Testimony for LR261: Interim study examining Nebraska’s tax structure

Chairwoman Linehan and members of the Revenue Committee, my name is Jim Smith, and I am the Chief Strategy Officer of the Platte Institute.

Thank you for scheduling this hearing to examine the structure of Nebraska’s tax system and for your ongoing efforts to improve the State’s tax environment and competitive standing.

As a Blueprint Nebraska Alliance Partner and a supporter of Blueprint’s 15-point plan for economic growth, the Platte Institute recognizes there are many factors that drive economic growth and effect our state’s competitiveness. These dynamics include our education system, the availability and affordability of housing, broadband connectivity and performance … and the list goes on. But perhaps the single most important factor that influences our economic outlook is our state and local tax system.

Unfortunately, Nebraska’s state and local tax systems are no longer structured to optimize economic growth, or to reflect our current economy for that matter. Currently, we have property taxes predating statehood, an inheritance tax from 1901, a sales tax designed around a Depression-era economy, and business tax incentives built on 1980s economic development concepts.

To answer this committee’s first question of the portion of the tax system in most need of reform, we believe consideration should be given to the hierarchy of taxes in terms of how they impact our economy. We know that certain taxes are more harmful to economic competitiveness and growth because of the taxpayer’s mobility and sensitivity to change. For example, taxes on the most mobile factors in the economy, such as income and capital, have the most negative impact.

However, taxes on factors that can’t easily be moved, such as land, are the most stable and have less impact … but that does not mean that we should not work towards reducing the tax burden on our most captive taxpayers, the property owner.

Regarding the committee’s second question on our position on expanding the sales tax base, the Platte Institute supports the careful and strategic broadening of the state and local sales tax base. I have included potential targets of this broadening strategy with my testimony. However, such broadening measures should avoid taxes on business inputs as well as goods and services that harm fixed- and low-income segments of the population and workforce.

The committee’s final question involves the strategy or framework for using the incremental sales tax revenues generated by expanding the base. By using the state’s portion of this new revenue to reduce the income tax burden on individuals and businesses, dynamic modeling shows that we can grow the economy by generating new state revenues from factors like population growth, higher wages and increased investment. This growth and the new local option sales tax dollars can then be used to further reduce Nebraska’s property taxes and overall taxpayer burden.

In concluding my remarks, modernizing Nebraska’s tax code should have dual outcomes: increasing the competitiveness and growth of Nebraska’s diverse economy and reducing the burden on Nebraska’s families, farmers and businesses. With the right approach and design, we believe we can achieve both outcomes without sacrificing the stable and diverse revenue sources needed for government’s critical services.

Thank you again for your time and continued work on behalf of Nebraska’s taxpayers.