Legislative Testimony for LB50: Change individual income tax brackets and rates
Good afternoon Revenue Committee. I am here today to testify in opposition of this bill.
This bill creates another tax bracket for those earning over $100,000 as well as proposes a millionaire’s tax. Currently, the only states that levy a higher tax rate on income of $1 million or more are California and New York along with the District of Columbia.
Under the current tax code, Nebraska has the 16th highest income tax rate in the nation[i] and one of the highest in the region. Under this bill, Nebraska will have the 5th highest income tax rate (9.84%) in the country following California at 13.3%, Hawaii at 11%, Oregon at 9.9%, and Minnesota at 9.85%.
While this bill’s intent is to target the wealthiest in our state, the unintended consequence is that it will also put additional pressure on small businesses in Nebraska that file through the individual income tax.
Over the last 30 years, sole proprietors, S corporations, limited liability corporations (LLCs), and partnerships have seen tremendous growth. These non-corporate firm types are often referred to as “pass-through” entities because the firm’s profits are passed directly through to the owners and taxed on the owner’s individual tax return. If this tax policy were enacted, we would be imposing a significantly higher tax rate on our small local businesses, who are the backbone of our state’s economy and many of our communities.
In addition to the impact on small businesses, according to research by the Tax Foundation[ii], a millionaires’ tax is poor policy because it is a narrow, high-rate tax on a highly mobile group of people who earn less in bad economic times. Enacting such a tax makes state tax revenue more volatile and unpredictable.
The unpredictability and detrimental economic repercussions of the tax was proven in Maryland when the state tried to address a state budget deficit by enacting a new millionaire income tax bracket.[iii]
This same situation played out in Oregon when they instituted a higher tax rate on high income earners and according to the state treasury, one-third less revenue than projected was collected and 10,000 high income earners left the state.[iv]
IRS records[v] show that since 1992, a net total of over $3.5 billion in adjusted gross income has left Nebraska, the majority of which found its way to states such as Texas, Florida, Arizona, Colorado, and Missouri, which all levy lower top personal income tax rates or none at all. If Nebraska increases its top marginal income tax rate, we will see even more money and residents flee for lower tax states just as Maryland and Oregon did.
When high income earners flee to lower tax states, this puts more pressure on the middle class families to pay for even more of state government.
We have seen what could happen in other states if Nebraska decides to pass LB50, along with the risks that come with adopting the 5th highest income tax in the country. The research and evidence from other states is clear that this is bad tax policy and not the right decision for Nebraska.
I encourage the committee to vote in opposition to LB50. Thank you and I would be happy to take any questions from the committee.
[i] List of top states’ income tax: California, 13.3%; Hawaii 11%; Oregon 9.9%; Minnesota 9.85%; Iowa 8.98%; New Jersey 8.97%, Vermont 8.95%, District of Columbia 8.95%, New York 8.82%, Wisconsin 7.65%; Maine 7.15%, Idaho 7.4%, South Carolina 7%; Connecticut 6.9%; Arkansas 6.9%.
[ii] Tax Foundation, Joseph Bishop-Henchman, “Trend #1: Millionaires’ Taxes”, June 15, 2012.
[iii] The Wall Street Journal, “Millionaires Go Missing – Maryland’s fleeced taxpayers fight back” May 27, 2009.
[iv] The Wall Street Journal, “Ducking Higher Taxes –Oregon’s vanishing millionaires”, December 21, 2010.
[v] How Money Walks – IRS Tax Migration, accessed January 22, 2019.