States have always competed for business investment. Now they’re also in competition for footloose families.
States have always competed for business investment. Now they’re also in competition for footloose families.
T he Great Plains region was the center of action during the recently concluded third year of the state-tax revolution, propelling the ongoing drive toward competitive state tax systems, and Nebraska was the primary actor in this year’s efforts. In a year when tax reform was already the norm, the Cornhusker State raised the bar for the region and the country by simultaneously accomplishing major income- and property-tax reforms.
States commenced tax cuts en masse in 2021 and 2022 thanks to unexpectedly strong tax revenues and a rapid pandemic recovery. While robust revenues provided the means to cut tax rates, competition provided the motive. America’s increasingly mobile workforce could choose where to live, and so states needed to put their best foot forward. Nearly half of all states cut their income taxes during this period, signaling their economic competitiveness and family friendliness.
Tax cuts swept across the Great Plains in 2023. Montana and North Dakota enacted income-tax cuts, with the energy-rich Roughrider State inching its way toward full income-tax repeal. Oklahoma repealed its corporate-franchise tax and eliminated the marriage penalty in its income-tax code. South Dakota, which doesn’t levy a personal- or corporate-income tax, trimmed its already low sales tax. Lone Star State lawmakers enacted an $18 billion, Texas-sized property-tax cut. And even in Kansas, where income-tax reform was vetoed by Governor Laura Kelly, lawmakers nearly secured the supermajority necessary to override her veto. Tax cuts will probably soon prevail there too.
Yet Nebraska bested the Great Plains bunch. The Cornhusker State’s 2023 legislative session concluded with an impressive tax-reform package. L.B. 754 slashed income taxes, while L.B. 243 repealed and reformed property taxes. Governor Jim Pillen, who was a champion of tax relief during his first year in office, put his signature on both bills.
Nebraska’s historic tax-relief package cuts taxes by thousands of dollars per household and meaningfully enhances the state’s overall competitiveness. The 2023 package, once fully phased in, provides $1.3 billion in annual tax relief, which comes on top of $1 billion in annual tax relief enacted in 2022. That adds up to $3,000 in annual tax cuts per year per Nebraska household. Tax Foundation analysts assess that Nebraska’s reforms, if they were to be phased in immediately, would move the state up from the 29th to the 16th most competitive in the country.
Just two years ago, Nebraska’s income-tax rates topped out at 6.84 percent for families and 7.81 percent for businesses. In 2022, Nebraska lawmakers enacted a law to gradually reduce those rates to 5.84 percent. Now, thanks to the enactment of L.B. 754, Nebraska’s top rate will be slashed to 3.99 percent for both families and businesses. And lawmakers didn’t stop there.
Nebraska’s property tax averaged 1.54 percent of home value prior to tax reform, higher than the average property taxes of all its neighbors. With L.B. 243, lawmakers repealed the community-college portion of the property tax and expanded a tax credit to offset the rest of the local-property-tax burden, ensuring that all homeowners across the state will experience lower tax bills. Property taxes will be reduced by as much as one-sixth as a result of two consecutive years of reforms. All in all, Nebraska addressed its two biggest tax problems and is poised to do more in coming years.
This a good example for states across the country. Once an uncompetitive tax outlier, Nebraska explicitly embraced interstate competition. Governor Pillen championed, and testified in favor of, this year’s reform, describing it as “a dire need for Nebraska,” after neighboring Iowa passed a bill in 2022 to slash the Hawkeye State’s income-tax rate from 8.53 percent to 3.9 percent by 2026. Interstate competition means that both states will become national tax-reform leaders, and families in both states will win.
States have always competed for business investment. Now they’re in competition for footloose families, too. Following the Great Plains, other states and regions will pick up the mantle in 2024. As Nebraska strives to prove, states that embrace tax competition might be rewarded with increased investment by both firms and families, while states that delay reform will be deprived of it.
Michael Lucci is a visiting economic-policy fellow at the State Policy Network. Jim Vokal is the chief executive officer of the Platte Institute.