LINCOLN — The Nebraska Chamber of Commerce and Industry, a heavyweight in forging state tax policy, is recommending that the state slash its top rates for individual and corporate income taxes.
The chamber argues that Nebraska should reduce its top rate to 5.5 percent to become more competitive with its neighbors. The state's top rate on individual income taxes is now 6.84 percent, which is 16th-highest in the nation and higher than all neighboring states except Iowa.
“We think there's a need to have a top rate that makes us competitive nationally,” said Richard Baier, the chamber's executive vice president.
The ideas were revealed as the Tax Modernization Commission, composed of state lawmakers, prepared to meet today at the State Capitol to discuss ways to make Nebraska's tax structure more competitive for 21st century jobs and businesses.
The ideas outlined by the state chamber, the state's largest business group, are the first public goals to be offered by a major special interest group on the topic of taxes.
Until Monday, much of what has been discussed about tax changes has been academic ideas and generalities.
However, a Lincoln-based think tank on Monday threw some cold water on the idea of reducing the state's top individual income tax rate.
The OpenSky Policy Institute said dropping the top rate to a hypothetical 5 percent — which is lower than the chamber recommendation — would cost the state $339 million in revenue. The institute said 40 percent of the revenue would leave the state.
OpenSky Executive Director Renee Fry called the income loss troubling because the $134million that would depart the state is now used to fund education and other state services.
Fry said such a plan might require an increase in sales and property taxes, which hit low- and middle-income earners the hardest.
Last month, the Tax Modernization Commission discussed sales taxes and heard from a national expert on the ideal sales tax structure. Today, the commission will hear from two authorities on the two other major sources of tax revenue in Nebraska — state income taxes and local property taxes.
Georgia State University economists David Sjoquist and Sally Wallace will address the state's personal and corporate income taxes, while a University of Nebraska-Lincoln economics professor, John Anderson, will discuss property taxes.
The tax modernization study rose from the ashes of proposals introduced by Gov. Dave Heineman to eliminate or reduce state income taxes as a strategy for economic and job growth.
The plans were similar to ones introduced by several Republican governors nationwide. But Heineman's proposals were quickly killed by the Legislature in the face of withering opposition from agriculture and business groups — including the state chamber — which labeled them impractical and job killers.
Those groups objected to giving up sales tax exemptions that kept them competitive with products and crops produced in other states.
State lawmakers then approved a once-in-a-generation study of Nebraska's state tax system and set a Dec. 15 deadline for recommendations on how to make the state's tax system fairer, simpler and more competitive.
A page of the chamber's suggested goals was obtained by The World-Herald. Dated June 28, the nine suggestions include:
» Reduce the number of personal income tax brackets from three to two and reduce the top bracket to “no higher” than 5.5 percent. That top bracket is now 6.84 percent and is paid by individual taxpayers with $27,000 or more in taxable gross income ($54,000 for a married couple filing jointly).
» Reduce the top state corporate income tax rate from 7.81 percent to 5.5 percent and set the top bracket at $250,000 of gross income or higher. Currently, the top bracket begins at $100,000 of income. The lower bracket on corporate income tax would pay 2.75 percent, a reduction from the current 5.58 percent.
» Use any new tax revenue generated by taxing Internet purchases to cut other taxes, not increase expenditures. Nebraska is projected to collect at least $45 million more if a plan is approved by Congress.
» Reduce state spending gradually, by limiting state budget increases to .5 percent below the expected increase in state tax revenues.
» Keep and attract more young people to the state by cutting taxes on automobile purchases and cellphone bills.
Two state chamber officials emphasized that the group's tax proposals were for “discussion only” and had not been vetted by other chambers in the state, including the Omaha and Lincoln chambers of commerce.
“This isn't a perfect list by any means, but it's a place to start a dialogue,” said Baier.
He said the ideas represented a “balanced approach” between the state's need to finance higher education, social services and other state programs, and the need to make the state more competitive with neighboring states. Two states, South Dakota and Wyoming, levy no state income taxes, and another, Kansas, recently slashed its income tax rates amid controversy.
“This isn't about what the perfect tax policy is for the rest of the county, this is what works for Nebraska,” Baier said.
It's impossible at this point to calculate the fiscal impact of the chamber's tax suggestions. They do not, for instance, include a recommendation about the income level at which the top personal income tax bracket should be set.
Ron Sedlacek, legal counsel with the chamber, added that there's no need to estimate the fiscal impact of the chamber's ideas because “it isn't a plan.”
Baier, though, noted that with the state's cash reserves rising to $679 million, the largest reserve in state history, some of that money could be used to finance the tax cuts recommended by the chamber.
Heineman made the same point last month, urging state lawmakers to make “tax relief ... the top priority of the next legislative session.”
OpenSky officials said its analysis of the impact of a income tax reduction wasn't based on any specific plan but was offered to illustrate what would happen.
The analysis said Nebraskans, who can write off their state income tax payments on their federal tax returns, would lose $48 million in write-offs. That money would go to the federal government instead of state coffers.
An additional $86 million in personal and corporate income tax revenue would be lost to out-of-state shareholders in Nebraska companies and to non-Nebraskans who earn income from Nebraska sources, according to OpenSky.