Guest Opinion: Principles of good tax policy (2024)

Gov. Jim Pillen is embarking on a policy campaign to sell a new plan meant to lower property taxes. He’s hitting the road making his pitch to voters and state senators in communities around the state.

If you have planned a summer vacation, you know that a great trip does not happen on its own — it takes vision, planning and strong execution. The same is true for state tax policy. Before embarking on a restructuring of Nebraska’s tax system, it’s important to set goals and map out the path to our ideal destination.

We can all agree we want to arrive at a destination where Nebraska has a tax system that allows individuals and businesses to thrive, for our state to compete with our peers, and a system that is fair and equitable for all. How we get there, and what principles we follow, are the primary questions at hand. Achieving meaningful tax reform requires more than a big goal; it must be built upon sound tax policies that will endure for generations to come.

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Prior to 2023, Nebraska consistently ranked high among peer states for income tax rates and property tax burdens. Unfortunately, budgets were tight during that time, which limited fiscally responsible means for reducing these taxes. Regardless, our state leaders knew Nebraska had to perform better if it was to successfully compete with peer states for business and job growth and personal prosperity.

Finally, in 2023, Nebraska had its shot. Due to a revenue surplus, in part because of the COVID crisis, Nebraska was able to slash its income tax rates to 3.99% over five years and also eliminate community colleges’ ability to levy property tax. These changes significantly enhanced our state’s tax code; however, they did not happen overnight, and they did not happen by accident. Despite this reform, Nebraska still has the seventh highest property tax rate in the country. As we look forward now, we need to consider what goes into good tax policy, and how Nebraska can ensure we get the best outcome for our state.

Budgetary restraint

Foundational to any good tax policy is budgetary restraint. Although Nebraska was able to accomplish significant reforms due to excess revenue, only budgetary restraint can provide sustainable tax relief. That is, future tax reforms should not rely on a tax shift, but instead focus on capping local spending growth and promoting budget restraint.

Simplicity

Good tax policy is also rooted in simplicity. A tax code that is easy to understand and comply with reduces administrative costs and economic distortions. Nebraska’s recent reforms aimed to simplify the tax code by reducing the number of brackets and lowering rates. Eliminating the community college property tax simplified the overall property tax system. Future reforms should continue this trend towards simplicity, making the tax system as straightforward as possible while ensuring that elected officials are accountable to the taxpayer.

Transparency

Transparency is another critical principle of foundational tax reform. A transparent tax system ensures that taxpayers understand how their money is being used and can hold government officials accountable. Transparency also means keeping accountability at the level of government most accessible to the taxpayer. This means local decisions should stay in the hands of local elected officials, not bureaucrats in Lincoln. Nebraska should continue to prioritize transparency, building trust with taxpayers and ensuring that public funds are managed responsibly.

Economic growth

Lastly, economic growth should be a guiding objective. Tax policies that promote investment, job creation and economic expansion benefit all Nebraskans. By keeping tax rates competitive and reducing burdensome regulations, Nebraska can attract new businesses and retain existing ones, driving economic prosperity. Legislators should reject ideas that raise taxes on business inputs and instead focus on policies that spur economic growth throughout our state.

The principles of budgetary restraint, simplicity, transparency and economic growth form the bedrock of sound tax policy. As Nebraska looks to further improve its tax system, these principles will guide us toward a fairer, more prosperous future for all. In the next part of this series, we will explore specific policy solutions to achieve property tax reform, building on this strong and principled foundation.

In conclusion, it is wise to have a clear understanding of the objective before embarking on the journey. For Nebraska, the objective should be statewide population and job growth, business creation and personal prosperity, partnered with state and local spending controls and fiscal policies that help sustain Nebraska’s performance, even through economic turbulence.

Jim Vokal, of Omaha, is chief executive officer at the Platte Institute and the host of the Nebraskanomics podcast. He wrote this for the Nebraska Examiner. Nebraska Examiner is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Nebraska Examiner maintains editorial independence.

Two-part commentary

This is the first in a two-part series outlining good tax principles and the specific recommendations from the Platte Institute to achieve property tax reform in Nebraska.

Today:

Principles of good tax policy.

Coming Wednesday:

Foundational property tax relief is within our reach.

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Guest Opinion: Principles of good tax policy (2024)

FAQs

What are the criteria for a good tax policy? ›

A good tax system should meet five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease. Although opinions about what makes a good tax system will vary, there is general consensus that these five basic conditions should be maximized to the greatest extent possible. 1.

What are the four characteristics of a good tax? ›

Four characteristics make tax a good tax and they are: certainty, equity, simplicity and efficiency. Certainty is characteristics by which every tax payer must be certain how much tax does he or she own, when payment of tax is due and how it should be paid.

What are the principles of the US tax system? ›

The Five Principles. The IRS uses five main principles to guide them in enforcing this system. These principles are (1) neutrality, (2) efficiency, (3) certainty and simplicity, (4) effectiveness and fairness, and (5) flexibility. As you can imagine, managing the U.S. tax system is a big job!

What are two principles that help determine the fairness of a tax? ›

Two criterion used to measure fairness in taxes are benefits received and ability to pay. According to the benefits received principle, those who receive or benefit from public services should pay for them.

What are optimal tax policies? ›

Optimal taxation theory attempts to derive the system of taxation that will achieve the desired revenue and income distribution with the least inefficiency—that is, that interferes least with market participants making Pareto optimal exchanges—economic transactions that make both parties better off.

What are the three criteria for effective taxes? ›

Criteria for Taxation: Equity, Simplicity & Efficiency.

What are the principles of tax analysis? ›

The principles of tax analysis and cost-benefit analysis are presented with a focus on the role of public policy in improving economic efficiency, promoting the goals of equity and social justice, and improving equity by altering the distribution of wealth and income.

What are the three tax structures? ›

progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.

What are the principles of tax equity? ›

Horizontal equity means that taxpayers who are similarly situated pay the same amount of taxes. Vertical equity requires that those who have more income (or property) pay more in taxes because they are better able to pay.

What are the two principles of taxation? ›

These are: (1) the belief that taxes should be based on the individual's ability to pay, known as the ability-to-pay principle, and (2) the benefit principle, the idea that there should be some equivalence between what the individual pays and the benefits he subsequently receives from governmental activities.

What is the fairest tax system? ›

Supporters of the progressive system claim that higher salaries enable affluent people to pay higher taxes and that this is the fairest system because it lessens the tax burden of the poor.

How to tax fairly? ›

State policymakers can make the tax and revenue system more equitable by strengthening taxation of Californians with high incomes and wealth while providing more support to Californians with low incomes and Californians of color who have been blocked from income- and wealth-building opportunities.

What are the 3 criteria used to evaluate taxes explain? ›

The answers matter because various combinations of tax bases and rates can raise the same amount of revenue. Three long-standing criteria—equity; economic efficiency; and a combination of simplicity, transparency, and administrability—are typically used to evaluate tax policy.

What is one of the criteria that makes a tax fair? ›

ability to pay

A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay tax at different rates. Wealth includes assets such as houses, cars, stocks, bonds, and savings accounts. Income includes wages, interest and dividends, and other payments.

What are the three types of tax policy? ›

progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.

What are the main points of the two principles of taxation? ›

These are: (1) the belief that taxes should be based on the individual's ability to pay, known as the ability-to-pay principle, and (2) the benefit principle, the idea that there should be some equivalence between what the individual pays and the benefits he subsequently receives from governmental activities.

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