 Yeah, we're back real live on a Thursday morning. This is talking tax talking tax with Tom Tommy. I'm a chica and We're talking today with Jim Smith who is a former state senator in Nebraska and The leader of the blueprint in the Breska program, which we find very interesting to discuss Hence the name of our show is tax reform blueprint in Nebraska. Welcome to the show you guys good morning, and let me just Give a couple of words of introduction for Jim Jim is the executive vice president of the Platt Institute in Nebraska Which is an organization similar to the tax foundation here in Hawaii? there a Tax watchdog organization and they are Looking out for policy initiatives dealing with tax and public finance just like we are Jim is their executive vice president and chief strategy officer. Did I get that right? That's correct. Okay, great and The reason why we hear this morning is to talk about this blueprint for tax modernization That Nebraska has recently initiated Could you could you tell us a little bit about the Platt Institute first and then maybe give us an idea of what this blueprint Is all about and tell us whether it's the law now or to be Still working on it. Yes, it is a framework currently and we're hoping that we will be able to have the legislature develop legislation around this Framework and that it becomes a bill in front of the legislature in the 2022 legislative session Regardless of whether that happens or not We have a gubernatorial election next year and we expect that it will continue over to 2023 in discussion so So it's not currently legislation, but it is a recommendation For a framework in which to build the best legislative policy around tax modernization And if I if I could maybe mention that I Also wear a hat as president of blueprint Nebraska Blueprint Nebraska is in the process of phasing out. It's a three-year-old initiative And it was the first and largest comprehensive strategy for economic prosperity growth and competitiveness across the state It was established by governor rickets and the university of Nebraska president Hank bounds And it involved about 21 leaders In business from across the state. My chair is Lance fritz who's the ceo president of union pacific railroad that is headquartered here in Omaha and blueprint Nebraska was really about building a framework for Making our state improving our state's competitiveness among our pure states And before we before we go further on that. What is Nebraska like? Um, what issues does it have in its economy now? Uh, how does it compare against its competitive states? And and are the young and vital people leaving Nebraska the brain dreams such as we have here in Hawaii? Exactly the points you just made Were the reasons that we embarked on this initiative our standing right now is that we are consider a high tax state even among our pure states which are the border states to Nebraska our property taxes Ranked 41st in the country And that is I mean 41st high or 41st low 41st highest And so when you look at the rural components of Nebraska the ranchers the farmers It's a huge burden to them To have that high of property taxes Especially when they do not necessarily have the type of representation. They believe that they should have In low local jurisdictions like uh, like counties and school districts and so on Corporate, uh, we rank in the top half States and corporate taxes. We are not competitive and we have to rely on Business incentives in order to be Uh as competitive as we are today with our regional states And then when you look at uh individual taxes, uh, we are middle of the pack I mean if you look at the brackets and the rates, we're middle of the pack But the problem is that Our highest bracket, uh kicks in at a mere $31,000 a year So someone that is uh at the low end of the or at the you know, the beginning end of the spectrum of career Uh, and they're just starting their career Uh, they have a huge burden on them, uh entering into the workforce And then the person at the other end of the spectrum as well that is retiring and is moving into a fixed income structure Uh, they have a huge burden as well. So taxes. We are highly, uh Non-competitive with our peer states Um quality of life no one can compete with Nebraska for quality of life. We may not be a paradise Like Hawaii. However, we uh, we have a great quality of life Smaller towns smaller types cities Great infrastructure things of that nature now. We have a workforce issue like everyone does We have a workforce issue And uh, and we are working to develop the right types of jobs higher paying jobs Well, what types of jobs are you trying to develop? I mean, is this a defensive move in terms of You know retaining the best parts of Nebraska or is it um, you know an offensive move Where you were trying to incentivize new sectors in the economy Yeah, well, I would say it's a combination. We have a a problem without migration Particularly among the 18 to 34 year old population our rural communities are losing that 18 to 34 year old population and the stem the stem uh The stem degrees that are issued in Nebraska oftentimes Those receiving those stem degrees are leaving our state for uh for higher paying jobs So that's part of the problem. Uh, so so on a defensive move We're trying to slow that outward migration But on an offensive move, we're saying, hey, look, we do really well in diverse manufacturing in our state We do really well in agriculture. Uh, we great producers for agricultural products banking finance Very strong as well and we have a lot of entrepreneurs Uh, a lot of people start great companies right here in Nebraska Unfortunately, they move them to larger cities to compete for the workforce. So on an offensive side of this, we're