A University of Nebraska-Lincoln professor who has studied state tax policies told a state business group Monday that cutting income taxes is the surest way to achieve long-term economic growth.
The statements by John Anderson, an economist and public finance adviser, came at a policy forum of the Nebraska Chamber of Commerce & Industry, an influential player in state tax practices and a group that has already called for cuts in income taxes.
His remarks also come as a special legislative committee is finalizing its recommendations for state tax reforms.
The preliminary suggestions of the Nebraska Legislature's Tax Modernization Committee do not call for reductions in state income tax rates, but do suggest that Nebraska begin indexing its tax brackets for inflation, a move designed to prevent taxpayers from rising into a higher tax bracket due to inflationary increases in income.
There has been a battle of studies on the income tax issues, with conservative groups claiming that cuts inspire economic growth and more moderate organizations saying there's no proof of that, and that such cuts primarily help the rich.
Anderson, who spoke to the Tax Modernization Committee this summer, said that since income taxes are imposed on salaries as well as investment income, it cuts into the accumulation of capital that economies need to grow.
“If you've got capital to work with, you can put it to work,” he said.
But, Anderson said, the big question is “how do you get there,” in terms of cutting income taxes. There is a question of fairness, he said, and where the tax load would be shifted. He suggested that an income tax credit for the poor — who don't pay much income taxes — might be necessary to make an income tax cut politically possible.
State Sen. Paul Schumacher of Columbus, a member of the Tax Modernization Committee, joined Anderson on the panel before the state chamber. Schumacher said about half of the state's income taxes are paid by the wealthiest one-eighth of Nebraskans.
He said Nebraska has one of the highest rates in the country of both parents working, and he doesn't want to see taxes shifted onto lower and middle people to pay for an income tax cut.
“Do you really want to put tension on them?” Schumacher asked.
The Tax Modernization has until Dec. 15 to finalize its recommendations. Schumacher said the five-month study of state tax policies has shown him Nebraska's taxes “aren't that dramatically out of line,” though there are several minor steps that should be taken to bring state taxes into the 21st century.
Indexing income taxes is one step, he said, along with increasing the threshold at which corporations pay the highest state corporate income tax rate and ending a sales tax on agricultural repairs, which hurts implement dealers on Nebraska's borders.
Gov. Dave Heineman also spoke to the chamber, telling those at the La Vista Conference Center that Nebraska needs to seize the opportunity now, due to the work of the legislative committee, to not just reform taxes, but cut them, in 2014.
“This is the session we need to get it done,” said Heineman, who is entering his last year in office due to term limits.
The governor said he's waiting to see the Tax Modernization Committee's final report before commenting but said he supports a balanced plan that delivers property tax relief as well as cuts in state income tax rates. Heineman said he supports the chamber's call to cut those rates to below 6 percent. The state's highest rate is now 6.84 percent, which is higher than any neighboring state except Iowa.
The governor said he also agreed with Anderson that cutting income tax rates won't provide immediate economic gains. Anderson said it may be a decade before the impact of an income tax cut would become apparent.
Heineman said income tax cuts would lead to better paying jobs and a slowing of the “brain drain” of young people. “This is all about the future,” he said. “This is about two to three decades from now.”
While business and conservative groups have supported income tax cuts, other groups have argued there are plenty of studies that show income tax cuts do not translate into economic growth and that such cuts only benefit the wealthy. It's more important, they say, that Nebraska maintains good schools and produces skilled workers.
Schumacher pointed out that the Nebraska Department of Revenue recently issued a report that stated a $100 million cut in sales taxes would create more of an economic boost than a $100 million cut in income taxes.
“There is no easy answer to the puzzle,” the senator said.