How Does the LB461 Tax Reform Plan Work?

For the first time in years, the Nebraska Legislature's Revenue Committee has advanced a tax reform plan that addresses both property and income taxes together. Traditionally, the committee has been divided by urban and rural members who didn't agree on which tax to prioritize, not to mention those who just didn't think Nebraskans needed tax relief.   

But with the advancement of LB461 to the full Legislature, Nebraskans will finally get the debate they deserve on the future of Nebraska's tax system. 

Many parts of LB461 would not take effect immediately, though. Senators are working to introduce reforms that will allow the state to first get through the work of balancing this year's budget, and then putting the state in a position to only cut taxes in years when the budget is healthy.

Here's a list of reforms contained in LB461 along with a timeline of how the changes would roll out:

Starting in 2018, agricultural land would be assessed based on the income-potential of the property instead of its current assessment based on the market value of the land. An analysis of this reform shows that if enacted a decade ago, increases in agricultural valuations would have been much lower. Property taxes are local taxes in Nebraska, so the state does not lose tax money directly through this change, but will need to spend more on state aid to school districts as a result. 

In 2019, a new state budget will be written, and the personal and corporate income taxes would begin to see their first reductions.  

  • Nebraska's two bottom income tax rates would be combined into a single rate of 3.25 percent, lowering the tax rate on roughly the first $3,000-$36,000 Nebraskans earn, depending on their tax filing status.
  • Nebraska's Earned Income Tax Credit would increase from 10 percent of the federal credit claimed by a taxpayer to 11 percent. The following year it would increase to 12 percent. Depending on family size, the EITC is available to workers earning less than approximately $15,000-$54,000 in Adjusted Gross Income and maximum federal credits range from $510 to $6,318. 
  • The state corporate income tax would be reduced from 7.81 percent to 7.59 percent.

These changes would be funded through the suspension of two state tax credits and a reduction of personal exemptions for higher-income taxpayers.

In 2020, LB461 would initiate eight steps of annual income tax cuts that would only occur in years when state revenue growth was more than sufficient to cover the costs. This mechanism is known as a revenue growth "trigger."

The tax cuts are only triggered if certain projected revenue growth goals are met: The top personal income tax rate, which kicks in at middle-income levels, would be reduced by about 0.1 percent each year that state revenue is projected to grow above 3.5 percent.

The top corporate income tax rate would be reduced about 0.2 percent each year state revenue growth is projected to exceed 4 percent.

Ultimately, the goal is to get both tax rates to 5.99 percent, which wouldn't be the lowest by any means, but would take Nebraska in the opposite direction of being ranked among the 15 worst states for income taxes, as it was recently by the Small Business & Entrepreneurship Council for its tax rates and the Tax Foundation for how much income tax Nebraskans pay per capita.   

So now you know what LB461 does, and how it works to provide tax relief that safeguards the state budget. Stay tuned to learn more about how the state budget will fare under tax reform in Nebraska. 

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