LB 754 keeps Nebraska’s income tax progressive
Nebraska has a progressive state income tax. This means that higher income earners pay a greater portion of their income in taxes than do lower income earners. If Nebraska lawmakers enact LB 754, a comprehensive income tax reform bill, the state will still have a progressive income tax.
Nebraska’s top income tax rate of 6.64% begins at relatively modest levels of taxable income. The top rate hits taxable income beyond $29,000 for individuals and $58,000 for married/joint tax filers. In addition, Nebraska has a large standard deduction ($15,800 for married/joint) and a personal exemption credit ($157 tax credit per household member), which each make the income tax even more progressive.
If LB 754 is enacted, Nebraska would still have a progressive income tax with higher earners paying a greater portion of their income in taxes than lower earners. Furthermore, Nebraska’s tax code exists within America’s federalist framework. This is important context because the federal tax system is highly progressive.
In fact, The U.S.’ federal tax code might be the most progressive in the world. Past analysis by the Organization for Economic Cooperation and Development (OECD) concluded that the U.S. has single most progressive tax code in the developed world. Furthermore, the Congressional Budget Office (CBO) concluded that the federal 2017 Tax Cuts and Jobs Act (TCJA) made the federal tax code even more progressive. In short, Nebraska levies a progressive income tax at the state level, and the United States levies the developed world’s most highly progressive tax system at the federal level.
It is eminently reasonable, therefore, for Nebraska to trim the progressivity of its state tax code in order to maintain competitiveness with other states. Income tax reform is sweeping across the Great Plains and across the country. Nebraska can substantially reform its income tax to remain competitive while also retaining a progressive income tax structure. That’s what LB 754 does.
To reiterate, Nebraska’s income tax will still be progressive even if lawmakers enact LB 754. This is proved true by looking at the effective income tax rates for a Nebraska family of 4 making $30,000; $60,000; $100,000; and $300,000 under LB 754.
Title: Nebraska family effective income tax rates under LB 754
|Total income||Taxable income after standard deduction||Income taxes owed||Personal exemption credit (family of 4)||Taxes owed after exemption credit||Effective income tax rate|
A Nebraska family of 4 making $30,000 has no income tax liability under LB 754 because income taxes owed are more than offset by deductions and credits. The same family making $60,000 would pay an effective income tax rate of 1.5%. If the family’s income grew to $100,000, they would pay an effective income tax rate of 2.5%. And if their income grew to $300,000, they would pay an effective income tax rate of 3.5%. In other words, Nebraska will retain a progressive income tax system under LB 754, with higher income families paying a greater share of their income in taxes than lower income families.
Nebraska lawmakers inherited a highly progressive income tax code. Tax reforms to increase competitiveness would necessarily trim the progressivity of the state tax code. That doesn’t mean that taxes will go up for lower income families (they won’t), nor does it mean that Nebraska’s income tax will become regressive. The state income tax will remain progressive.
Public officials must consider the proper balance between tax competitiveness and tax fairness. When state lawmakers engage in tax reform, they should keep in mind that the federal tax system is already highly progressive, and state income taxes are all at least slightly progressive.
States must compete with each other within the federalist system. That means that well-managed, cost-effective states with low tax rates levied upon a broad tax base can achieve the benefit of attracting and retaining residents and businesses that they might otherwise not keep. That is the opportunity tax reform offers for Nebraska, along with more dollars in the pockets of Nebraska families.