Now that federal tax reform has taken place, the news has been focused on state efforts to address the impact federal tax law changes will have on their state taxes and budgets. Many may not realize that these changes are necessary because states often tie parts of their tax code to federal tax laws.
Lawmakers in California, Georgia, Iowa, Maine, Missouri, New York, South Carolina, among others have already begun discussing how to change their tax code to ensure federal tax reform doesn’t result in higher state taxes. Nebraska is one of nearly 20 states that estimate their state revenues will increase as a result of federal tax reform. But this is mostly because Nebraskans would be paying higher state taxes, due to changes in the state tax base that are tied to federal law. In response to the state tax increase that would occur, there is a bill being debated in the Unicameral (LB1090) which would effectively hold state taxpayers harmless to the impact federal tax reform has on the state’s tax revenue.
Some have started to voice their opposition to Nebraska implementing LB1090 fully, in the belief that the state should hold onto some of the new revenues. In first round debate on LB1090, these lawmakers said that since revenue projections are not exact, the state needs the extra revenue to offset a possible budget shortfall. While it’s true that projections are only educated guesses, the likelihood that states will see an increase in revenue from the federal tax reform is a solid assessment. The Congressional Budget Office, and all but a couple states among those that have released calculations, predict a resultant increase in revenues.
Another argument made is to only prevent the tax increase on low- and middle-income residents, while allowing higher-earners who are expected to see more savings under the new federal law receive the brunt of the state tax increase. This is not wise tax policy because many small businesses file through the personal income tax, and they would receive a large tax increase at the state level. According to the Small Business Administration, 96.5 percent of all businesses in Nebraska are small businesses, making up nearly half of the workforce in the state. By not fully implementing LB1090, Nebraskans who expected tax relief under the new federal law will see the state take hold of more of their savings instead.
While some in Lincoln are trying to prevent a change that would hold Nebraska taxpayers harmless to an imminent tax increase, other states are taking this as an opportunity to cut their tax rates. In Georgia, where lawmakers expect to receive more than $1 billion in additional state taxes, the state’s top income tax rate is being cut and its standard deduction is being doubled. Missouri Governor Greitens has called his tax plan the “boldest” reform in the nation by cutting both the personal and corporate income tax rates and eliminating some buasiness tax credits. Iowa’s governor and senate have both proposed tax reform plans that cut taxes significantly and lower the state’s high tax rates.
If Nebraska sits silent and does nothing, or even if it does not fully implement LB1090, taxpayers will see a tax increase while the state becomes less competitive, as other states lower their tax rates. So many states are making bold changes to their tax code in response to federal tax reform, because there is so little evidence that states won’t see more revenue under the new law.