Think tank: Tax cuts would benefit state's wealthiest

A breakdown of what’s included in the package of proposed income tax cuts

Income tax cuts set to be debated soon in the Nebraska Legislature would benefit the wealthiest Nebraskans and send more money to out-of-staters than our own middle- and lower-wage earners.

When fully phased in, the proposed individual and corporate income tax cuts included in LB 754 would cost the state more than $700 million in 2027. To make sense of that number, it’s worth noting that this is the same amount that the state has allocated to fund the university and state college systems in the current fiscal year.

Additionally, several of the bills wrapped into LB 754 would further reduce the funds that would be available for future Legislatures to pay for essential programs, such as K-12 education and public safety.

With senators expected to begin consideration of the tax package this week, we looked at the six bills amended into LB 754 by the Revenue Committee.

Two bills – LB 641 and LB 38 – extend tax exemptions for retirement benefits at a time when the number of Nebraskans aged 65 and older is projected to grow by 90% from 2010 to 2050. Meanwhile, the number of working-age residents 18-64 is expected to grow by just 12%.

LB 641 accelerates the state’s exemption of Social Security benefits subject to state income tax, bumping the exemption to 100% in 2024. These benefits will flow exclusively to seniors in the state’s top income groups, as those married filing jointly are already exempt from state income tax on Social Security benefits if their incomes are under $61,760.

For those ineligible for Social Security, LB 38 exempts federal retirement annuities from state taxes in the same way Nebraska has moved to exempt Social Security earnings.

LB 492, another bill amended into the tax cut package, allows businesses to immediately deduct from their tax liability the full cost of some purchases of machinery and equipment and some research expenditures. Because most of our corporate tax is paid by out-of-state corporations, the benefits of LB 492 will go overwhelmingly to non-Nebraska corporations and subsidize predominantly out-of-state investment and research activity.

LB 173 exempts nonresident income from state income tax for those who work for a Nebraska-based business, assuming they work in the state for fewer than 15 days.

LB 497 proposes a new tax write-off for a small group of wealthy Nebraskans who run up against a $10,000 cap on the amount of state and local taxes they can deduct on their federal tax return. Only taxpayers with itemized deductions exceeding the federal standard deduction – $27,700 for couples filing jointly – could benefit from this workaround.

Finally, LB 318 provides state tax credits for childcare expenses, a potential benefit targeting working families. LB 318 also extends tax credits for contributions to a childcare program and extends tax credits for workers in childcare facilities.

Although the tax cut package will be pitched as including something for everyone, evidence indicates that the components proposing tax benefits to low- and middle-income residents provide a fraction of the cuts granted to high-income Nebraskans.

Based on estimates, the average tax savings from the child care tax credit specifically is less than $50 annually for Nebraskans outside the wealthiest 20%. The tax cut for the top 1% would be, on average, nearly $26,000 annually, when considering the entire package.

The state’s robust budget surplus might make those cuts affordable now, but what happens under different economic conditions, especially as federal pandemic relief drops out of the equation? The state received $24 billion in federal stimulus in 2020 and 2021.

If approved, LB 754 would restrict what’s available to fund programs that all Nebraskans rely on, including education, health care for aging populations, unemployment insurance and nutritional support programs, while providing tax cuts that predominantly benefit the wealthiest Nebraskans.