LINCOLN — An income tax cut backed by the state’s major business groups is headed back to the legislative garage for repairs.
Even the sponsor of the tax plan admitted that Legislative Bill 1097 wasn’t going to fly.
“In its current form, it’s not (financially) sustainable,” said State Sen. Burke Harr of Omaha.
The public hearing on the measure was billed as the opening bell in the debate over tax changes in the 2014 legislative session.
The bill, crafted by the Nebraska Chamber of Commerce and Industry and chambers of commerce in Omaha and Lincoln, includes the main goal of Gov. Dave Heineman — reducing state income taxes, especially the top rate of 6.84 percent.
But proponents were on defense for most of the afternoon, offering to compromise after the estimated impact of LB 1097 came in at a whopping $645 million annually when fully implemented. That would represent about 16 percent of current state spending.
Opponents said giving up that amount of money would require deep cuts in spending on public schools, higher education and social services, or shifting costs to cities and counties, resulting in local property tax increases.
“The required annual budget cuts would be equivalent to the salaries of more than 11,000 teachers,” said Renee Fry of the Lincoln-based Open Sky Policy Institute.
Barry Kennedy of the state chamber said business groups had believed their tax bill was a reasonable measure that would cost somewhat less than $300 million a year.
He said that LB 1097 will have to be amended but that there’s still plenty of room to give taxpayers a cut with the state’s projected $700 million-plus cash reserve.
“This opens the discussion,” Kennedy said.
The bill as proposed would cut individual and corporate income tax rates over three years and require rates after that to be adjusted annually for inflation.
It address concerns raised by Heineman and business groups that the top rate of 6.84 percent is higher than any neighboring state except Iowa — a situation they say makes Nebraska uncompetitive in recruiting businesses and workers.
Under the bill, the top rate would drop to 5.9 percent after three years, and fewer taxpayers would pay that rate.
The top bracket right now begins at $27,000 in adjusted gross income for a single person ($54,000 for a married couple filing jointly) — prompting criticism that millionaires pay the same rate as the poor. The top bracket under LB 1097 would begin at $36,000 for an individual and $72,000 for a couple.
Fry said there’s no proof that income tax cuts will spark economic growth. She said 61 percent of the tax cut benefits would go to the top 20 percent of income earners. The bottom 40 percent of wage earners would get 7 percent of the benefits.
Middle class taxpayers, whose incomes have not been rising, are the people who need a tax break, said Mike Marvin of the Nebraska Association of Public Employees, the state workers union.
Proponents said top wage earners would naturally get the most benefits from income tax cuts because about 60 percent of such taxes are paid by the top 14 percent of wage earners.
They said a family of four with $100,000 in adjusted gross income would see an $870 tax decrease under the proposal, while a similar family with $35,000 in income would get a $213 break.
Nebraska’s income tax rates serve as “sticker shock” when recruiting businesses and talented workers, said Jim Vokal of Omaha’s Platte Institute, which has advocated for income tax cuts offset by new sales taxes on services.
“Nebraska needs every advantage it can to overcome the cultural bias that it’s not an exciting place to live and work,” Vokal said.
But members of the Revenue Committee were dealing with their own sticker shock Thursday over the projected cost of LB 1097. They took turns asking where spending could be cut to afford the deep tax reductions in the bill.
Sen. Kate Sullivan of Cedar Rapids, who heads the Legislature’s Education Committee, said Nebraskans told a special legislative committee studying tax modernization that they valued K-12 education and that they wanted more state aid to allow for property tax cuts.
Sen. Galen Hadley of Kearney, chairman of the Tax Modernization Committee as well as the Revenue Committee, echoed that sentiment.
“We did not hear from common citizens that they were paying too much income tax,” he said, “but we did hear that they’re paying too much in property taxes.”
Hadley said he remains wary of cutting income taxes, calling it “rolling the dice” because there’s little proof the cuts will create jobs.
Next week, the Appropriations Committee will take testimony on proposals to raise the property tax credit to landowners, a direct way for the state to deliver property tax relief.
Hadley said next week also will be when the Revenue Committee begins crafting its tax proposals for this year. He said the work will probably begin with a couple of modest proposals on income taxes: indexing brackets for inflation and reducing taxes on Social Security income.