While everybody seems to like lower taxes for themselves, different groups in Nebraska come to different conclusions about how high taxes should be in general. One reason is that there is also disagreement about what kind of activity really grows the economy.
Some groups, particularly those found within government, believe that government programs drive economic activity. Others advocate for smaller government and claim that increased government spending undermines economic growth by taking resources from the private sector and putting them into a less efficiently run government.
Which side is right?
When evaluating government spending decisions, secondary consequences and long-term effects on all residents must be taken into account. It is easy to see the immediate effects of a given policy benefiting certain special interests, but harder to look ahead for the long-term effects on citizens as a whole.
While we weathered the recession better than most, Nebraska has not seen the employment or population growth the country’s fastest-growing states experienced over the last decade. Nebraska lagged behind the national average in both measures, while many people are choosing to move to other states rather than stay in Nebraska.
This shows that there is room for improvement. Nebraskans and their lawmakers have to make a choice: will they attempt for government to spend our way toward growth, or reform our tax code and remove other barriers that can help Nebraskans raise their own standards of living?
Some have argued for more economic development programs targeted at specific businesses or public sector interests. Many school administrators making six-figure salaries believe more K-12 funding would grow Nebraska’s economy.
School officials can’t be totally faulted for believing this, since tax dollars clearly provide a great improvement in their quality of life. But beyond a certain point, increased spending can become counterproductive whether the beneficiaries work for the government or private businesses. This is because no matter the benefits ascribed to these plans, the costs are still paid by taxpayers who have to give up their own economic plans.
Let’s take ConAgra for an example. In the 1980s, the tax burden was too high on the company and they threatened to move to Tennessee, where their overall tax burden would be lower. The state put together an incentives package aimed at keeping ConAgra in Nebraska. In the short-term, this policy worked for one narrow group.
Now, let’s fast-forward to 2015 when ConAgra decided to cut 1,500 jobs and move its headquarters to Chicago.
Over those thirty years, how many other businesses who did not receive state incentives left Nebraska due to high taxes? A better long-term policy would have been to reevaluate the state’s tax structure and make it friendlier for all businesses, not just ConAgra.
While Nebraska bested Tennessee in one instance using an incentive package, Nebraska has lost over $3 billion in annual income to out-migration on net, while Tennessee has gained over $12 billion.
More expensive government programs didn’t cause Tennessee’s increase in wealth. Tennesseans pay the 4th lowest state and local tax burden in the country. Voters there have passed a constitutional amendment banning personal income tax in the state, and the state’s income tax on dividends and interest is now being phased out over the next six years.
When someone says the solution is an economic development program, they are acknowledging the existing business environment is not conducive to productivity and needs to be fixed. Unfortunately, these proposed fixes come at a great cost to others in taxes. Taxes discourage productive behavior, particularly in Nebraska, where high tax rates are imposed on work, saving, and investment. Government spending also displaces private-sector activities. Every dollar spent by the government is one less dollar spent in the productive sector of the economy.
The government’s role in the economy should be focused on benefiting everyone — to maximize the individual freedom that produces economic growth and prosperity, rather than giving special breaks to selected companies or expecting government to be our job creator through “targeted investments.” While there is certainly a core role for government that assists economic activity, Nebraska’s state and local spending passed that point long ago.