we're looking to make certain that, um We uh make investments around research and development So we have greater innovation and automation and those core businesses. So around around manufacturing agriculture banking and finance We want to make the right types of investments so that we uh create the jobs of the future around innovation and automation Okay, now in in terms of Nebraska's tax structure um We had uh, I had talked with some of your staff that that told me that your State has an inheritance tax that's kind of second to none. Um In a way, so what's what's that all about and and uh Why do you think that needs to be changed? Well, I think as part of an overall tax, uh strategy reform Inheritance tax is is a part of that So we're one of six states that has an inheritance tax And among those that has an inheritance tax, we have the highest rate The problem there is that is a disincentive for our retirees to remain here in Nebraska So it is an issue and it's not a tax only on the wealthy as some portrayed as it is a tax across the board on incomes Now our local governments are our counties had become quite dependent upon That type of tax as a slush fund if you would and we're going to have to address that and our plan provides for revenues to be able to backfill the gaps in Local funding that is currently received from inheritance tax revenues Tim, what do you think of the Possibility that tom and I have discussed earlier of knocking off the inheritance tax in every one of the 50 states and allowing the federal government to have You know the policy choices and the revenue From a sort of a revamped state tax Well, I think I would agree with everything other than laying the federal government take that over right I would prefer to see it Eliminated at the state level And now granted. I know that the federal government may take advantage of that But I'm not a I'm not a fan of the inheritance tax. I I just don't think that it achieves what it's intended to do and it just doesn't create certainty In revenue sources for local governments Or for the okay, let me try to Yeah, let me try to kind of Uh folks discussion along along this line. You had mentioned that the blueprint Nebraska was a measure to Restore some level of competitiveness among, you know, between Nebraska and intermember states What why do you feel that there is a need? for competitiveness if you Are already saying well, look, you know our quality of life is second to none Well, why do you have to compete? Well, because that quality of life actually is is present in many of our pure states as well In the midwest people choose to be in the midwest for reasons that quality of life The pace of life and things of that nature. So we're competing With our peer states on things beyond just that quality of life So when you're looking at Kansas, South Dakota, North Dakota Wisconsin and so on a lot of those states can can say they they have similar quality of life opportunities for their citizens We are losing. We have a an outward migration particularly for the 18 to 34 year old age group, which is the lifeblood of any economy and we have to Take make certain that we create Opportunities to retain and I hate to say to use the word retain. It sounds like we're We're, you know shackling them to their gas But we want to make Nebraska more attractive to where they do not leave And for those that are outside looking for a place to begin their career That we want to make certain Nebraska is is considered as a at the top of their list So the essence of this is you would knock down the income tax You would knock down the corporate income tax, I guess also and you would do a consumption tax No, that is not our proposal. There is a consumption tax. Well, there is well. Yes. Yes part of it There is a purely consumption tax proposal that is Out there right now in Nebraska That's so it's called the epic consumption tax. I want to make certain we're not talking about that So you're you're partly right that in blueprint Nebraska's tax modernization plan We have a very narrow sales tax base in Nebraska. We exempt a considerable amount of goods In our economy and we exclude services from taxation in our economy So we have one of the most narrow tax bases among our competitor states We can afford to expand that sales tax base avoid taxing business inputs avoid taxing goods like foods And medical services that you know, we don't want to do harm to those at the low end of the income spectrum That includes medicines Right, we we can avoid those items We can avoid taxation of business inputs and we can generate revenues that will allow us to buy down The income tax individual income tax to where no one under $50,000 individually pays an an individual income tax and then over 50 50,000 dollars There's a flat tax a low flat tax. It's under 5% and for corporations We mirror that on the corporate side of things as well So Expanding the sales tax base in a way that is not harmful to individuals At the low income side, we can buy down income taxes and what we do is we generate growth in the economy our modeling shows that we can generate growth in our economy and local option sales taxes Will increase to where we can buy down property taxes to the tune of almost 20 to 25 And we're going to do that through state aid to education. So that is what our plan is in a nutshell Yeah, and you also have a plank whereby you're going to knock off the local option inheritance tax as well, right? I mean the the The framework as I read it was You know, right now you have these tremendous holes in your sales tax You would basically fill fill those up, you know, maybe you tax more services. Maybe you tax more tangible personal property But in return You knock off the