Package of income-tax cuts advances from first-round debate on resounding 41-0 vote

Mar 30, 2023 | 2:02 pm ET

By Paul Hammel

Package of income-tax cuts advances from first-round debate on resounding 41-0 vote

State Sen. Lou Ann Linehan of Elkhorn, chair of the Revenue Committee, addresses an income tax package on the floor of the Legislature on Wednesday. (Zach Wendling/Nebraska Examiner)

LINCOLN — A package of state income tax cuts, designed to move Nebraska to among the lowest tax states in the country, advanced Thursday from first-round debate on a 41-0 vote.

The main sponsor of Legislative Bill 754, State Sen. Lou Ann Linehan of Elkhorn, said that if the package is ultimately passed, the state should rank among the lowest 15 states in the union in terms of taxation. Right now, the Tax Foundation ranks the state’s “business tax climate” as 29th nationally.

Under LB 754, the state’s top personal income tax rate, along with the state corporate income tax rate, would gradually decrease to 3.99% by tax year 2027. That proposal and a property tax relief proposal are projected to provide $3 billion in combined tax cuts over six years. That is billed as a record by Gov. Jim Pillen, who is backing the measures.

Components of LB 754

Reduces the state’s corporate tax rate and top individual income tax rates to 3.99% by 2027. Two lower income tax brackets would remain unchanged. Estimated to provide $700 million in tax breaks by 2027.
Accelerates phasing out of income taxes on Social Security. By tax year 2024, Social Security checks would be 100% exempt from state taxes. About a $48 million a year tax break.
Provides an income tax exemption on federal pension benefits, thus mirroring the exemption for about 14,000 Nebraska retirees who don’t qualify for Social Security. About $2 million a year in tax relief.
Provides tax credits of between $1,000 and $2,000 for child care expenses and provides credits to those who contribute to child care programs, as well as to workers in such programs and employers who provide them. Taxpayers whose household income is below the federal poverty level would receive $2,000 per child, regardless of whether they have child care expenses. About a $35 million tax break.
Allows nonresidents who temporarily work in the state 15 days or less to be exempted from filing a Nebraska income tax return. A tax break estimated at about $3 million a year.
Provides an income tax break for corporations on purchases of qualified business assets, research or experimental expenditures. About a $45 million a year cut.

The current top individual rate is 6.27% and will trend downward to 5.84% under a tax-relief package passed last year. But Linehan and other supporters of the bill said those rates put Nebraska at a competitive disadvantage with neighboring states.

Iowa, Kansas lowering rates

Iowa recently moved to lower its income tax rate to a flat 3.9%, and a 4.75% flat tax is moving through the Kansas legislature, while two neighboring states, South Dakota and Wyoming, do not levy a state income tax.

“Bringing down our top income tax rate is critical for the future of the state of Nebraska,” Linehan told senators during debate Wednesday night. “We are overtaxed in Nebraska.”

Over two days of debate, lawmakers amended several other tax-relief measures into LB 754 (see infobox). Debate on the property tax bills could begin as soon as Friday.

Amendments defeated

Two attempts at making the income tax cuts more moderate were fended off during debate Wednesday. And supporters of LB 754 pushed back on criticism that the income tax cut package is aimed mostly at the wealthiest Nebraskans and offers relatively little to low-income residents.

The Lincoln-based OpenSky Policy Institute projected that Nebraskans with household incomes above $138,000 will see the bulk of the tax break. Households with taxable income under $32,950 would see no reduction because tax rates at that level are already under 3.99%.

“The tax cut provisions in LB 754 are a good deal for the wealthiest Nebraskans, but these proposed cuts could threaten education and health care and other things we value that would hurt our working families and small businesses,” said Rebecca Firestone, OpenSky’s executive director.

Lincoln Sen. Danielle Conrad said that in tough economic times, the Legislature doesn’t raise taxes, it cuts programs.

Sen. Jane Raybould of Lincoln, citing a report from Moody’s, said that cutting the corporate tax rates does not stimulate new hiring or increased production. That is driven by sales.

Bayard Sen. Steve Erdman said the bill doesn’t solve the state’s problem with high taxes. That, he said, is only accomplished by scrapping the state’s tax system entirely and shifting to a “consumption tax,” which Erdman has advocated for years but has failed to advance in the Legislature.

Could force cuts in state programs

Conrad and other critics expressed concern that foregoing so much state revenue, by cutting income taxes, would leave the state short of money in an economic downturn to finance other priorities, such as K-12 school aid.

But opponents of LB 754 were unsuccessful in seeking to amend LB 754. One amendment, which failed on a 32-8 vote Wednesday, would have lowered the top rate to 4.99% rather than 3.99%.

Supporters of the bill said fiscal projections by Gov. Jim Pillen’s office show that Nebraska has plenty of excess funds to provide the tax breaks.

Lee Will, the governor’s top budget aide, has said the state could weather three years of the state’s worst economic downturn in history and still provide the tax cuts, due to the ballooning of the state’s cash reserve fund to a record $1.6 billion.