Sales Tax Modernization Could Help Nebraska Stay Competitive

In an increasingly competitive environment, states are competing every day for workers, entrepreneurs, investment, and new residents. Tax policy plays a major role in those decisions. States with more competitive tax structures are often better positioned to attract business investment, encourage job creation, and retain families looking for opportunity. 

For Nebraska, that matters. Neighboring states continue pursuing aggressive tax reforms designed to improve economic growth and attract investment, and right now they’re winning this competition. If Nebraska wants to remain competitive in the years ahead, policymakers should continue pursuing reforms that encourage growth rather than penalize it. 

When Iowa, Kentucky, Louisiana, North Carolina, and other states implemented large-scale income tax cuts, they offset part of the cost by broadening the sales tax base. Policymakers in these states understood that income taxes are worse for economic growth than sales taxes, and that sales tax modernization efforts would allow them to cut income tax rates more than they could otherwise. Nebraska policymakers contemplated a similar approach, and the Platte Institute has longchampioned combining these two reforms, but legislators ultimately chose to cut income tax rates without broadening the sales tax base. 

That income tax rate relief represents a historic victory for Nebraska families and is crucial to efforts to grow Nebraska’s economy. Preserving the reductions already implemented and phasing in the target rate of 3.99 percent should remain a top priority. Consequently, while it wasn’t part of lawmakers’ original package, responsible sales tax base broadening deserves to be part of the conversation to lock in a highly competitive income tax rate while balancing the budget.   

Two tax policy axioms are relevant here: (1) whatever you tax, you get less of; and (2) well-designed taxes feature broad bases and low rates. 

Taxes on consumption are more economically efficient than taxes on income. Income taxes fall on labor and investment, reducing both — whatever you tax, you get less of. An income tax, moreover, is a tax on both present and future consumption, since it reduces the savings from which future consumption will draw. 

Consumption taxes are less harmful, particularly when limited to final (personal) consumption. Shifting some of the tax burden from income to sales taxes makes a state’s tax code more competitive, as economic studies have documented extensively. The best way to raise additional sales tax revenue, moreover, is to broaden the base to include currently untaxed final consumption rather than to raise rates on the goods and services that are already taxed — broad bases, low rates.  

Most economists believe that the sales tax base should include all final consumer transactions, involving both goods and services, while excluding intermediate (business-to-business) transactions to ensure that all consumption is taxed once, but no more than once. Exempting some forms of final consumption is inefficient, favoring certain purchases over others and requires higher rates on products that remain in the base (or on income). 

Conversely, including intermediate transactions in the sales tax base can lead to tax pyramiding, where the tax is imposed at multiple points in the production process and is embedded several times over in the final price paid by consumers. Taxing these inputs also turns that portion of the sales tax into a production tax, making it more expensive for businesses to operate in the taxing state and encouraging them to shift production to states that tax fewer business inputs.  

A major study involving data from 21 OECD countries found that a 1 percent shift of tax revenues from income taxes to consumption taxes would increase gross domestic product by 0.74 percent. In Nebraska context, this means that every $70 million that the state can shift from income to sales taxes would increase gross state product by $1 billion.  

Most sales taxes, including Nebraska’s, are badly out of date. They tax the sale of most tangible goods (with significant exceptions, like groceries) while exempting most services. Existing statutory language is also often insufficient to capture new personally consumed digital products by default. 

When Nebraska taxes lawnmowers but not lawn care services, and washing machines but not laundromats, its formalistic distinction between goods and services creates distortions and unnecessarily narrows the tax base. And whereas many statestax repair services broadly, Nebraska imposes sales tax on parts but not labor. Maintenance services, haircuts and other personal care services, dating app subscriptions, event admissions, interior design, mini-storage, moving services, small animal (non-livestock) veterinary and pet grooming services, and other consumer purchases are also outside the tax base, while gasoline is subject to a motor fuel tax to pay for road maintenance, but not to the sales tax to capture driving as consumption.  

Modernizing the sales tax is progressive, because the categories of consumption currently exempted are consumed in greater quantity by higher-income households. It also promotes economic neutrality, because it involves a broader base with fewer carveouts and resulting economic distortions.  

State income tax systems are increasingly diverging, and Nebraska’s future tax competitiveness relies on the Cornhusker State being among the lower-income-tax states. Sales tax base broadening was considered as a partial pay-for from the start, and it should remain on the table as lawmakers navigate the current budgetary environment and work to ensure that Nebraska can afford the final stage of planned income tax rate reductions. 

Nebraska stands at an important crossroads. The state has already taken meaningful steps toward a more competitive tax code through income tax relief, but maintaining that momentum will require policymakers to think long term about how to build a stable, pro-growth tax system. 

Modernizing the sales tax base offers one path to preserve planned income tax relief while creating a simpler, broader, and more economically neutral tax structure. At a time when states across the country are competing for workers, entrepreneurs, families, and investment, Nebraska cannot afford to stand still. A more competitive tax code can help create the kind of economic environment that encourages growth, attracts opportunity, and keeps Nebraska competitive for the next generation.