May 4, 2017
Senior Policy Analyst
Nebraska lawmakers had a long and contentious tax-cut debate this session but ultimately chose the wise path and rejected attempts to give a massive tax cut to the wealthy at the expense of the state’s schools, other public services, low- and middle-income families, and property tax payers.
Tax cut efforts in Nebraska last year ended with a promise to find a package over the summer that would resolve the differences between major factions within the state who sought different outcomes. But the death of LB 461 in the state legislature this week showed that no amount of wheeling and dealing, nor any innovative tax-cut gimmickry, can turn costly and regressive income tax cuts into a good idea for Nebraska.
The session began with a multitude of ideas, each of which had one or more fatal flaws in the eyes of some policymakers. Early proposals to pay for income and/or property tax reductions with sales tax expansions were unacceptable to Gov. Pete Ricketts and others who refused to support anything that might be branded as a tax increase. Plans backed by Gov. Ricketts and some of his allies focused on slashing income tax rates for wealthy Nebraskans and pushing the full cost of the tax cuts into future years using arbitrary tax cut “triggers,” but rural representatives wanted property tax reductions, many objected to giving most of the tax cut to the wealthy, and most lawmakers saw the “trigger” proposal for the fiscally irresponsible gimmick that it was. Another attempt to reduce rural property taxes through increased and redirected school aid was unpalatable to urban legislators who wanted their districts’ school aid kept whole. And all this unfolded as the state grappled with a projected shortfall of as much as $1.2 billion and neighboring Kansas’s recent tax-cut disaster continued to play out just to Nebraska’s south.
A compromise finally emerged from committee that included triggered personal and corporate income tax rate cuts and bracket consolidation, a small increase in the state Earned Income Tax Credit (EITC), and a phase-down of the personal exemption credit. But amendments and objections came flooding in immediately, and it became clear during the first round of debate that the bill had not succeeded in pleasing all these diverse factions. The bill had a little something for each faction, but retained the key flaws. ITEP microsimulation model analyses showed that more than half (54 percent) of the tax cut for Nebraska residents would go to highest-income 5 percent of Nebraskans. Additionally, much of the benefit from would have flown out of state, it still relied on “triggers” meant to obscure the true budgetary cost, and it shifted around property taxes without significantly reducing them for very many Nebraskans, all while undermining the revenue sources that could be used to actually reduce property taxes in the future.
The bill was ultimately rejected Tuesday, falling several votes short of the threshold needed to overcome its opponents.