Corporate, individual income tax rate cuts proposed

Nebraska’s top corporate and individual income tax rates would fall to 5.84 percent by 2026 under proposals heard Jan. 27 by the Revenue Committee.

LB938, sponsored by Elkhorn Sen. Lou Ann Linehan, would cut the state’s top corporate income tax rate, which applies to income in excess of $100,000, in four steps, from the current 7.5 percent to 5.84 percent beginning in tax year 2026.

The rate on the first $100,000 of taxable income will remain 5.58 percent.

Linehan said the bill would accelerate the phased-in reduction in the top corporate rate approved by the Legislature last year in LB432. That proposal reduced the rate from 7.81 percent to 7.5 percent for tax year 2022. It will fall to 7.25 percent beginning in tax year 2023.

The state Department of Revenue estimates that LB938 would reduce general fund revenue by $1.9 million in fiscal year 2022-23, $10.6 million in FY2023-24, $29.3 million in FY2024-25 and $53.5 million in FY2025-26.

LB939, also introduced by Linehan, would cut Nebraska’s top individual income tax rate from the current 6.84 percent to 5.84 percent beginning in tax year 2025.

The rate applies to income of $29,000 and over for individuals and $58,000 and over for those who are married filing jointly.

The department estimates that the bill would reduce general fund revenue by $61.7 million in fiscal year 2022-23 and $177 million in FY2023-24. By FY2026-27, the reduction would grow to $363 million.

Linehan said the proposals would create rate parity for corporations and businesses formed as passthrough entities, whose owners pay taxes at the individual rate.

They also would help Nebraska compete with neighboring states when trying to attract businesses and workers, she said, and generate economic activity by allowing taxpayers to keep more of their money.

Bryan Slone testified in support of both bills on behalf of the Nebraska Chamber of Commerce and Industry, the Greater Omaha Chamber and the Lincoln Chamber of Commerce.

He said cutting the state’s corporate and individual income tax rates is “critical” if the state is to compete for workers and corporations, especially technology companies, in a post-pandemic economy.

“Nebraska has an incredible ability to be a top 10 growth state in the country if we get this workforce thing right,” Slone said. “What does lowering the income tax rate do in that context? I would say everything.”

Craig Beck testified in opposition to both bills on behalf of OpenSky Policy Institute. Nebraska already provides generous tax incentives to corporations, he said, and approximately 80 percent of the proposed cut in LB938 would go to taxpayers who do not live in Nebraska.

Beck said LB939 would disproportionately benefit the wealthiest Nebraskans without creating the promised economic growth. Under Linehan’s proposal, he said, the average tax cut for the 80 percent of Nebraskans who are paid less than $125,000 per year would be $63, compared to $8,900 for the highest 1 percent of earners.

Nicole Fox of the Platte Institute gave neutral testimony on both bills. She said the Platte Institute would prefer to see both proposals included in an “aggressive,” comprehensive plan to change the state’s overall tax structure.

At the same time, Fox said, many of Nebraska’s peer states are working to reduce their individual income tax rates in a nationwide competition for workers.

“This suggests a significant effort on personal income tax would be important if Nebraska wants to buy further growth that will increase Nebraska’s tax base well into the future,” she said.

The committee took no immediate action on either bill.