Nebraska, Wisconsin, aim towards flat taxes

Nebraska, Wisconsin, aim towards flat taxes

The state flat tax revolution marches on in 2023.

Arizona, Idaho, and Mississippi each inaugurated a flat-rate income tax on January 1st, expanding the count of states that opt for a single-rate income tax structure. Massachusetts, on the other hand, moved in the other direction by abandoning its decades-long protection of a flat tax system. Bay State voters narrowly approved a new rate for high earners in a 52-48 vote.

Yet lawmakers in Nebraska and Wisconsin are aiming to join the ranks of the flat tax revolution. Wisconsin lawmakers, led by Senate Majority Leader Devin LeMahieu, received encouraging coverage from the Wall Street Journal in a Jan. 16 article that detailed a legislative proposal to make Wisconsin the 14th state to adopt a flat tax. Another 9 states levy no income tax, effectively imposing a flat tax of 0%.

The Wisconsin proposal would deploy the state’s $6.6 billion budget surplus to consolidate the state’s four rate brackets into one, collapsing Wisconsin’s rates of 3.54%, 4.65%, 5.3%, and 7.65% into a 3.25% single-rate structure.

Wisconsin has divided government, though, and Governor Tony Evers has pledged to veto the legislature’s flat-tax proposal. Veto override requires a two-thirds supermajority of both chambers in Wisconsin. If Wisconsin’s 35 House Democrats are unified with Gov. Evers, they can block a veto override in the state’s 99-seat lower chamber to either prevent the tax change entirely, or force an amendment to the proposal.

Perhaps the Wall Street Journal should consider Nebraska as the more likely state to make a big move towards a flat, competitive income tax in 2023. After all, Revenue Committee Chair Lou Ann Linehan introduced a major income tax overhaul on January 18th in LB 754 with the support of Governor Jim Pillen. Nebraska’s current income tax rates are 2.46%, 3.51%, 5.01%, and 6.64%. Linehan’s proposal would iteratively cut the top rate as follows:

  • 2023: 6.27%
  • 2024: 5.70%
  • 2025: 5.13%
  • 2026: 4.56%
  • 2027: 3.99%

The top corporate income tax rate would also be cut as follows:

  • 2023: 6.80%
  • 2024: 6.10%
  • 2025: 5.40%
  • 2026: 4.70%
  • 2027: 3.99%

The likely result would be a low-rate flat corporate income tax and a low-rate, nearly-flat individual income tax.

Under the assumption that LB 754 is fully implemented, Nebraska would have a highly competitive individual income tax. Starting in 2027, a married couple filing jointly would pay 2.46% on the first $6,000 of income, then 3.51% on the next $30,000 of income, and would most likely pay 3.99% on all income beyond $36,000.

If a future legislature wants to completely flatten the tax structure and keep the 3.99% rate, they could expand the standard deduction and impose the 3.99% rate on all income levels. By way of explanation, a married couple filing jointly would pay $1,200.6 on their first $36,000 of taxable income [$6,000 * 2.46% + $30,000 * 3.51%] if the bill was fully implemented as intended. By contrast, the same family would $1436.4 in taxes on their first $36,000 of income if the 3.99% rate was applied on all taxable income. The family’s tax liability would be $235.8 greater under a 3.99% flat tax rather than a structure that imposes 2.46% and 3.51% rates at lower incomes.

However, the increase in tax liability under a flat tax could be offset trimming the definition of taxable income. This could be accomplished by expanding the standard deduction by at least $5,910 ($235.8 ÷ 3.99%) for a family that is married filing jointly, so Nebraska would have a flat-rate income tax with a larger standard deduction. Everyone’s tax bill would either go down (those making $36,000 or less) or stay the same (those making $36,000 or more). Any such change would marginally reduce revenues to the state and must be considered accordingly.

Revenue and spending stability will be the key to making Nebraska’s tax reform last. Nebraska lawmakers will undoubtedly be on guard to avoid the decade-old mistake of the Cornhusker State’s neighbor to the south. In a zeal to eliminate the income tax entirely, Kansas’ 2012 tax reform resulted in deficits that necessitated unwinding some of the original tax cuts. Since then, however, dozens of states have successfully cut and reformed their income taxes, with several states consolidating their progressive tax structures into a single-rate tax, all while avoiding Kansas’ pitfalls.

Nebraska only has one legislative chamber, and Governor Pillen supports an overhaul to the state’s income tax. As LB 754 advances, lawmakers in Lincoln could force the Wall Street Journal to see the Cornhusker State as the upcoming standard-bearer in the flat tax revolution.

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