My name is Katherine Loughead and I am a Senior Policy Analyst at the Tax Foundation, a not-for-profit, impartial tax policy research organization based in Washington, DC. We are not taking a position on legislation, but I do appreciate the opportunity to exchange some information points with you today.
First of all, I would like to commend this committee for taking the time to discuss tax modernization. These bills are a key conversation starter when it comes to discussing structural improvements to make tax laws less burdensome for Nebraskans while making the state more attractive to potential new employers and residents.
Tax modernization is an important goal because the underlying structure of Nebraska’s tax law has not changed significantly since 1967, when individual income tax, corporate tax, and sales tax were first introduced. The state’s economy has developed quite a bit since then, but most of the tax laws that affect economic activity in Nebraska were written with the 20th century economy in mind and have become a barrier to government investment. Our State Business Tax Climate Index is an annual study that compares the tax structures of states based on more than 120 political variables. In the index, Nebraska is slightly below average in terms of overall competitiveness – 28th out of 50 states.
With that in mind, the Tax Foundation released a report last month that identified the areas of Nebraska tax law that most affect its competitiveness. The report makes suggestions on how each of the main taxes can be improved to promote economic growth while making tax legislation simpler, more stable, more neutral and more transparent.
I don’t have time to discuss all of our findings now, but I would like to provide a brief overview.
Nebraska has high property taxes, which is a common problem that policy makers are likely to want to address as part of a larger tax modernization plan. In recent years, in response to taxpayers ‘concerns, the state has used increasing amounts of state taxpayers’ money to offset local property taxes paid. As long as local spending patterns do not change, property taxes will remain on an uptrend due to rising valuations. Our report discusses how tighter property tax caps – or taxpayer transparency measures similar to Utah’s Truth In Taxation Act – can help slow the rate of growth in property tax collection. The report also examines how the state government can structurally compensate for these revenue requirements in a structurally sound manner.
However, Nebraska’s lack of competitiveness is due not only to property taxes, but also to state income taxes. Nebraska’s highest marginal corporate and individual income tax rates are regionally and nationally high. Numerous studies have shown that high income tax rates reduce the economic growth of the state. And states with high marginal individual income tax rates consistently suffer from emigration, while their competitors with lower taxes attract new residents.
Beyond tax rates, however, there are a few other points worth addressing, such as Nebraska’s global low intangible tax income tax (GILTI), which this committee examined last week. Nebraska’s heavy reliance on material wealth taxes, which hinder capital investment; the capital tax, which has become a nuisance tax more than anything; and inheritance tax, which affects Nebraskans who inherit relatively small amounts of property.
One of the best ways to address these issues is to modernize the sales tax base for additional consumer goods and services. Since the introduction of sales tax, Nebraska’s sales tax base has deteriorated by nearly half. As the base has narrowed, tax rates have increased to make up for the lost revenue. Modernizing the sales tax base would generate additional state and local revenue to offset other growth-enhancing reforms while also making tax legislation more neutral. However, it is important to remember that broadening the sales tax base should focus on end-user transactions – not business-to-business sales transactions – as taxing corporate inputs usually results in these taxes being passed on to consumers in an opaque manner the form of higher prices.
A good comprehensive tax modernization plan usually takes time to develop and implement, but states that make the effort benefit, including a regional competitor in Indiana, and neighboring Iowa is also beginning the reform phase. I recommend the legislature’s focus on the beginning of the tax modernization process, as this and subsequent legislative sessions will provide the unicameral service with an excellent opportunity to make progress towards simpler, more stable, less burdensome and more competitive tax legislation.
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