Flat rate state income tax proposed

Nebraska would institute flat rates for individual and corporate income taxes under a bill heard by the Revenue Committee March 2.

Currently, the individual income tax rate is based on a primary rate of 3.7 percent, to which a multiplier is applied to create four tax brackets of 2.56 percent, 3.57 percent, 5.12 percent and 6.84 percent. The corporate income tax also uses the primary rate to create two brackets of 5.58 percent and 7.81 percent.

LB620, introduced by O’Neill Sen. Tyson Larson, would create a single individual income tax rate of 3.5 percent and a corporate income tax rate of 4.5 percent, which annually would decrease by 0.1 percent until it reached 3.5 percent. The bill would have an implementation date of Jan. 1, 2014.

The bill would not allow itemized deductions or extra standard deductions for age or blindness and would implement standard deductions of $4,000 for a single return, $8,000 for a joint return and $5,500 for a head of household.

The bill also would eliminate credits for the elderly, child care, beginning farmers, earned income, community development assistance and biodiesel.

Larson said Nebraska’s current progressive income tax penalizes those who earn more, discourages growth and leads to tax evasion. Seven states and 23 countries have adopted flat taxes, Larson said.

Seth Giertz, assistant professor of economics at the University of Nebraska-Lincoln, testified in support of the bill, saying it would broaden the state’s tax base and reduce marginal rates. Lower tax rates would encourage growth and investment in Nebraska, he said, adding that a lower universal rate would provide more growth than current targeted tax incentives.

Giertz said eliminating itemized deductions would most effect people with large mortgages and those who make substantial charitable contributions. He said the middle class would benefit from job creation and increased economic activity.

Mark Intermill, representing the AARP, testified in opposition to LB620, citing the bill’s fiscal impact of $458 million in fiscal year 2014-15. Taking away 10 percent of the state’s general fund revenue and modifying the state’s consistent income tax structure is not a wise decision in the current economic climate, he said.

The committee took no immediate action on the bill.