Income tax cut ‘pause’ considered

The Revenue Committee heard testimony March 13 on a bill that would end incremental income tax rate cuts earlier than planned to help address the state’s projected revenue shortfall.

Nebraska’s top individual income tax rate, currently 5.2%, applies to incomes of $29,000 and over for single individuals and $58,000 and over for those who are married filing jointly. The same rate applies to all taxable corporate income.

A rate of 5.01% applies to the third individual income tax bracket, which includes incomes of $18,000 to $28,999 for single individuals and $36,000 to $57,999 for those who are married filing jointly.

Under a measure passed by the Legislature in 2023, the rates will continue to decrease in annual increments until reaching 3.99% in tax year 2027.

LB171, introduced by Plymouth Sen. Tom Brandt, instead would stop the cuts next year at 4.99%.

Brandt said pausing the rate cuts is the “simplest and most straightforward” way to reduce Nebraska’s revenue shortfall.

“If we do nothing, we risk putting the state in [a] financially unsustainable position, jeopardizing essential services and making it harder to provide meaningful property tax relief,” he said.

Brandt said he would support a trigger mechanism allowing future income tax rate cuts when the state is in a stronger financial position.

The state Department of Revenue estimates that LB171 would increase state general fund revenue by $101 million in fiscal year 2025-26 and $396 million in FY2026-27.

Rebecca Firestone of OpenSky Policy Institute testified in support of the proposal, saying it alone would address the projected $289 million shortfall in the current budget cycle.

Protecting the state’s revenues also would alleviate projected deficits in future years, she said, avoiding cuts to essential services like education and health care as well as allowing lawmakers to make needed investments in affordable housing and child care.

Testifying in opposition to LB171 was Jim Smith of the Platte Institute. He said the “historic” tax cuts have helped Nebraska compete with neighboring states in national rankings.

“Income tax reform will remain mission critical for states that want to remain competitive in an expanding economy,” he said, “so we cannot afford to slow down or go backwards.”

The committee took no immediate action on the bill.