Tax Freedom Isn’t Free

Tax Freedom Isn’t Free

In 2016, Americans worked until April 24 to reach the purely symbolic Tax Freedom Day; the day when the public has earned enough income as a whole to pay all federal, state, and local taxes levied that year.  The sum of these taxes exceeds what the country spends annually on food, clothing, and housing combined.

The good news is that Nebraska’s state tax burden will not grow until 2017 at least, when the Legislature meets again. The bad news is that until then, constructive criticisms of Nebraska’s tax system are sure to be met with suggestions that critics should move to Kansas, or other locales where fire is part of the climate.

From how some opponents of tax relief talk about Kansas you might think the recent clouds of smoke billowing over our shared border were not from wildfire control but the burning ruins of all Kansas civilization. As 2017 approaches, state and national media will provide their retelling of the Kansas story to stoke the flames of irrationality once more. As if quoting from scripture, they will pronounce that reduced taxes verily lead states to destruction, and have the gall to accuse those who disagree of being ideologues.

That’s why starting now, months before any tax relief bills are drafted, Nebraskans should plan ahead. The next wave of Kansas Derangement Syndrome is coming, but is easily treatable by practicing sound tax policy and basic math.

There is definitely more subtlety to the tax debate than politics suggests. Empirical research shows lower marginal tax rates and broad tax bases improve the climate for investment and growth, but states also have to make good decisions about spending and tax structure to sustain tax relief.

The Kansas Policy Institute writes, “the Kansas budget problem can be summed up rather succinctly: you can’t have a conservative tax plan and a liberal spending plan.” Concerns over Kansas’ solvency and stability have multiplied due to pension and other debts the state carries.

Nonetheless, other states haven’t been paralyzed by fears of becoming Kansas, as 17 states passed tax cuts in the 2015 legislative session, including 10 income tax reductions. Several others continued relief measures passed in previous years, while Illinois and Hawaii allowed income tax increases to expire, returning to lower rates.

This year Tennessee passed legislation ending investment income tax, while Mississippi zeroed-out their bottom tax bracket. More may come from other legislatures.

Some of these reductions may appear too slow or small, like Indiana, which cut their flat personal income tax rate only 0.1 percent. But that small step makes their larger ambitions easier to fund. As years go by, these incremental gains add up and produce greater progress than is being made in Nebraska, where income tax rates have hardly budged that much over the last 20 years.

Notably, none of these states are emulating the Kansas approach. Yes, Kansas cut income tax rates — more and faster than policymakers were willing to match with cuts or other taxes — but that change is fairly easy to calculate and wasn’t the main cause of their unexpected revenue losses.

As the Tax Foundation warned against in 2012 and recently testified on at a legislative hearing in Topeka, the defining characteristic of the Kansas plan was repealing all tax on pass-through income filed by businesses and self-employed taxpayers. This exemption led to 330,000 taxpayers falling off tax rolls while everyone else shouldered the burden of supplying the state with revenue.

In effect, Kansas narrowed their tax base by attracting 70 percent more filings for the carve-out than projected. In the long-run, the state would benefit from scrapping this exemption and offering everyone the same significantly reduced tax rate. Nebraska can do this too, by reviewing its exemptions and incentives to make broad-based rate reductions more affordable.

As Tax Foundation economist Scott Drenkard said in Topeka, “tax reform is about broadening tax bases and lowering tax rates.” Successful states are building a stable platform for growth around these principles. Nebraskans don’t expect not to pay taxes, but they do deserve fewer excuses from policymakers and more honest effort toward crafting a vision for a state that enables them to keep more of the rewards of their hard work.

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