With virtually all legislative hearings now behind us, the real tax debate in Nebraska is about to begin. The Revenue Committee is likely to piece together its final tax reform package this week, which will then be debated on the floor of the Legislature.
The final package’s income tax reform will include a fail-safe called a revenue trigger. Triggers work by setting a goal for tax reform—in Nebraska’s case a 5.99 percent income tax—and only enabling incremental reductions toward that goal in years where state revenue growth shows the tax reduction can be afforded through new revenue growth.
Some critics say that triggered income tax reductions, such as found in the prioritized Legislative Bill 337, would leave our state without the necessary revenue to fund core government services.
Let’s bust this myth with some math.
As I’ve written previously, the wider economy has had a much greater impact on the growth of Nebraska’s General Fund revenue than state tax policies in this century. The only recent years the state did not experience growth in tax collections was in 2002 and in 2009-10, during the two national recessions.
Since 2000, Nebraska’s tax revenue has grown an average of 4.6 percent each year.
According to Legislative Fiscal Analysts, in its first year, the 1/10 percent reduction in the personal income tax called for in LB337 would reduce additional revenue by $11.7 million.
Notice I said “reduce additional revenue.” That is because in order for the state to trigger this tax rate reduction, revenue forecasts must show growth in tax collections by more than 3.5 percent, which is much more than what will be returned to the taxpayers in the form of tax reductions.
Now let’s introduce some much bigger numbers, which are all rounded for simplicity. Nebraska’s General Fund revenues were $4.2 billion in Fiscal Year 2015-16.
Under tax reform, that $4.2 billion would need to be expected to grow by at least 3.51 percent, or roughly $149 million.
Adding those together gives you about $4.4 billion.
From that available revenue, the $11.7 million would be returned to the taxpayers in the form of a tax rate reduction. That means the state will still have around $137 million in additional tax revenue, above the previous year, to spend on government services.
In this case, the net growth of state revenue even after the tax cut would still be over 3 percent. The point of tax triggers is to create the conditions for achieving needed tax reforms gradually as the state can afford them. As hardworking Nebraskans make it possible for the revenue pie to grow in Lincoln, triggers make sure that taxpayers share in the benefits.