NCPA - National Center for Policy Analysis


December 15, 2005

Larger than expected growth in tax revenues is filling state coffers. Lawmakers have different priorities for emptying the coffers, but they need to consider investing their surpluses in improving state business tax climates, says the Tax Foundation's Chris Atkins.

Nebraska Governor David Heineman agrees, and he wants to use part of his state's surplus to reduce taxes. He proposes:

  • Returning Nebraska's four individual income tax rates to their 1998 levels (the top rate is currently 6.84 percent)
  • Restoring an exemption for construction remodeling labor in the state sales tax base
  • Accelerating a previously scheduled reduction in the property tax levy for schools

Governor Heineman should also consider cutting Nebraska's 7.81 percent top rate on corporate income, which is the third highest in the region. The corporate tax rate is important in attracting new business investment, but it's also important for maintaining neutrality in the tax system, explains Atkins:

  • A corporate rate that is higher than the individual rate, like the system in Nebraska, will distort the decision whether to incorporate or not.
  • A sound tax system will treat the decision to incorporate in a neutral fashion, neither encouraging nor discouraging the use of the corporate form.

If Nebraska goes ahead with its individual rate reduction without also reducing its corporate tax rate, the state risks introducing further distortion into the business tax climate. Such distortion will offset the positive gains that will undoubtedly be reaped from the reduction in individual income tax rates, says Atkins.

Source: Chris Atkins, "Nebraska Governor Recommends Tax Cuts," Tax Foundation, December 13, 2005.

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