inheritance tax because it kicks in at such a low level and And you bite on the income tax a bit So what are the tax rates that you contemplate? personal income tax and corporate income tax So of individual it'd be zero percent up to $50,000 for an individual And over that we would buy that down to 4.99 percent But that would have to be faith. It had to be gradually phased down to 4.99 over about six years The on the corporate side of it It would be four percent For $100,000 And then over $100,000 It would match The individual That's pretty attractive. What about the consumption tax? What is the rate of that? So you mean the other plan? Does it know your sales tax sales tax sales tax? So our sales tax is Five five and a half percent at the state level And local government entities local count local cities Have can can put up to two percent on top of that So some counties some counties there's nothing no taxes and some are up to two percent Let me just straighten myself out on one thing the the counties Recover some of that as you just mentioned And the counties take the real property tax. Am I right? And the counties also are responsible in Nebraska for schools. Am I right? For the most part, you're right So the the Only cities and towns Municipalities can have a local option sales tax But it's collected through the counties as is the property taxes and The property taxes 60 of the property taxes go to education spending Okay, so so you have a problem with earmark taxes just like we do then Uh The legislature can't spend What it gets on what it What it deems to be important because there are shackles built into the Uh, the the spending system that already the redirects Some of the some of the revenue toward You know certain specified causes Yeah We have a provision in our constitution That requires a balanced budget on the state level Do you Yes, we do Good and and so in terms of fiscal condition Nebraska is in and is in very good fiscal condition and the rainy day fund Is uh is strong So we're in a good position to be able to restructure our revenue system, which is our tax code To make certain that we have a tax code that promotes economic growth and competitiveness Uh, so so again, I'll go back to this plan that that we are working on is about growing our economy And having a fair tax code more than it is about tax relief We're going to come up. We're going to bring about tax relief or we're going to do it through economic growth and prosperity Well, you know the the modeling that you talked about would seem to be very, you know accurate relatively speaking on modeling The revenues based on the existing economic activity in this state You know and and my guess is it would be lower than the revenues that you have now Because in large parts of tax rates are being reduced but The modeling you talked about as would support the Nebraska blueprint Would would would assume the growth of the economy How can you model on that? How can you know? What growth you'll have so as to be able to say that this blueprint will in fact pay the bills Well, first of all, we know that even setting aside just setting aside entirely The economic growth We know that the restructuring that we are proposing pays for itself we know that uh the income that we will recover from Expanding the sales tax base We know pretty closely what type of revenue that's going to generate We know pretty closely how much it's going to take to buy down certain tax brackets. So that part of it We're pretty good on The modeling the econometric modeling that we're doing that predicts the growth in the economy That's based on certain elasticities around certain goods and services Also, the propensity to spend by certain income brackets. We have good historical evidence that people do respond to taxation and And they're spending habits and their investment habits Also their migration habits We can fairly much Predict what that's going to be and so that's how we come up with that expanded portion of this So what I would like to say is that this pays for itself nothing If nothing else we can create a fair a more fair tax structure, but the gravy Better part of this is that we're going to have growth in the economy All evidence shows we're going to have growth in the economy and I would suggest we're probably Being conservative on our on our measurements of that Well, you know, this is kind of remarkable because if you look around the country You see that most if not all other state tax systems are we don't want to call it Their legacy they've been in existence for hundreds of years. Well 100 years anyway And they and in terms of the general framework the structure Maybe the rates changed, but the general structure has been the same As it has been so you're really breaking away Uh from from the you know traditional Systems here and Nebraska could be my right could be a leader In in tax reform because it isn't happening anywhere else. Am I right? Well, there are some states that are you know doing pretty well But they have not have have had and they have not had an overall Reform or transformation It's been small changes over time. You know, you look at Florida. You look at Utah some of those states Nebraska has an opportunity to yes be a leader and transformation changing our tax structure To promote growth and and I think you're absolutely right So how are you able to sell us to your Well, can yes, of course we should ask that but uh, why don't you ask that? And I have a question for you to ask afterwards Sure. So how are you able to sell this to uh, to your legislature? What what did you what did you tell them? I mean, what what were the Kind of the main things that the legislature was residing, you know, resonated with? Well, first of