Pillen touts ‘historic’ package of tax cuts, saying ‘we have to compete better’ with other states

Watchdog group concerned about ‘affordability’ of big tax cuts coupled with proposed increase in state aid to schools

By: - January 18, 2023 12:38 pm
Jim Pillen

Gov. Jim Pillen, flanked by several state senators, unveiled his tax cut proposals Wednesday. (Paul Hammel/Nebraska Examiner)

LINCOLN — Gov. Jim Pillen unveiled a package of proposed tax cuts on Wednesday that he labeled as “historic” and making Nebraska more competitive with other states.

The package includes a gradual reduction in state personal and corporate income tax rates to a flat, 3.99% — which mirrors the rate recently adopted in Iowa — and a shift in the funding of community colleges off property taxes.

It also would adopt a new way of valuing agricultural property based on the land’s income-producing potential and would limits increases in ag land valuations for tax purposes.

In addition, state lawmakers will be asked to accelerate, and make immediate, the elimination of state income taxes on Social Security. Last year, the Nebraska Legislature passed a bill to phase out such taxes over a period of years.

“We in Nebraska have to compete better with our neighbors. That’s really a key piece,” Pillen said at a press conference with several state senators standing behind him.

The newly elected governor said that the tax cuts, which amount to $720 million in income tax reductions alone, would place the state among the 15 lowest nationwide in taxing income, as calculated by the Tax Foundation’s business climate rankings.

While business groups hailed Pillen’s proposals as “bold,” one watchdog group questioned whether the state would be able to continue funding of state services if such a huge tax cut is approved, coupled with a proposal to invest an additional $2.5 billion in state aid to K-12 schools.

‘Serious concerns’

Rebecca Firestone of the Lincoln-based OpenSky Policy Institute also said “a robust body of evidence” indicates that lower tax rates alone do not determine where people and businesses locate.

Rebecca Firestone
Rebecca Firestone, executive director of the OpenSky Policy Institute (Courtesy of OpenSky)

“Other factors such as quality of life, access to good jobs and the desire to be close to family rank much higher than taxes in the decisions of businesses and individuals,” Firestone said, adding that there are “serious concerns” about Pillen’s proposals.

Robust tax receipts, fueled in part by federal pandemic spending, has left Nebraska with a budget surplus of $1.9 billion by the end of the 2024-25 fiscal year. That glut of money has prompted several proposals to cut taxes or increase spending on critical needs, such as addressing the state’s workforce shortage.

Pillen, during his press conference, said he had said “no, no and no” to new spending ideas. Afterwards, he called his plan “very sustainable” and “very, very conservative” and said reducing taxes was a higher priority than increased spending.

As an example, he said that the state’s hospitals, which are struggling with workforce shortages and increasing costs, need to “tighten their belts” and that spending more money for health care isn’t “solving anything.”

Aspects of the governor’s plan, which was introduced in the Legislature, are:

  • Reducing the state’s income tax rates, which now top out at 6.2%, gradually to a flat tax of 3.99% by tax year 2027.
  • Taking the funding of community colleges off the property tax rolls and making it a state responsibility, which would mean a $280 million shift from property taxes to state sales and income taxes.
  • Putting a cap of 3.5% on increases in valuations of farm and ranch land, addressing the explosive growth in ag land valuations in recent decades. Also, valuation of farmland for tax purposes would change from being based on recent sales to being based on income potential, as is done in Iowa and South Dakota.
  • Accelerating the elimination of taxes on Social Security income adopted last year on a phased-in basis and making it immediate. That would amount to a $16.7 million tax break.
  • Providing $25 million a year in tax credits for those who donate toward private school scholarships.
Lou Ann Linehan
State Sen. Lou Ann Linehan of Elkhorn (Courtesy of Unicameral Information Office)

Opportunity scholarships

Such “opportunity scholarship” proposals have been pushed unsuccessfully for several years by State Sen. Lou Ann Linehan of Elkhorn. She said it is a way of giving mostly low-income students an alternative to public schools.

The proposals have been opposed by school groups, which say it diverts public funds away from public schools to private schools and is a step toward state funding of private schools.

There was some confusion at the press conference about what exactly was in Pillen’s proposed flat tax, which critics have said benefits mostly higher income families.

A bill introduced on behalf of the governor, Legislative Bill 754, just reduces the state’s top income tax rate, from 6.84% to 3.99% by 2027.

But after Pillen’s press conference ended, his chief of staff, Kenny Zoeller said that the governor’s intent is for a flat tax of 3.99% for all brackets. He said that an amendment will be worked out to accomplish that with the Legislature’s Revenue Committee.

That led to questions about what happens to taxpayers who currently pay less than 3.99%. Right now, for instance, married couples with an adjusted gross income of less than $41,190 already pay at a rate of 3.5%, and couples with incomes of $6,860 or less pay at 2.46%.

Would those taxpayers get a tax increase? the governor was asked.

Pillen responded that under his plan, everyone would pay the 3.99% rate eventually.

Flat tax called ‘fairest way’

“It’s treating everyone the same. Taxing income on an equitable basis is the fairest way I know,” he said.

But Linehan, who chairs the powerful Revenue Committee that guides tax policy in the Legislature, said she would not do anything to harm low-incomed Nebraskans, and would consider leaving the lower rates as they are.

Pillen was also asked what benefit his tax plans have for urban homeowners. In some instances, such homeowners are now seeing steep rises in their property valuations for tax purposes.

The governor said “we’re working on all aspects of property taxes.”

“They’re so high, you don’t have to own property (to be impacted),” he said. “We’re still working on that piece.”

Jim Vokal of the Omaha-based Platte Institute said he was excited to see the new governor’s focus “on objectives important to Nebraska’s taxpayers: reducing the overall tax burden on our families and businesses and making our state economically competitive for job creation and growth.”

There’s long been an argument in Nebraska that, because the state’s personal and corporate income taxes and property taxes are so high, generous tax incentives must be offered to encourage companies to expand or locate in the state.

Linehan said that once the state’s personal and corporate rates are lowered to 3.99%, a conversation about reducing tax incentives — which one report indicated cost Nebraska $93.4 million more than the benefits they generated — should occur.

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Paul Hammel
Paul Hammel

Senior Reporter Paul Hammel has covered the Nebraska Legislature and Nebraska state government for decades. He started his career reporting for the Omaha Sun and later, editing the Papillion Times group in suburban Omaha. He joined the Lincoln Journal-Star as a sports enterprise reporter, and then a roving reporter covering southeast Nebraska. In 1990, he was hired by the Omaha World-Herald as a legislative reporter. Later, for 15 years, he roamed the state covering all kinds of news and feature stories. In the past decade, he served as chief of the Lincoln Bureau and enterprise reporter. Paul has won awards for reporting from Great Plains Journalism, the Associated Press, Nebraska Newspaper Association and Suburban Newspapers of America. A native of Ralston, Nebraska, he is vice president of the John G. Neihardt Foundation, a member of the Nebraska Hop Growers and a volunteer caretaker of Irvingdale Park in Lincoln.

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