by Sarah Curry, Policy Director, Platte Institute for Economic Research
Many economists will say the first essential ingredient for an economically prosperous state is a government sector that has sound fiscal policy, with reasonable and appropriate taxes, and that spends its money frugally on a core set of public goods. While Nebraska has been fiscally stable, it is becoming more evident that our tax policy is one of the most significant causes — if not the most significant cause — for Nebraskans to move to our identified competitor states of Arizona, Colorado, Florida, Iowa, and Texas.
In Removing Barriers in Nebraska Part Three: How Our Taxes and Spending Compare, we review U.S. Census Bureau data to identify key differences between Nebraska’s tax policy and its mostly faster-growing state competitors.
All of Nebraska’s competitor states provide lower tax burdens for one or more taxes. This difference is not measured solely by tax rates, but also in the amount of taxes Nebraska collects per person. By far, the largest difference is Nebraska’s income tax burden, which imposes greater costs on the investments that produce economic growth.
Nebraskans pay 52 percent more in personal income tax and 36 percent more in corporate income tax than the average tax burdens of Texas, Florida, Arizona, Colorado, and Iowa combined on a per person basis. To put that into perspective, Nebraska’s state and local governments collect over $1,000 more per person than the average of these other states.
It shouldn’t come as any surprise that one of the main reasons Nebraska has higher tax rates is that Nebraska’s government spending is substantially higher per person than these other states. While the average competitor state spends $8,840 per citizen per year, Nebraska spends $11,035. With Nebraska spending $2,195 more per citizen, our average spending is about 20 percent higher than the average of Texas, Florida, Arizona, Colorado and Iowa.
Taken individually, Nebraska’s total government spending is still higher than all five of the comparison states, by a fairly wide margin. Arizona’s government spending is almost $3,300 less per citizen per year, Florida’s is about $3,000 less per year, Texas is approximately $2,600 less per year, Colorado is about $1,300 less per year, and even Iowa spends almost $1,000 less per citizen per year.
Though the state’s tax structure is harmful to economic growth, we found the main reason for this wide difference in spending is the size of local government, which is also why local property tax is so high. Relative to other successful states, Nebraska’s local governments are too big and spend too much, spending 29 percent more than their counterparts in Arizona, Colorado, Florida, Iowa, and Texas.
On average, our comparison states also rely much more heavily on local option sales taxes than do local governments in Nebraska. If local governments in Nebraska were to reduce property taxes and replace their revenue with local option sales taxes, they would share more similarities to the local governments in the other comparison states.
State policymakers are beginning to acknowledge that for Nebraska to have a successful tax reform effort, the Legislature must offer a comprehensive approach that includes taxpayers from all walks of life, and addresses our reliance on property, income, and sales tax as a whole.
U.S. Census Bureau data provides a road map for these legislators, showing how Nebraska’s tax structure can be improved to more closely reflect the tax structure of these successful states that rely on more on taxing consumption and less on taxing income and property.
Of course, a change in tax structure alone will not end Nebraska’s debate on how much government should spend. But even if government spending in Nebraska were to remain at the same levels, our economic rivals are showing that over the long haul, greater numbers of Nebraskans and Americans are choosing to live, work, and invest in states that allow citizens to keep more of the money they earn.