The economy of the State of Nebraska is a shining star on many fronts. According to the state’s Department of Economic Development website, in 2011 Nebraska ranked 1st in the country in the lowest combined debt and pension liabilities, was the 3rd best state for job seekers, 9th in growth and innovation, 5th in pro-business legal climate, 5th most pro-business climate and 2nd best run state, along with achieving top ten placement in many other categories that address quality of life, leadership and growth in emerging industries and workforce training.
And yet, in true Nebraska form, state officials continue to look to their laurels to improve the lives of their hardworking citizens. Just as 19th century settlers transformed this barren land from near desert conditions to become the breadbasket to the world, the Cornhusker State is considering ways to transform their position in the battle to attract well-paying jobs and highly qualified employees.
Key to its 21st century transformative vision is the Nebraska tax reform debate, which is slipping into high gear. A joint report released earlier this month by the Tax Foundation and The Platte Institute for Economic Research, Building on Success: A Guide to Fair, Simple, Pro-Growth Tax Reform for Nebraska, proposes several well thought-out options for how to improve opportunities and secure the state’s competitive advantage.
Options include increasing the personal exemption from $6,100 of $7,500 per person for low income earners, reducing the top rate for individual income tax from 6.84% to 5.5% to bring it in line with neighboring states, and flattening the corporate income tax rate to 5.5% across all business types while reducing tax incentives to mirror the lowered rate. Certain triggers would cut corporate rates to 4% and then 3% when the state reaches revenue goals. Other options include capping property taxes, which are currently among the highest in the country and three options for broadening the sales tax base.
While the scenarios laid-out in the report’s Action Plan seem fair and reasonable, flawed thinking is found in the details of the individual income tax option. While simplifying the tax code by reducing the number of tax brackets from four to two, this plan retains a progressive PGR +0.19% imposition of taxes on those earning above $35,000.
A better approach is to flatten out the rate for all workers with the exception of low-income earners. Distortions that occur with progressive tax rates are detrimental to growth. Flattening the tax code offers several real advantages for taxpayers and a state’s economic stability, such as transparency, simplicity, cost savings in tax preparation, and removing the temptation to game the system.
Progressive taxation is seen by some as the easier approach, politically. But in reality, progressive tax codes hinder future reform measures because lower income brackets have no incentive to vote down the rate applied to top earners.
In my own home state of Missouri, our flat rate of 6% is applied beginning at $17,200 ($9,000 income plus the standard deduction and personal exemption), so all taxpayers have the shared incentive to lower rates across the board.
If Nebraska’s leaders are committed to their vision of real, sustained growth, they will consider modifying the proposed personal income tax option by removing progressivity in favor of a system that encourages success rather than punishing it.