Posted on: September 19th, 2016
Jobs and the economy remain top issues this election cycle, and once again, we find some of the smartest pro-growth leaders right here in the Midwest. Nebraska Governor Pete Ricketts is holding true to his promise from earlier this year to grow the state’s economy by creating a more reliable, less destructive tax system.
In 2017, Nebraskans will commemorate the 50th anniversary of their state’s current tax system; in 1968 Nebraska eliminated state property taxes and head taxes in favor of individual and corporate income taxes and sales taxes.
According to this Platte Institute report, the genesis of this tax strategy occurred in the late 1940s, when advances in agricultural technologies and production efficiencies created a need for an expansion in manufacturing and employment opportunities. Well-meaning elected leaders created a state agency to attract and expand certain industries.
Unfortunately, the Cornhusker State now is reliant on an antiquated, high corporate income tax rate system and alarming per capita spending on so-called “economic development” tax incentives that are doing little to actually grow the state’s economy. In fact, it’s this damaging twisted logic that is creating a number of problems with Nebraska’s corporate tax system.
Unfortunately, this approach is having a distortionary and destructive effect on the state’s ability to attract entrepreneurs, a significant indicator of economic growth and one of the most powerful instruments for employment growth.
The Tax Foundation suggests that state legislators should put into place a plan to reduce corporate tax rates based on specific revenue triggers while ridding themselves of “inefficient corporate tax credits” and expanding sales taxes on professional services to offset these gradual cuts in revenue.
The history of Nebraska’s individual income tax rate is also confounding. On average, every two years state leaders have seen fit to make adjustments to the number of brackets and relative rates since the tax was first imposed in 1968. And guess where all of those manipulations have ended up? The state has one of the highest rates in the Midwest. Arguably, this not-so-clever plan also contributes to Nebraska’s anemic entrepreneurial environment, as business income of many smaller companies is taxed on the business owners’ tax returns through the individual income tax code.
To make a bad situation worse for the nation’s most active job creators, Nebraska also taxes business equipment and other tangible personal property. According to the Tax Foundation and most clear-thinking economists, these taxes “disincentivize capital formation and imposes substantial compliance costs on Nebraska businesses. The state should consider approaches to reduce reliance on, or gradually phase out, tangible personal property taxes.”
Of course, the usual suspects, including the Center for Rural Affairs (CFRA), are sounding alarms, circling the wagons and pronouncing near-frantic concerns about budget projections and economic devastation while they continue their efforts to raise income taxes for all.
Instead they should be sounding alarms about the fact that from 1992-2014, Nebraska lost $3.07 billion in annual Adjusted Gross Income (AGI), nearly one-third of which fled to the no-income tax states of Texas and Florida.
Last month, Barry Kennedy, president of the Nebraska State Chamber of Commerce and Industry, emphasized that the top individual tax rate hits everyone earning just under $30,000 per year, which he calls “woefully uncompetitive.” According to Kennedy, “It acts as a disincentive to economic growth and hinders population growth. If Nebraska wants to attract and retain young talent and keep its retirees, state leaders must find a way for individuals and businesses to keep more of their own money.”
Governor Ricketts’ effort to replace his state’s Byzantine and destructively high tax scheme is on the right path. If he is successful he will be setting a great example for other growth-oriented governors.