all We're talking in terms of a framework We are not bringing a specific piece of legislation to our legislators Um, you know the plight institute Myself we have good relationships with the majority of the legislature and members of the revenue committee with the governor So what we are saying is that this is a proposal for a framework This this modeling effort demonstrates that we can produce Economic growth and prosperity and we can make our state more attractive To the retention of 18 to 34 year olds. We're talking about this being more than just a tax relief package that this is an economic growth package And I think that's what resonates with them and we are being very courteous and very, you know In that we're we're not overstepping ourselves here We're not bringing legislation legislation comes from the legislators and from the governor Uh, we're just offering our services and our modeling efforts to show them that this can work And how popular is this with the um the public? well, you know, uh I like to I like to Measure our level of success by the number of shots that are taking at us And I would say, you know We're in good shape right now. I think people are hearing us out We're traveling the state In fact, the people that have the consumption tax the epic consumption tax We've invited them to come along with us so that the public can compare and contrast two plans Um, and the public is hearing us out And uh, we're getting great coverage in the in uh local news across the status of traveling And people are taking to wait and see because you know in the brasskins they've heard this all before They've heard it before that someone's going to come in they're going to fix the tax system And it doesn't happen, uh, but no one has really approached it from this way before and and um, so You know, I think people are giving us a shot giving us a chance You think there'll be a bill or a series of bills to advance this uh initiative what next year 2022? Yeah, I mean those are some of the uh Unusual aspects of the Nebraska legislature next year 2022 is a short session It's a so it's not the budget uh year There's a typically a two-year session first year is a budget second year is a shorter session shorter session Heavy lifts typically don't take place. Uh, I hope we can break that Cycle and that we have a heavy lift in 2022 But we also have redistricting that's taking place and that's uh kind of putting everyone on edge So all of those things factoring together for the political environment It's uh, I would say the path is narrow But uh, there is a path So we know now that uh, you know, a lot of states, uh, including Nebraska have What do you want to call it a divisiveness between the red and the blue the democrats or republicans? Where are you getting support? Uh, is it from both sides? Is is it from the red side? Is it from the blue side? Well, we we have a different divide. We have the red and blue but because the legislature is non-partisan Obviously, everyone knows what the score is there. Everyone is a registered republican or democrat or independent But it's a non-partisan unicamal system But another divide is between urban and rural And rural is is really the reddish the the most red part of the state And they are really leaning heavily on property tax relief They're not so much focused on economic growth now. They say they need workforce But they're really focused on property tax relief and then it's the urban side of the pro-business Group that is really driving an economic growth plan So that's kind of an interesting dynamic that we have and so, you know, we picked up pro-growth Now this plan picks up pro-growth democrats And it picks up pro-growth republicans. Uh, we have some convincing to do with the rural republicans and we have some convincing to do with the democrat Progressives that makes a good plan go you you're reaching out to both sides. You're appealing to both sides That's right. Tom. I I wanted to suggest that we discuss at this point how How jim's framework could be useful in hawaii? Whether it could do the things that he's trying to do in Nebraska, whether it could do those things here Can you address that with him? Sure. I mean, I I'm of the opinion that Before something Like that can work here in hawaii. We really have to Kind of work with you know, the the lawmakers mind set a lot of people In the you know in our our favorite square building Seem to think That because hawaii is a paradise as jim suggested That there isn't that that you that you can squeeze taxpayers without mercy and they won't leave But but the census figures and our own department of business economic development and tourism Shows that that's not the case that people are leaving That we are we are losing the competitiveness war and we need to do something about it Once I think The legislature is attuned to the need for us to be competitive Then then I think The the value of something like what jim has in Nebraska can be readily apparent Well jim has mentioned a couple of things that sound pretty appealing I mean increasing the floor for personal income tax Wouldn't that be great for young technology people would bring them into the state and would hold them here They'd get a tax holiday of sorts wouldn't it wouldn't that be an attractive point? Uh buying down the the tax rate of course is going to be an attractive point right now We have I think the second highest uh tax rate in the nation. We go all the way up to 11 percent The you know the nine ten and 11 percent brackets don't don't kick in until you well into six figures But the low brackets Uh, you know kick in at very very small numbers such that when When you're at the federal poverty level Okay, you're already in the fourth bracket. I