Recently I was cited in the Journal Star indicating that only property tax reforms are needed in Nebraska. However, I have consistently stated that Nebraska requires both income and property tax reform to become more economically competitive.
What many people refer to as “property tax relief” from state government coffers is really a tax shift with the ultimate outcome of both higher property and income taxes.
Suppose, for example, the state provides a $100 credit on a Nebraska property owner’s tax bill. This credit is paid for with $100 drawn from the state treasury, funded from income and sales taxes or fees also paid by Nebraska taxpayers. What this means is that state-provided property tax relief is a tax shift, not a tax cut.
Furthermore, years later when the state tax coffers are threatened, state property tax relief is reduced with local taxing units once again raising property tax rates to support local spending. Thus, local governments are not given the appropriate signal that local spending must be reduced. Spending continues to rise, requiring more property tax dollars, leaving frustrated taxpayers at square one.
Historically, in exchange for property tax restraints, the state has provided increases in state aid to local units, but with no ceiling on spending. Subsequently, in periods of economic slack, the state then reduces state aid to local units, with local units once again raising property taxes. In the end, there is no restraint on local spending, and no property tax or income tax relief.
As a result of this year-over-year “bait and switch,” all six states bordering Nebraska have lower state and local tax burdens once fees such as those for license plates are factored into the mix. Nebraska’s lack of tax competitiveness with its neighbors has meant that the state has lagged behind its neighbors in terms of job and earnings growth.
The latest economic data show the result of Nebraska's failing to reform its tax system. Compared with its six geographically contiguous neighbors:
* Nebraska had the highest state and local tax burden as a share of income.
* Nebraska ranked fifth in job growth.
* Nebraska ranked fourth in GDP growth.
* Nebraska ranked fifth in wage growth.
To become more tax-competitive, I recommend that Nebraska:
* Limit unfunded mandates on local units and evaluate current mandates for economic soundness and competitiveness. Mandates that are not economically competitive should be eliminated or more properly shifted to the state government.
* Freeze state aid to local units at current levels for five years. Beyond the five-year period, the state should limit the growth in state aid to local units to the rate of growth in county population plus inflation.
* Cut income tax rates by 5 percent per year for the next five years. Thus, the highest income bracket declines from 6.84 percent to 6.5 percent in the first year. Under current Nebraska law, the first $5,599 of the income remaining after taking the standard deduction would currently be subject to an income tax rate of 2.46 percent. Eliminating this bottom-bracket tax liability, as proposed by the Platte Institute’s Strong Roots Nebraska plan, would mean relieving a single parent of $137 in tax liability. For a married couple filing jointly, the savings would be slightly higher, at $148.
* Eliminate the tax on tangible personal property (TPP). This tax results in excessive business compliance costs and added government bureaucracy to administer. Furthermore, this tax has reduced the capital per worker in the state. Iowa and South Dakota have eliminated their TPP. As a result of the TPP, capital per worker for Nebraska is $78,371, for Nebraska’s geographic neighbors it equals $105,605, and for the U.S. is $122,736.
Furthermore, the state’s growing state and local tax burden has exacerbated Nebraska’s key economic problems: out-migration or reduced in-migration of workers, or both, and a lack of business investment that creates higher-paying jobs and develops a more skilled workforce -- all reasons why reforms on the income tax side are as needed as property tax reform.
A responsible income tax reduction plan such as the one recommended above or as proposed by Strong Roots Nebraska, developed by the Platte Institute, are prudent courses for Nebraska and steps in the right direction.
Ernie Goss is an economics professor at Creighton University.