LINCOLN — The lead sponsor of Gov. Jim Pillen’s proposal to cut state income taxes fended off doubts Thursday that such a $1.5 billion reduction in state revenue was affordable and wouldn’t harm state services.
State Sen. Lou Ann Linehan of Elkhorn said the state has more than a $2 billion surplus of state tax funds and needs to return that to Nebraska taxpayers in the form of lower tax rates.
“It is imperative that we improve our tax climate so it is more welcoming for current and future Nebraskans,” Linehan said.
Meanwhile, representatives of Nebraska’s community colleges put on a full-court press to oppose Pillen’s proposal to shift funding of such colleges from local property taxes to state sales and income taxes.
Such a shift would remove about $300 million a year from property tax bills, which the governor and others said provides “immediate” relief. But a wave of opponents expressed worries that state funding commitments would eventually erode, damaging the efforts by the regional colleges to train skilled workers and serve underserved communities.
“We are part of the solution,” said Fred Uhe, board chair of Metro Community College, based in Omaha.
Thursday was a big day for the new governor’s tax proposals, with hearings held all day long on his income tax and community college proposals.
Cut would improve state ranking
The income tax cuts won support from state business and conservative groups but raised concerns from others about whether state funds could sustain them into the future.
Proponents said it would place Nebraska’s tax ranking among the lowest 15 states in the nation — right now, the Tax Foundation rates the state 35th for its business climate — but opponents said there were better ways to return the excess funds to taxpayers.
Under Legislative Bill 754, Nebraska’s top individual and corporate income tax rates would be gradually reduced to 3.99% by tax year 2027.
A second pair of bills, LB 804 and 806, would accelerate phased-in income tax cuts passed last year, allowing the reductions to 5.84% to go into effect in 2024 instead of 2027. Those two bills would presumably be supplanted by LB 754 if it passed.
Pillen said that with several other states looking at tax cuts, there was a “dire need” to remain competitive. All of Nebraska’s neighboring states have lower top income tax rates, he said, mentioning the recent passage of a flat tax of 3.99% in Iowa.
“We would all agree that we can’t get beat by Iowa, not a chance,” said the governor, a hog producer, veterinarian and former Nebraska football player.
In response to questions from Linehan, Lee Will, Pillen’s budget director, said the state has about $2 billion in excess funds to spend, on top of a projected $1.6 billion in cash reserve that could be tapped in the event of a recession and a drop in tax payments.
Michael Lucci of the free-market Platte Institute said two dozen states have reduced income taxes in the past two years, including five that enacted flat taxes.
‘Timing is very good’
“The timing is very good,” Lucci said, with the state’s healthy cash surplus and cuts coming from other states.
But Rebecca Firestone, of the Lincoln-based OpenSky Policy Institute, joined Lincoln Sen. George Dungan in expressing concern about the long-term sustainability of the tax cuts. They rejected the idea that tax cuts would drive more people and businesses to move, or stay, in the state.
For instance, Firestone said, ConAgra moved its headquarters from Omaha to Illinois, even though Illinois is a higher tax state.
She said that three-fourths of the income tax cuts would benefit the wealthiest 20% of Nebraskans, households making more than $138,000.
Firestone called the proposal “poorly targeted” and said there were better ways to return excess tax revenue, such as direct rebates or targeted tax credits, such as those for child care.
Few people relocate
Dungan said that jobs and family drive most people to relocate — not taxes —and that only a “small swath” of people, 1.5%-2% of the population, actually relocate every year.
Lucci, of the Platte Institute, said that taxes are among many factors that drive relocations but that low tax rates allow a state to create more jobs. He also noted that people do move to take jobs.
Linehan also defended the proposal, saying that $138,000 is more of a middle class household income and that LB 754 doesn’t take anything from the state’s rainy day fund. It is no doubt sustainable, she said.
LB 783, introduced by Glenvil Sen. Dave Murman on behalf of the governor, would shift financing of Nebraska’s community colleges from property taxes and onto state sales and income taxes, as the University of Nebraska system is funded.
Just recently, the state has moved in that direction, approving a state income tax credit for a portion of the property taxes paid to support community colleges.
Under LB 783, more than $300 million would be shifted off the property tax rolls by 2027, providing a property tax break of about 5.5%. State funding for community colleges would rise by 3.5% a year under the bill, which proponents said was a rate that was typically higher than inflation.
A parade of community college administrators, board members and students opposed the legislation, expressing doubt that the state would live up to its funding commitment.
Representatives of colleges based in Norfolk and North Platte also said their rural institutions would lose out in the competition for funds with the University of Nebraska and urban community colleges.
The Revenue Committee was told that a state association of economic developers opposed the idea because community colleges are key partners in helping train skilled workers for 21st century jobs. Local boards are better able to respond to those needs, the committee was told.
Local control better
“Eliminating local control and replacing local funding with the state worries me,” said Nicole Sedlacek, a board member of the Norfolk-based Northeast Community College. “In today’s environment, we need programs that can respond at the speed of business and industry.”
Neal Stenberg, a board member of Southeast Community College based in Lincoln, said LB 783 as written would put the college in default on $50 million in bonds issued recently to build new classrooms and training centers. A capital improvement levy that community colleges use for building projects would go away under the bill, he said.
“This would bring our capital improvements to an end,” Stenberg said, which would include a new tech center that businesses are “begging” the college to build.
The Revenue Committee took no action on the bills it heard on Thursday, but Murman, the sponsor of the community college proposal, said an amendment was being drafted to address the concern about capital construction.
He added that he would consider letting community colleges retain their property taxing authority but increasing state aid to eliminate the need to tax property — something suggested as a solution by the Platte Institute.
Murman said the goal of the bill was not to reduce funding of community colleges.
Advocates for the colleges, though, said they expected state funding would fall, especially if the state hit an economic downturn. That would force tuition increases, they said, which run counter to a mission of keeping education affordable and accessible to underserved communities.