Advocates for income tax cuts dispute critics who say reductions are only for the wealthy

LINCOLN — Advocates for a $3 billion package of state income tax cuts pushed back Wednesday against criticism that the proposal only helps the wealthiest Nebraskans.

State Sen. Lou Ann Linehan of Elkhorn, the main architect of the proposal, said 32% of state’s top income earners pay 80% of state income taxes, so it only made sense to return the bulk of the state’s budget surplus to them.

 “I think we should give the money back to the people who actually paid the taxes,” said the senator, who chairs the Revenue Committee, which crafts state tax policy.

Linehan also disputed that Nebraska’s huge revenue surplus was caused by a deluge of federal stimulus funds related to the COVID-19 pandemic. She argued that the state also built a surplus by limiting spending increases to under 3% a year while tax revenue growth has been over 4% a year.

“We have a lot of money because we didn’t spend it,” Linehan said. “As long as we keep our spending below our revenue, we will be fine.”

Whether the tax cuts proposed in Legislative Bill 754 will be financially sustainable, whether the plan will slow outmigration and whether it benefits lower-income families were matters of discussion as lawmakers opened debate on the income tax package. (See related story.)

The bill, which now includes several proposals, would make a gradual reduction in the state’s top individual income tax brackets and corporate taxes to 3.99% by tax year 2027.

The state’s top income tax rate now stands at 6.27%, which Linehan and the state’s business community argue makes Nebraska uncompetitive with its neighboring states.

‘Reasonable compromise’ turned down

Critics of the bill said that people don’t decide where to live or locate businesses solely on tax rates and that most of the corporate tax cut will go to out-of-state companies. Such a “massive” cut could also jeopardize state services, they said.

Omaha Sen. John Cavanaugh proposed a more modest, cautious approach, by lowering the top rate to 4.99% rather than 3.99%.

It was billed as a “reasonable compromise” given the nation’s shaky economy and high inflation. The tax rates could be adjusted lower in subsequent years, Cavanaugh and others said, if the economy can justify the reduced income tax revenue, estimated at $735 million a year by 2028-29.

The entire package is projected to provide $3 billion in tax breaks over six years.

Cavanaugh said that in past years, senators have been willing to strike a compromise and have been more cautious about reducing state tax revenue too sharply.

“There is a downturn coming, and we need to be cautions about huge expenditures like this,” Cavanaugh said.

But his amendment was shot down by a 32-8 vote.

Also defeated, on a 29-6 vote, was an amendment proposed by Lincoln Sen. George Dungan. He had offered another compromise that would simply ccelerate the income tax cuts passed last year by the Legislature, which would reduce the top income tax rate to 5.84%.

Linehan and other supporters of LB 754 cited figures from the budget office of Gov. Jim Pillen, who asked that the income tax cuts be introduced, arguing that the state has plenty of revenue to cut taxes.

The state, Linehan said, has nearly $2 billion in its “rainy day” cash reserve fund and has enough excess revenue for the governor to finance a $1 billion “future fund” for K-12 schools.

‘We are overtaxed’

“We are overtaxed in Nebraska,” she said.

The state, she said, will jeopardize its future if it has the highest income tax in the region, pointing out that Iowa is reducing its top tax rate to 3.9% and that tax cut proposals are advancing in Kansas and Missouri.

Some rural senators said they were conditionally supporting LB 754 — the condition being that a property tax relief proposal,  expected to be debated Friday, would provide a similar amount of tax relief as the income tax cuts.

Plymouth Sen. Tom Brandt and Niobrara Sen. Barry DeKay said high property taxes are the biggest issues in their rural districts.

Sen. Tom Briese of Albion, the chief sponsor of the property tax relief package, said passage of LB 754 was contingent on the passage of his bill, LB 243, as well as passage of the governor’s bills to change state aid to local schools.

“One does not pass without the other,” Briese said. “They are tied together at the hip.”

He added that Nebraska has “a resilient ag-based economy, well-positioned to weather any downturn.”

Lincoln Sen. Danielle Conrad said the top issue in her urban district was dissatisfaction among working people that the state’s budget surplus wasn’t being used to help struggling families. Nebraska already ranks among the most business-friendly states in the union, she said.

“We should do more to come together on working family issues, kitchen table issues,” Conrad said.

The $35 million set aside for child care tax credits, she said, paled in comparison with the overall breaks given in LB 754.

A ‘headline’ tax cut that will help

North Platte Sen. Mike Jacobson, a banker, said lowering income tax rates to 3.99% was an important “headline” for businesses when they decide where to expand or locate. Linehan said she expected hiring to increase if the tax cuts are passed.

The OpenSky Policy Institute, a Lincoln-based think tank, has estimated that the wealthiest 20% of Nebraskans would see the vast majority of the income tax cuts granted under LB 754.

For instance, OpenSky projected that a lawyer with a gross income of $214,744 would see a tax break of $2,690, compared with an $80 tax reduction for a construction worker making $35,613 in gross income.

OpenSky’s Rebecca Firestone, during a briefing with reporters Wednesday morning, said there are better ways to return excess state funds to citizens, and if income tax cuts are too deep, it will blunt state efforts to reduce the sting of property taxes.

Lawmakers adjourned about 9 p.m. before getting to a vote on advancing LB 754. Debate is expected to resume Thursday.