March 4, 2021

Testimony: Prioritizing Comprehensive Tax Modernization in Nebraska

Note: Below is our testimony to the Nebraska Revenue Committee presenting on findings from our recent report, Thirteen Priorities for Pro-Growth Tax Modernization in Nebraska.

My name is Katherine Loughead, and I am a Senior Policy Analyst with the Tax Foundation, a nonprofit, nonpartisan tax policy research organization based in Washington, D.C. We do not take a position on legislation, but I appreciate the chance to share some informational points with you today.

First, I’d like to commend this committee for carving out time to discuss tax modernization. These bills are an important conversation starter when it comes to discussing structural improvements to make the tax code less burdensome for Nebraskans while making the state more attractive to prospective new employers and residents.

Tax modernization is an important goal because the underlying structure of Nebraska’s tax code hasn’t changed much since 1967, when the individual income tax, corporate income tax, and sales tax were first adopted. The state’s economy has evolved quite a bit since then, but most of the tax laws that impact economic activity in Nebraska were written with a 20th century economy in mind and have become a barrier to in-state investment. Our State Business Tax Climate Index is an annual study that compares states’ tax structures using more than 120 policy variables. On the Index, Nebraska ranks slightly below average—28th out of the 50 states—in terms of its overall competitiveness.

With that in mind, last month, the Tax Foundation published a report identifying the areas of Nebraska’s tax code that most detract from competitiveness. The report offers suggestions on how each of the major taxes can be improved to promote economic growth while making the tax code more simple, stable, neutral, and transparent.

I don’t have time to discuss all our findings now, but I’d like to provide a brief overview.

Nebraska has high property taxes, which is a widespread concern that policymakers will likely want to address as part of any larger tax modernization plan. In recent years—in response to taxpayers’ concerns—the state has dedicated increasing amounts of state taxpayer dollars to offset local property taxes paid. But unless and until local spending patterns change, property taxes will remain on an upward trajectory due to rising valuations. Our report discusses how a tighter property tax levy limit—or taxpayer transparency measures similar to Utah’s Truth in Taxation law—could help reduce the rate of growth in property tax collections. The report also looks at how state government could offset these revenue needs in a structurally sound way.

But Nebraska’s lack of competitiveness isn’t just due to property taxes, as the state’s income taxes pose barriers as well. Nebraska’s top marginal corporate and individual income tax rates are high regionally and nationally. Numerous studies have shown that high income tax rates reduce state economic growth. And states with high top marginal individual income tax rates consistently suffer from outbound migration while their lower-tax competitors gain new residents.

But beyond tax rates, there are several other issues worth addressing, such as Nebraska’s taxation of Global Intangible Low-Taxed Income (or GILTI), which this committee examined last week; Nebraska’s heavy reliance on tangible personal property taxes, which discourage capital investment; the capital stock tax, which has become more of a nuisance tax than anything; and the inheritance tax, which impacts Nebraskans who inherit even relatively small amounts of property.

One of the best ways to address these issues is to modernize the sales tax base to additional consumer goods and services. Since the sales tax was first adopted, Nebraska’s sales tax base has eroded by nearly half. As the base has narrowed, tax rates have increased to compensate for the lost revenue. Modernizing the sales tax base would generate additional state and local revenue to offset other pro-growth reforms while making the tax code more neutral in the process. It is important to keep in mind, however, that sales tax base broadening should focus on final consumer transactions—not business-to-business sales transactions—since taxing business inputs usually leads to those taxes getting passed along to consumers in a nontransparent way in the form of higher prices.

A good comprehensive tax modernization plan usually takes time to develop and implement, but states that put in the effort are reaping the benefits, including a regional competitor in Indiana, with neighboring Iowa beginning to phase in reforms as well. I commend the legislature’s focus on beginning the process of tax modernization, as in this and subsequent legislative sessions, the Unicameral has an excellent opportunity to make progress toward a simpler, stabler, less burdensome, and more competitive tax code.

Note: Above is our testimony to the Nebraska Revenue Committee presenting on findings from our recent report, Thirteen Priorities for Pro-Growth Tax Modernization in Nebraska.

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The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

A property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.

An inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

Base broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability.