LINCOLN — Gov. Pete Ricketts touts this year’s major income tax package as “tax relief for all Nebraskans,” with the highest-percentage cuts going to middle- and low-income taxpayers.
That would be true for the first couple of years, if Legislative Bill 461 passed.
But a World-Herald analysis shows that wealthier Nebraskans would reap the largest percentage benefits as more of the bill takes effect.
Full implementation would take until 2027, at the earliest. At that point, income tax cuts for the top-earning Nebraskans would be proportionally — and in actual dollars — several times larger than those for middle- and low-income people.
State Sen. Jim Smith of Papillion, the Revenue Committee chairman and LB 461 sponsor, said senators had worked hard to craft a plan that would cut taxes for all Nebraskans.
He defended the ultimate distribution of benefits, calling the proposal a “jobs bill” that would grow the state’s economy by leaving more money in the pockets of small-business owners.
About 90 percent of small businesses pay individual income taxes on the profits from their businesses.
It’s a “measured, thoughtful approach” to tax relief, Smith said. “The overall premise is that a lower tax bill is a good thing for Nebraska businesses and families.”
But others criticized the distribution of income tax benefits under the proposal.
“Let’s call LB 461 what it is: a tax cut for the wealthiest Nebraskans that will do little for the vast majority of our state’s hard-working people,” said James Goddard, an attorney with Nebraska Appleseed, a group that advocates on poverty issues.
Reform for Nebraska’s Future, a coalition pushing for property tax relief, also argued that the bill’s emphasis on cutting state income taxes won’t do much to help most Nebraskans.
“Income taxes aren’t the taxes Nebraskans want to see lowered,” said Trent Fellers, the group’s executive director.
Nebraska lawmakers are slated to start debating LB 461 on Friday.
The package, as advanced by the Revenue Committee, brings together several income and property tax measures.
It incorporates Ricketts’ proposals for cutting the top individual income tax rate and changing how agricultural land is valued for property tax purposes.
Other provisions would cut the top corporate income tax rate and combine the bottom two individual income tax brackets into one. The plan also would increase credits for most taxpayers, including a higher state earned income tax credit, a refundable credit that helps low-income working people, particularly parents.
The ag land valuation piece would take effect first. In 2018, the bill would switch from market-based valuations to income-based ones, along with capping annual increases in valuations.
The pieces that take effect in 2019 would provide most benefit to middle- and lower-income taxpayers. They include changes in the tax brackets and increases in credits. The first corporate tax rate cut also would occur in 2019.
Together, those changes would reduce state income tax revenues by around $30 million, according to State Department of Revenue estimates.
The other income tax rate cuts, both individual and corporate, would be phased in, starting in 2020.
Each reduction would be triggered by growth in projected state revenue — 3.5 percent for each individual rate cut, 4 percent for the second and subsequent corporate rate cuts.
The earliest they could all be implemented would be 2027. By then, the package could reduce state income tax revenues by an estimated $410 million a year.
Ricketts’ spokesman, Taylor Gage, said the structure of tax changes in LB 461 shows the priorities.
Changes primarily benefiting middle- and lower-income people happen first and are guaranteed. Changes benefiting higher-income people depend on future state revenue growth.
Judging from recent history, Nebraska may hit the 3.5 percent trigger only every three or four years. It could take up to 10 years to hit the 4 percent trigger.
That’s why Sen. John McCollister of Omaha said some critics are suggesting that the triggers are a “cheap political ploy” that will not bring about tax reductions.
Others worry that the proposal would put tax cuts on autopilot, forcing the state to rein in spending on schools, prisons, health care and other services.
Tax Commissioner Tony Fulton, a former state senator, said Nebraska could benefit economically from the plan, which would over time reduce the top individual and corporate tax rate to 5.99 percent.
Fulton said site-selection companies look for states with income tax rates below 6 percent. Nebraska’s top individual rate is 6.84 percent and the top corporate rate is 7.81 percent.
“One of the arguments the governor is making is that this will help strengthen small businesses and Main Street Nebraska,” Gage said.
Ricketts also has pointed out that the changes to the top income tax rates would affect more than half of married couples and about 30 percent of single Nebraskans.
Nebraska’s top individual income tax rate applies to the portion of an individual taxpayer’s income, after federal deductions, that exceeds $29,830 per year. For married couples, the rate applies to the portion of income after deductions that exceeds $59,660.
Legislative consideration of LB 461 will cap a week that is to begin with debate of another major tax proposal.
LB 640, introduced by Sen. Mike Groene of North Platte, will be debated Tuesday. The measure would take money from the Property Tax Credit Fund to benefit mostly rural property tax payers.
Speaker of the Legislature Jim Scheer of Norfolk said he plans to allot three hours each to the two tax bills this week.
He will schedule the bills for additional debate only if their sponsors can show that the bills will advance.
No matter how either debate goes, Smith called it a win to have gotten the proposals out of committee for consideration by the full Legislature.
“I am very pleased that we actually have an opportunity to get substantial tax relief legislation on the floor for debate,” he said. “At the very least, that’s an accomplishment.”
Legislative Bill 461 would make several changes to individual income taxes, including phasing in cuts to the top tax rate, combining the bottom two brackets and increasing credits for all but the top taxpayers. If the bill were fully implemented this year, here’s a sample of the savings for different taxpayers.
|Married, filing jointly|
*These taxpayers could benefit from the Earned Income Tax Credit increase. The amount of increase would depend on the number of children in the household.
**Savings as percent of current tax
Source: World-Herald calculations, Nebraska Department of Revenue tables