October 20, 2014

Why Nebraska's Tax Reform Plan Failed

Jeremy Horpedahl

Assistant Professor of Economics, University of Central Arkansas
Summary

What would your family do with an extra $3,000 this year? Use the money for college education? Take more vacation? Pay off debt? Based on my research, if state governments eliminated all special privileges in their tax systems and lowered tax rates an equivalent amount, the average family could save thousands of dollars annually – all without any reduction in government services.

What would your family do with an extra $3,000 this year? Use the money for college education? Take more vacation? Pay off debt? Based on my research, if state governments eliminated all special privileges in their tax systems and lowered tax rates an equivalent amount, the average family could save thousands of dollars annually – all without any reduction in government services.

In my recent study published through the Mercatus Center at George Mason University, I discuss the principles for a privilege-free tax system that can responsibly bring this scenario to fruition. Most state income, sales and property taxes contain a variety of exemptions, credits and deductions – or special privileges – that you may know as loopholes. Not only are many of these loopholes unfair, in that only certain industries and individuals can use them, they mean higher tax rates for the rest of us. This is also inefficient; it leads to less economic growth over time and consequently lower incomes for everyone.

Using the state of Nebraska as a case study, I show how the typical family could save over $3,000 annually. Starting with the state’s biannual “tax expenditure” report, which estimates $5 billion in tax expenditures each year, the study isolates the categories that truly represent economic privilege and calculates the smaller but sizeable estimate of $2 billion. That translates into $1,000 for each Nebraskan – or $3,000 for a family of three.

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