Gov. Jim Pillen's plan to flatten Nebraska's income tax rates could save money for at least half of the state's tax filers but leave out the rest.
His proposal would cut the top rate for both individual and corporate income taxes more steeply than a tax package passed last year, eventually dropping to a top rate of 3.99%. Both plans would phase in the cuts over the next few years.
But by 2027, when the plans reach their target, Pillen's top rate would be nearly 32% lower than the top rate in last year's package and would reduce taxes for people in the top two of Nebraska's four income brackets. Pillen's plan would mean an additional $1.5 billion less in tax revenues through June 30, 2027.
In his State of State speech, the governor described the rate cuts as part of "transformative tax reform" that would enable Nebraska "to be more competitive in attracting and retaining investment, talent and new opportunities.
"This is key to stopping out-migration," he said.
Critics, however, argue that few people move because of taxes alone and that the proposed rate cuts jeopardize Nebraska's future fiscal health. They also say that cutting the top rate doesn't help low- and middle-income Nebraskans.
State Sen. Danielle Conrad of Lincoln called the proposal "misguided."
"It's a major tax giveaway to millionaires and billionaires that leaves out seniors, working families and the middle class," she said.
Pillen's proposal is based on LB754, which Sen. Lou Ann Linehan of Omaha introduced on the governor's behalf. A public hearing on the bill is set for 9:30 a.m. Thursday in the Revenue Committee.
Both Linehan and the governor's staff acknowledge that the bill will need amendments. As introduced, the bill would drop the rates only for the top individual and corporate income tax brackets.
Linehan and State Budget Officer Lee Will said the governor's intent is to bring down all rates higher than 3.99%. That would affect the third- and fourth-highest individual tax brackets and both of the corporate tax brackets.
With such an amendment, the 3.99% rate would apply to single filers who made $27,940 in 2022, after accounting for the standard deduction, and to married filers who made $55,890. Those income levels will be higher by 2027 because income tax brackets, the standard deduction and personal exemption amounts are adjusted annually based on inflation.
That means significant numbers of Nebraska tax filers would see the benefit of the governor's plan.
Exact numbers are hard to come by. Based on a 2020 report, some 70% of tax filers reported more than $25,000 in income and nearly 45% reported more than $50,000 in income. The report does not show how many were single filers and how many filed as married or heads of households, which would affect the income at which they move into the third tax bracket.
But significant numbers of filers would see no change in their income tax bill and, of those who benefit, the wealthiest would see the biggest savings because more of their income is taxed at the top rate.
Michael Lucci, senior policy adviser for the Omaha-based Platte Institute, supports the plan, arguing that states have to be more competitive now that the federal government has limited the deductibility of state and local taxes and that people are increasingly able to work from anywhere.
He said Nebraska has among the worst problems with people in the top tax brackets leaving for lower-tax states. While he acknowledged that many head for places with beaches, mountains and warmer weather, along with lower or no income taxes, he said lower income taxes would help make Nebraska more attractive.
"Nebraska can't control beaches or mountains," he said. "But they have a better tax system, and that’s something Nebraska has the ability to control."
He said some of Nebraska's neighbors are cutting income taxes. Iowa last year approved a plan to phase in a flat tax system, with all individual filers paying a 3.9% rate by 2026. Corporate taxes would be reduced but remain at a higher rate. Missouri also has moved to flatten its tax system.
But Rebecca Firestone, executive director of the OpenSky Policy Institute in Lincoln, disagreed with Lucci's arguments. She said the best evidence shows that people and businesses make location decisions based on multiple factors, not just taxes.
She pointed to research by the Center for Budget and Policy Priorities in Washington, D.C., that contradicts claims about people with higher income fleeing higher tax states for those with lower taxes. The research shows that jobs and family drive most long-distance moves, and that migration has dropped despite growing disparities in state taxes.
Firestone also raised concerns that the governor's proposal would substantially decrease state tax revenues in future years. That could force cuts to schools, health care and other key services, especially after the effects of federal pandemic recovery efforts wear off.
The Governor's Office estimates the tax rate cuts would reduce state revenues by $840 million in the fiscal year ending June 30, 2028, when they are fully implemented. OpenSky estimates the loss from just reducing the top brackets would be more than $1.1 billion in 2027.
"Our first concern is about the stability and the sustainability of the state revenue sources," Firestone said.
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