mean how how sane is that? What about the other elements, uh, what about reducing corporate the corporate tax, what about reducing the real property tax Would those help in Hawaii? Well, uh, let's start with uh corporate tax Uh, we have a middle of the pack corporate tax rate. It's 4.45.4 and 6.4 and uh But but the but the but the problem is we don't have a lot of corporations that pay that that kind of tax here It it is, you know very very minor Compared with the individual income tax The the two biggest drivers of our tax Uh tax revenue picture are the general excise tax, which is our sales tax equivalent And the individual income tax not only because that's that's where you get money off the workers But it's because maybe 75 percent of the businesses are what we call pass-through businesses So, uh, they don't pay tax at the corporate rate because they're not corporations Instead the individual partners or the individual shareholders, you know shareholders in an s corporation or the individual beneficiaries of a trust They would be the ones paying the tax at the individual rate Yeah Well, I mean, you know what what you teach us Jim is a lot of things I mean one is that you can have dramatic reform And we should because our tax system is old and it isn't in touch in many places Including in hawaii The second thing is you can use this is like not Revelationary we learned this in school a long time ago as you can adjust public conduct by changing the tax system As an incentive and disincentive And in that way you can expand the economy And we could do that here too. Couldn't we Tom? but I go back to your first statement is that If you're both you you both said this You've got to convince the legislature of a mindset That will address the incentive and disincentive aspect of taxation and take take a policy point on You know increasing diversification increasing the economy So I think we're behind Nebraska, do you agree Tom? Well in terms of diversifying The economy where where I think we're definitely behind almost everybody else We have tourism and that's basically it Yeah So, you know, the the answer Jim is whether you can expand the blueprint to include hawaii come out here spend a little time and for that matter of time whether you can you know create a tax foundation of Nebraska and go to Nebraska and check out the quality of life Come in January when it's 20 degrees below zero Oh, yeah, lovely Jim. What is your advice to hawaii? Well, I'm going to go back and I try to kick it off this way and and I think it's really important that you frame any type of a tax reform effort around the ambitions to have economic growth and prosperity Competitiveness start there and and I go back to the blueprint Nebraska plan It's out on our website, but you know tax modernization Is really important But we're very honest in saying it's one of 15 points that we have to work on as a state In order to retain that 18 to 34 year old population And to be a better place to live And uh, so we don't shy away from the other 14 points and we put it all in perspective And I think that's part of the reason that people Are giving us a shot at this. They're listening to us because it's not all about tax relief It's about expanding our economy and there's other things in addition to taxes That complement expanding the economy Yeah, and uh, Tom, what's what's your advice to Jim? Based on this discussion and by the way, I hope you make it clear that we do not appreciate him recruiting our young people for Nebraska We have we have the same issue And you know your your catchphrase growing the good life. I think is uh, you know, very good You know very catchy You know slogan that that encompasses a lot of the good things that you're trying to do I I think um You know our our advice to Nebraska is keep it up I think I think you're going in a great direction and you know, we have to do the same here in Hawaii Especially with regard to an economic diversification and the need to be competitive in the national marketplace And uh, you know, we certainly hope you can follow your lead Yeah, and we're rooting for you Jim because we'd like to see how well you do on these things How how you tune it up? And maybe copy some of the things you've done or you will do What so what is the website that we can look at? Where can we learn more about your initiative? Sure, there's two websites. Of course, the platt institutes website is plattinstitute.org plattinstitute.org and the platt institute Publishes many studies that align with the blueprint Nebraska study. That's why We uh, we invited them to become one of the alliance partners with blueprint Nebraska blueprint Nebraska's website is blueprint spelled out dash Nebraska spelled out dot org blueprint dash Nebraska dot org And on that website you can find the reports in downloadable form That's great. Um, those are certainly resources. I'll be looking at and I hope you know some of our literatures will do the same Yeah, great to talk to you Jim. Thank you very much for coming on It's such a breath of fresh air to talk to somebody who's engaged in in real tax reform And I think it speaks well of Nebraska, but also It's it's make sure a little optimistic or a little more optimistic about the country in general That you can come up with these things and have a reasonable chance of success. It's great Tom, thank you for arranging uh, Jim. It's great to have you both on the on the show today Great to be here. Jay Jim they the one thing I just want to mention is that Nebraska gets cold, doesn't it? 20 degrees below, he said. Yeah It's very warm and gets very cold Okay, well It's the diversity That kind of diversity I don't care for I'm sorry Thank you very much Jim. Thank you Tom. Aloha