Legislative Testimony for LB625: Impose a surtax on certain taxable income and use the proceeds for early childhood education

We are in opposition to LB625 because the surtax effectively creates a fifth individual income tax bracket. With this change, Nebraska’s top individual income tax rate would be higher than New York State, which had a net of more than half a million residents out-migrate over the past decade. While Nebraska’s first four individual income tax brackets are adjusted annually for inflation, as written, the amount at which the surcharge is applied will not be adjusted.

It is also important to recognize that many of our businesses are subject to the individual income tax rate. Pass-through businesses, organizations where the owner “passes on” profits through to their individual income tax returns (such as LLCs, S-Corporations, sole proprietorships, and partnerships). Nebraska pass-through businesses employ 58.5% of the private sector in Nebraska.

This means that not only does this tax make Nebraska more uncompetitive with a higher income tax liability, but this tax is also a disincentive for job creation. Essentially, this surtax will be a direct tax on business activity needed for economic growth in Nebraska.

As you all know, tax policy cannot be viewed in a vacuum. In the November 2020 election, Colorado voters adopted a permanent reduction of their flat individual and corporate income tax rates. Arkansas also enacted an income tax reduction which will start in tax year 2021. And we cannot forget that Iowa will see a significant drop in their income tax rates if the state hits its revenue targets, which it is currently on schedule to trigger (8.53% to 6.5% in 2023).

In addition, as of February 1, more than 40 governors had released their budgets. Of those governors, 14 proposed tax cuts. The Mississippi and West Virginia governors have unveiled plans to eliminate their income tax completely while bills have been introduced to reduce business taxes in Colorado, Montana, Alabama, and New Hampshire.

The goal of tax modernization in Nebraska is to make our tax code simpler and more attractive for business to promote economic growth. LB625 does neither. The justifiable concern about early childhood education should not be answered by simply hiking income tax rates and making Nebraska’s tax code even less competitive.

Overall, we see LB625 as a bill with good intent. Unfortunately, the consequence of creating an income surtax could be to reduce the economic growth needed to support education programs in Nebraska.