Tax Reform Can Add Certainty to Nebraska’s Budget Picture

Tax Reform Can Add Certainty to Nebraska’s Budget Picture

Recent headlines report Nebraska state tax collections came in $95 million below certified projections at the recent close of the fiscal year (June 2016). It’s certainly prudent for Governor Ricketts to ask all state departments to rein in expenses. That’s what Nebraska families and businesses would do.

However, even with tax dollars coming in under projections, state revenue is growing, not shrinking.

Over the last fifteen years, the state has seen an average annual revenue growth of 4.6 percent, or 2.6 percent when adjusted for inflation. And with the $4.3 billion in actual revenue receipts to cover budgeted expenses of $4.2 billion, taxpayers can be assured the bills will be paid without a budget shortfall in 2016.

The people who have the real budget shortfalls are Nebraskans themselves. They’ve been good to the State of Nebraska, and while they have paid their taxes diligently over the years, it is clear the state can afford to let people keep more of what they earn. 

The chart below shows the state budget versus what is actually spent. The Legislature has been cautious in overestimating the cost of government, so cautious, that the state has budgeted $240 million more annually on average than what is actually spent. In Fiscal Year 2015, the difference nearly reached $400 million. While having breathing room in the budget is commendable, this becomes a problem when revenue projections are tied to inflated budget figures, making it look like the state needs more money than it actually does. 

This means, year after year, the state is collecting more from taxpayers than is really needed.

Some interest groups hope to use the recent revenue numbers as a means to sow doubts about the wisdom of tax reform. But if policymakers are truly concerned with Nebraska’s revenue stability, that makes 2017 an even better year for meaningful tax reform. That’s because Nebraska’s general fund relies mostly on income tax, which is one of the least stable taxes.

The most recent Nebraska Department of Revenue report supports this fact, with sales and use taxes coming closest to meeting projections and income taxes farther from expectations.

The case for consumption taxes being more stable is well-documented over time as well. Research from Pew Charitable Trusts shows that from 1995-2014; state sales tax collections were less volatile than income tax not only in Nebraska, but across the country.

One reason income tax is less stable is that income is more mobile than consumption. A person driving through Nebraska on I-80 will pay sales tax if they stop for lunch, but won’t pay income tax unless they earn money here.

Further, many forms of income are earned on an irregular basis and vary with phases in the economic cycle. A business or individual may have a very good year followed by a very average year, or even a loss. All the while, even when people don’t make a profit or see fluctuations in their earnings, most will make many essential purchases in the state where they reside.

Nebraska’s sales tax could become even more efficient and stable by rolling back arbitrary tax exemptions. As one small example, it makes no sense that a person washing their clothes at home pays sales tax to buy detergent, but someone who dry cleans pays no tax at all.

It is generally the case that when you tax something you get less of it. A tax levied on income will discourage individuals from working more or businesses from expanding their production. As a result, the economy will produce less overall. Nebraskans can do even better than we are today with slightly less conspicuous consumption, but nobody who has read our most recent policy brief on Nebraska’s loss of income and population to lower-tax states could argue that Nebraska will do better with less income produced in our state.

Nebraskans in search of a tax reform option that provides more stable revenue and less drag on Nebraska’s economy should look toward a broader sales tax base and lower income tax rates on working and investing in Nebraska.

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