Tag Archives: Nebraska

States Aim to Eliminate Corporate and Individual Income Taxes

Although the prospects of fundamental tax reform on the federal level continue to look bleak, the sprigs of beneficial tax proposals in states across the US are beginning to grow and gain political support. Perhaps motivated by the twin problems of tough budgeting options and mounting liability obligations that states face in this stubborn economy, the governors of several states have recommended a variety of tax reform proposals, many of which aim to lower or completely eliminate corporate and individual income taxes, which would increase state economic growth and hopefully improve the revenues that flow into state coffers along the way.

Here is a sampling of the proposals:

  • Nebraska: During his State of the State address last week, Gov. Dave Heineman outlined his vision of a reformed tax system that would be “modernized and transformed” to reflect the realities of his state’s current economic environment. His bold plan would completely eliminate the income tax and corporate income tax in Nebraska and shift to a sales tax as the state’s main revenue source. To do this, the governor proposes to eliminate approximately $2.8 billion dollars in sales tax exemptions for purchases as diverse as school lunches and visits to the laundromat. If the entire plan proves to be politically unpalatable, Heineman is prepared to settle for at least reducing these rates as a way to improve his state’s competitiveness.
  • North Carolina: Legislative leaders in the Tar Heel State have likewise been eying their individual and corporate income taxes as cumbersome impediments to economic growth and competitiveness that they’d like to jettison. State Senate leader Phil Berger made waves last week by announcing his coalition’s intentions to ax these taxes. In their place would be a higher sales tax, up from 6.75% to 8%, which would be free from the myriad exemptions that have clogged the revenue-generating abilities of the sales tax over the years.
  • Louisiana: In a similar vein, Gov. Bobby Jindal of Louisiana has called for the elimination of the individual and corporate income taxes in his state. In a prepared statement given to the Times-Picayune, Jindal emphasized the need to simplify Louisiana’s currently complex tax system in order to “foster an environment where businesses want to invest and create good-paying jobs.” To ensure that the proposal is revenue neutral, Jindal proposes to raise sale taxes while keeping those rates as “low and flat” as possible.
  • Kansas: Emboldened by the previous legislative year’s successful income tax rate reduction and an overwhelmingly supportive legislature, Kansas Gov. Sam Brownback laid out his plans to further lower the top Kansas state income tax rate from the current 4.9% to 3.5%. Eventually, Brownback dreams of completely abolishing the income tax. “Look out Texas,” he chided during last week’s State of the State address, “here comes Kansas!” Like the other states that are aiming to lower or remove state income taxes, Kansas would make up for the loss in revenue through an increased sales tax. Bonus points for Kansas: Brownback is also eying the Kansas mortgage interest tax deduction as the next to go, the benefits of which I discussed in my last post.

These plans for reform are as bold as they are novel; no state has legislatively eliminated state income taxes since resource-rich Alaska did so in 1980. It is interesting that the aforementioned reform leaders all referenced the uncertainty and complexity of their current state tax systems as the primary motivator for eliminating state income taxes. Seth Giertz and Jacob Feldman tackled this issue in their Mercatus Research paper, “The Economic Costs of Tax Policy Uncertainty,” last fall. The authors argued that complex tax systems that are laden with targeted deductions tend to concentrate benefits towards the politically-connected and therefore result in an inefficient tax system to the detriment of everyone within that system.

Additionally, moving to a sales tax model of revenue-generation may provide state governments with a more stable revenue source when compared to the previous regime based on personal and corporate income taxes. As Matt argued before, the progressive taxation of personal and corporate income is a particularly volatile source of revenue and tends to suddenly dry up in times of economic hardship. What’s more, a state’s reliance on corporate and personal income taxes as a primary source of revenue is associated with large state budget gaps, a constant concern for squeezed state finances.

If these governors are successful and they are able to move their states to a straightforward tax system based on a sales tax, they will likely see the economic growth and increased investment that they seek.

Keep an eye on these states in the following year: depending on the success of their reforms and tax policies, more states could be soon to follow.

The New York Times Database on Government Granted Privilege

Louise Story of the New York Times has earned her salary many times over this week. She and her colleagues have created a searchable database of targeted incentives (read: privileges) that states offer particular firms. To my knowledge, it is the most comprehensive database on the subject to date, containing information on over 150,000 awards.

Among her findings: Alaska, West Virginia, and Nebraska give up more per resident than any other state and Oklahoma and West Virginia “give up amounts equal to about one-third of their budgets, and Maine allocates nearly a fifth.”

Here is the database.

Also check out her articles, “How Taxpayers Bankroll Businesses,” “Winners and Losers in Texas,” and “When Hollywood Comes to Town.”

Readers of this blog know where to go for more information on the economic and social costs of government-granted privilege.

Local Governments in the United States

From an article in Stateline:

There are 89,476 local governments in the United States. They include counties, cities, villages, towns and townships, as well as special districts that handle utilities, fire, police and library services.

The authors of this article look at the number of local governments in each state relative to its population, finding that the average for the United States is 3,451 people per unit of local government. North Dakota (249), South Dakota (411), and Nebraska (687) were on low end of the spectrum whereas Hawaii (71,595), Maryland (22,553) and Virginia (15,658) where on the high end.

Illinois, in particular, finds itself in an interesting situation in this data. Although the state has only 1,835 people per unit of local government, its total number of local governments (6,944) is far greater than any other state. To put this into perspective, Pennsylvania (4,871) and Texas (4,835) rank second and third, respectively, for states with the highest number of local governments.

So what explains the proliferation of local governments in Illinois? One likely cause is a debt loophole in the state’s constitution. Specifically, the 1870 Illinois Constitution limited the amount of debt that a unit of local government could issue but allowed localities a dodge: the special district. In other words, each unit of local government was allowed to get around its legal debt limit via the creation of a special district. Since that time, the state has created 3,249 special districts. This phenomenon of special district creation as tool for expanded fiscal reach is investigated by Bennett and DiLorenzo in their book, Underground Government.

Does Illinois’s situation suggest the need for consolidation? If so, what is the optimal number of governments for a state to have and how is this determined? It’s not necessarily obvious at first glance: what are these governments, how did they arise, what do they do, and how do they finance their operations?

The concept of consolidating governments to increase efficiency has been the root of much debate in public policy. However, as Ostrom, Tiebout, and Warren argue,

It would be a mistake to conclude that public organizations are of an inappropriate size until the informal mechanisms, which might permit larger or smaller political communities, are investigated.

Thus, when debating over whether or not consolidation will increase efficiency, it’s necessary to understand the institutional environment in which the units of local government were created as well as the underlying informal mechanisms connecting them.