NC Budget and Tax Center

‘Modest’ or ‘Bold,’ Nebraska Tax Cuts Could Not Be Sold

This is an additional contribution to the blog series that presents voices from other states that have unsuccessfully pursued comprehensive tax reform. (See Part 1, Part 2 and Part 3)

Commentary provided by Renee Fry, Executive Director of the OpenSky Policy Institute in Lincoln, NE.

Nebraska’s 2013 legislative session kicked off with Gov. Dave Heineman rolling out two proposals that would have drastically cut state taxes.

The first proposal – known as the “bold” plan – would have eliminated the state’s personal and corporate income taxes and replaced the lost revenue by ending several sales tax exemptions, including those for prescription drugs and non-profit groups. The second, more “modest” proposal would have reduced the individual income tax, eliminated the corporate income tax and again made up the lost revenue by eliminating sales tax exemptions – although fewer than were to be axed in the “bold’ proposal.

The tax cuts were sold under the banner of economic development despite research showing no direct correlation between personal income tax levels and economic growth. In fact, Nebraska’s own economic performance refutes the economic development claim – gross state product growth and the unemployment rate for Nebraska are better than most states that have no income tax.

Proponents claimed that the proposals would not reduce the amount of total revenue the state takes in and would not require cuts to education, health care, roads and other vital services that individuals and businesses rely on. But the plan quickly ran into trouble on multiple fronts.

Data used to back the proposals raised eyebrows, in part due to questionable and vague details. For instance, the claim that the state wouldn’t lose money was based on unrealistically high estimates of how much revenue the new sales taxes would bring in. If the estimates had been based on a rate more typical of the historical performance of sales taxes, the tax cut proposals would have created massive shortfalls of money for public services.

On the other hand, plenty of data existed to buoy opposition to the proposals. An analysis by the Institute on Taxation and Economic Policy, a non-partisan research group, found that the plans would increase taxes for 80 percent of Nebraskans, while lowering them only for the wealthiest.

Business leaders throughout the state lined up against the tax cuts, since many businesses would have lost sales tax exemptions, particularly those in agriculture and manufacturing. Other opponents worried the tax cut proposals were rushed and would lead to unintended consequences that would harm the state.

Opposition mounted quickly. Legislative committee hearings on the proposals were among the longest in Nebraska’s history. For nearly 15 hours, opponent after opponent testified and asked lawmakers to scrap the proposals. Lawmakers never got a chance to do so, as Gov. Heineman asked that the package of bills be killed less than a month after he introduced the plan.

Nebraska legislators will likely take up a comprehensive study of the state’s tax code after the legislative session ends. The review will give legislators a chance to step back, take a look at the entire tax code – which was conceived in the 1960s – and make informed decisions about taxes that will benefit our state and all of its residents.

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