State and Family Budgets Grow with LB461 Tax Reform

In the same year Nebraska celebrates 150 years of statehood, the tax code is also celebrating a milestone: 50 years since the state income tax was enacted.  Lawmakers are recognizing that our current tax structure was designed with the economy of the mid-20th century in mind, and that it’s time for the state to reform this outdated system to embrace the 21st century economy. 
 

For the first time in many years, the Revenue Committee has advanced a comprehensive vision for tax reform in Nebraska.  Legislative Bill 461,[i] the Nebraska Taxpayer Reform Act, reins in high property and income taxes on families, farmers, and businesses across the state.
 

While a reduction in personal and corporate income tax rates and an increase in the Earned Income Tax Credit would come as a relief for many, opponents are concerned whether the state will have the revenue to pay for core government functions such as education, criminal justice, and road maintenance.  However, through the use of revenue “triggers,” LB461 is designed to prevent tax cuts from taking place unless ample revenue is also available to fund government services.
 

The tax rate reductions in LB461 are funded by rolling back specific tax credits and dedicating a portion of future state revenue growth to tax relief.  Most of the tax cuts in LB461 will not occur unless state General Fund revenues are projected to grow above a designated threshold in a given year.

The revenue triggers for the personal and corporate income taxes are 3.5 and 4 percent of General Fund growth, respectively.  If state revenue is not projected to grow by the required amounts, the tax cuts will not take effect that year.
 

In testimony provided to the Revenue Committee, the Tax Foundation noted that the triggers built into LB461 would be “the most cautious yet adopted by any state.”[ii]
 

The annual reductions of the tax rates are also cautious.  Once triggered, the personal and corporate income tax rates are reduced by approximately 0.1 and 0.2 percent respectively, until reaching a top rate of 5.99 percent.


To analyze the full budget impact of LB461, let’s assume the state sees a constant annual revenue growth of 4 percent.  That would mean the rate reductions would be triggered consecutively, and the tax plan would be implemented over ten years, ending in 2028.
 

As shown in Figure 2, in the first year of the income tax portion of the Nebraska Taxpayer Reform Act, there is no reduction to General Fund revenue growth.  This is because the first year of income tax cuts are funded through the suspension of specific tax credits. 

At 4 percent growth, the General Fund’s revenue will grow more than the tax cut over this ten year period.  The annual General Fund would stand at approximately $6.4 billion[iii] upon the full implementation of LB461.  Annual gross revenue will increase by more than $1.5 billion[iv], a 33 percent increase[v] from the current fiscal year’s revenue amount.  Taxpayers would also see more than $2.2 billion[vi] in cumulative tax relief. 

The basis for these revenue estimates come from the Department of Revenue and the Legislative Fiscal Office.  Their figures are static, meaning there are no assumptions made for how these tax reductions will affect the economy or how people and businesses will change their behavior in response to lower tax rates.

Even after the tax cut in LB461, the state’s General Fund will have experienced robust growth.  Annual General Fund revenues would be only slightly reduced from their current trajectory.  The average annual reduction of revenue over the entire ten year plan is 4.3 percent less than General Fund revenue would otherwise be without the tax rate reductions. 



In the last year of the Nebraska Taxpayer Reform Act, the amount of revenue returned to taxpayers will only equate to approximately 7 percent of what the General Fund’s total revenues would otherwise be at 4 percent growth under current tax rates.

LB461’s income tax reductions only impact the General Fund.  Other state government funds[vii], accounting for over 50 percent of the budget, would be unaffected.

For example, the Department of Correctional Services receives a portion of its funding from every state fund.  The state Department of Education is funded from every fund except one, and the Department of Roads is solely funded from the Cash Fund.[viii] 

The overall goal of good tax policy should be to collect needed revenues for supporting essential services that maximize Nebraska’s economic growth, not merely maximizing tax revenues. 
 

But good news to all – LB461 does both. 
 

It would be fitting if as Nebraska celebrates its 150th anniversary of statehood, lawmakers could give Nebraskans something else to celebrate - lower taxes.  By relying on triggers built into the Nebraska Taxpayer Reform Act, lawmakers can obtain needed revenue growth for the state budget while giving the state more competitive tax rates.


For more information on this analysis, contact Platte Institute Policy Director Sarah Curry.


End Notes

 

[1] Nebraska Legislature, “LB461 – Correct references to a federal act in a revenue statute,” www.nebraskalegislature.gov/bills/view_bill.php?DocumentID=31598, accessed April 11, 2017.

[2] Joseph Henchman, Tax Foundation, “Testimony: Comments on Deferred Income Tax Rate Changes” https://taxfoundation.org/testimony-tax-triggers-nebraska/ February 8, 2017. 

[3] Nebraska Legislature Revenue Committee, “Proposed LB461 Amendment”, for the April 5, 2017 Revenue Executive Committee Meeting.

[4] Calculation is General Fund revenue with assumed 4% growth each year to enact triggers with accounting for the reduction in tax rates until the rate of 5.99 percent is established for both personal and corporate income.

[5] This is the percentage increase for the parallel column in Figure 3 from FY2018-19 to FY2027-28.

[6] Cumulative impact of tax changes implemented by LB 461 that would affect revenue estimates, illustrating a 4% growth scenario. Some taxpayers will receive more in tax relief from the property tax component of the bill, but this only illustrates the impact to revenue, not tax relief through an offset by appropriations.

[7] “2016-2017 State Budget, fiscal year July 1, 2016 – June 30, 2017: $9,047,829,715” www.statespending.nebraska.gov/spent1617, accessed on April 11, 2017.

[8] Examples came from the 2016-17 Budget by Agency and Fund on the StateSpending.Nebraska.Gov website, accessed April 11, 2017.

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