Legislative Testimony: LB832, Change individual income tax brackets and rates

My name is Nicole Fox, Director of Government Relations for the Platte Institute, and I’m testifying in opposition to LB832.

We oppose this bill because it is bad policy. LB832 adds 2 tax brackets above our current highest 6.84% personal income tax bracket. LB832 would impose a 7.75% tax on incomes >$100,000 per year and impose an 8.25% tax on those with incomes >$1million per year.

Currently, the only states that levy a higher tax rate on incomes of $1 million or more are California and New York, along with the District of Columbia. States levying higher taxes on income greater than $100,000 include those same states, in addition to Hawaii, Minnesota, Oregon, and Vermont. New Jersey levies 8.9% on incomes over $500,000.

Two of our border states, South Dakota and Wyoming, have no income tax. This November, Colorado voters may potentially adopt a flat 4.4% personal income tax rate. Iowa Governor Kim Reynolds is proposing to lower the state’s personal income tax rate to a flat 4%.

The Platte Institute’s Policy Director, Sarah Curry, participates in monthly calls with a network of state tax policy experts. This working group includes state think tank policy researchers from across the country and the Tax Foundation. During her December 2021 monthly call, 20 states reported that their governors or legislatures would be introducing legislation to reduce income taxes, either personal, corporate or both. Some of these states had already passed legislation to cut income taxes in 2021, and some are looking to completely phase out income tax, most notably Mississippi.

If the goal is to grow Nebraska’s economy by attracting and retaining more residents, imposing the proposed income tax rates in LB832 will not get us there.

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.

Most businesses today are pass-through entities, where the owner “passes on” profits through their individual income tax returns (such as LLCs, S-Corporations, sole proprietorships, and partnerships). 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.

Many Nebraska businesses have already been negatively affected by the pandemic and current high inflation rates. Why would we burden them further? We need to instead foster the growth of small businesses who are our job creators.

Furthermore, a high tax rate on higher income earners is an economically and fiscally harmful policy because it is a tax on a highly mobile group of people who earn less in bad economic times.[i] Enacting such a tax makes state tax revenue more volatile and unpredictable. When high income earners flee to lower-tax states, this puts more pressure on middle-class families to pay for even more of state government.

Earlier this month, the Platte Institute published an article discussing how Nebraska lost more residents than it gained due to migration in 2021.[ii]  The pandemic has prompted a lot of people to take a hard look at where they want to live and work. People living in high-tax states who can work remotely are choosing to move to low-tax states. Research by the Tax Foundation confirms this.[iii]

There are other ways to raise revenue and lower taxes for middle-class Nebraskans that don’t require making Nebraska’s tax code less competitive with other states. The Platte Institute would like to see tax modernization that makes Nebraska’s tax code simpler and more attractive for business to promote economic growth.  LB832 does neither. I ask that you hold LB832 in committee.

[i] https://taxfoundation.org/trend-1-millionaires-taxes

[ii] https://platteinstitute.org/census-numbers-show-nebraskas-pandemic-population-change/

[iii] https://taxfoundation.org/state-population-change-2021/