These states set the example for a better Nebraska tax system
Today, the 2021 State Business Tax Climate Index was released. Nebraska’s rank has remained unchanged from last year, which is unsurprising, because structural reform has not been accomplished in the Cornhusker State. However, states rising in the rankings, like Kentucky and North Carolina, have significantly overhauled their tax codes and have seen the positive benefits from doing so.
Coming out of the Great Recession, North Carolina’s economy was the 10th worst in the nation. Their 2013 tax reform legislation took the state’s position on the State Business Tax Climate Index from 44th to 10th, one of the largest jumps and score improvements in the history of the index.
North Carolina did this by replacing a three-rate progressive income tax that ranged from 6% to 7.75 %, the highest in the region, with a flat-rate tax of 5.8%. This rate was subsequently lowered to 5.499% and then to 5.25%, which took effect in January 2019. The corporate tax rate has been reduced from 6.9% in 2012, the highest in the Southeast, to 2.5% in 2019, the lowest of any state that taxes corporate income.
Today, North Carolina is in the top 10 states for business tax climate and is also ranked one of the fastest-growing economies in the nation.
Kentucky has one of the worst-funded pension systems in the country. The focus of their tax reform was to help the state collect more revenue to fund this growing liability. While Kentucky’s tax reform resulted in more revenue being collected, the structural reform made their tax code better for business, with a jump in their ranking from 39th in 2018 to 19th in 2021, another historic jump in the index.
Kentucky did this by moving from a six-bracket individual income tax with a top rate of 6% to a 5% single-rate tax. This move alone jumped the state from 37th to 17th in the income tax component of the index. In addition, Kentucky reformed its three-bracket corporate income tax for a single-rate tax of 5%. Lawmakers also suspended several business tax credits, broadened the sales tax base to include select services, and raised the cigarette tax, among other changes.
Both Kentucky and North Carolina had their own respective motivations for tax reform. They both executed their reform packages and have reaped the benefits. North Carolina is one of the fastest-growing economies in the nation and Kentucky can collect more revenue and is closer to paying off its massive unfunded pension liability. This is all the more noteworthy since both states have comparable or lower sales taxes and significantly lower property taxes than Nebraska.
Nebraska needs to take note. For many years, economists and tax policy researchers have made the case that Nebraska’s tax system needs a major overhaul. The system is a hodgepodge tax policy with high marginal rates on personal and corporate incomes and many exemptions carved out for the favored few. Our current tax system penalizes investment, entrepreneurship, and economic growth, and as a result we have some of the lowest job creation rates in the nation.
Tax reform has worked for North Carolina and Kentucky. The Tax Foundation has a roadmap for the state to follow: Eliminate our graduated rates on income tax and move to a low flat tax for both corporate and personal income, and broaden the sales tax base to include services, while exempting business inputs. Within this framework, there is room to also reform the state’s burdensome property tax.
While it wasn’t an easy road for either North Carolina or Kentucky, they have blazed a path of success that Nebraska needs to be the next to follow.