a comprehensive analysis of economic policy factors.

While public policies aren’t the only factor for economic growth, they are some of the most controllable factors for states. Nebraska’s current ranking is lackluster, but the good news is that lawmakers in the Unicameral can boost the state’s position by advancing practical, pro-growth tax reforms, some of which are already underway.

The Rich States, Poor States report shows that Nebraska is relatively competitive for its tort liability system, state debt load, and Right-to-Work status. However, most components of Nebraska’s tax code are uncompetitive. Nebraska is dinged for its high personal and corporate income tax rates, the progressivity of its income tax, a high property tax burden, and for levying an inheritance tax. Each of these problems can be addressed through tax reforms in coming years.

Nebraska lawmakers enacted legislation to trim Nebraska’s top income tax rates in 2022, which will improve state competitiveness and move Nebraska towards lower and flatter income tax rates. The state’s top rate for personal income tax will fall from 6.84% to 5.84%, and the top rate for corporate income tax will fall from 7.5% to 5.84%.

Meanwhile, policymakers in four other states enacted legislation in 2022 to pivot to lower, flat income taxes, a goal that Nebraska should follow. Arizona is transitioning to a 2.5% flat income tax, Iowa is moving to a 3.9% flat rate, Mississippi is going to a 4% flat rate, and Georgia is going to a 4.99% flat rate. These reforms make sense not only to enhance general state competitiveness, but also because America’s high-skilled workforce is becoming increasingly mobile through remote work.

There are several policy levers to pull to make these reforms fiscally and politically practical. Spending restraint is essential for tax reform. Large rate cuts like Iowa’s were made possible through the repeal of large deductions. In the case of Iowa (and similarly in Louisiana), the state repealed the deductibility of federal taxes paid, which generated a large stream of new revenue to use for rate reductions. In addition, states like Georgia and Mississippi raised their standard deductions to ensure that all taxpayers received tax relief as tax brackets were consolidated. Finally, states enjoying revenue surpluses are using this opportunity to cut rates against rising revenues. Nebraska policymakers should consider these tools as they move the state towards lower, flatter income tax rates.

Nebraska’s high inheritance and property taxes are also solvable problems. The inheritance tax brings in as much as $75 million per year for counties, a relatively small and unstable revenue source that can be replaced or phased out. High property taxes are a larger structural issue for Nebraska. However, Nebraska is dedicating significant state resources to provide income tax credits against property taxes paid. Channeling these resources into direct property tax reductions would simplify Nebraska’s tax code and improve its position in tax rankings.

Nebraska’s 2022 income tax reforms put the state on a pathway to improving the least competitive part of its tax code. If state tax receipts continue to come in strong, policymakers should accelerate the 2022 rate reductions and advance towards a lower, flatter income tax. Cutting rates and raising the standard deduction will ensure all Nebraskans tax relief while making the state more competitive.

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