In a report released Oct. 13, the D.C.-based Tax Foundation recommended changes to Nebraska’s tax code that would fund tax cuts for the wealthy through a tax increase on low- and middle-income families. Such tax changes also could lead to revenue losses that squeeze funding for vital services like quality schools and roads, which are proven to grow economies.
The report recommended Nebraska broaden the sales tax base to more services in order to fund cuts to personal and corporate income taxes. While broadening the sales tax base to tax services would help our tax code better reflect consumer spending habits, using that revenue to to buy down income tax rates would result in the vast majority of Nebraskans paying more in overall taxes while the wealthiest receive large tax cuts, based on prior analysis of similar tax shift proposals.[1]
The sales tax is the most regressive of Nebraska’s taxes, meaning that it falls heaviest on those least able to afford it. The sales tax increase most Nebraskans would experience under such a tax shift is likely to be much greater than the decrease in their income taxes. Many Nebraska families were already struggling to afford basic needs before the pandemic struck, with one in eight Nebraskans experiencing food insecurity[2] and one in ten living in poverty.[3] Broadening the sales tax to include essentials like groceries would make it even harder for such families to make ends meet.
Income tax cuts are often proposed in the name of economic growth. Academic research, however, fails to reach consensus regarding the connection between income tax cuts and economic growth.[4] The revenue losses created by cutting income taxes, however, could hinder investments in infrastructure, schools, public safety and other services that Nebraska residents and businesses care about. In their research on the effect of tax cuts and budget cuts on economies, Wichita State University professors Arwiphawee Srithongrung and Ken Kriz found that, over time, the negative economic effects of funding cuts normally significantly outweigh any positive economic impact of tax cuts.[5]
The experience of our neighbors in Kansas highlights the risks that come with income tax cuts. Kansas cut income taxes in 2012, and instead of the promised economic boon, saw nine rounds of budget cuts over four years, leading to crumbling roads, school years ending early because of a lack of funds and waiting lists for disability services that were several years long. Kansas’s economy underperformed the U.S. economy in the years following the tax cuts as its GDP growth was 6.1% from quarter four of 2012 to quarter three of 2016 while national GDP growth was 8.3%. Kansas private job growth rate was less than half of the national rate in that same period.[6]
Furthermore, thanks to the passage of LB 1107, Nebraska has already taken steps down the Kansas path,[7] and if legislators find it difficult to balance the budget under current tax rates, the task will likely be made even taller if the tax shift discussed in the report is enacted in Nebraska.
Given the precarious fiscal situation the state already faces along with the tremendous uncertainty that exists because of the ongoing global pandemic, now is not the time for Nebraska to consider enacting the risky tax changes discussed in the recent Tax Foundation report.