LINCOLN — Gov. Jim Pillen opened the door Thursday to pausing or extending a planned decrease in state income taxes to help fund his property tax reduction plan.
Pillen’s property tax plan, Legislative Bill 388, was placed in flux on Tuesday when sponsors pledged to remove a controversial 1-cent hike in state sales taxes — a major component of the plan — to help finance a $1 billion shift from local property taxes.
The decision has set off a search for a new source of funding to finance the proposal and sparked speculation that pausing the gradual income tax reductions passed by the State Legislature last year might be the solution since it would provide a similar amount of revenue.
It also prompted the main sponsor of LB 388, State Sen. Lou Ann Linehan of Elkhorn, to pledge that she wouldn’t bring the bill back unless she could get agreement on how to replace the lost revenue.
Top bracket to drop to 5.84% this year
Under last year’s tax law, the state’s top income tax bracket is scheduled to drop to 5.84% in tax year 2024, and then continue to drop gradually until reaching 3.99% in tax year 2027. The cut was projected to reduce income taxes by about $450 million in the next fiscal year. That compares to the projected income of $527 million from a sales tax increase in the same fiscal year.
In comments to the Examiner on Thursday, Pillen said he was encouraged that several ideas are emerging to replace the revenue that a 1-cent hike in sales taxes would have generated.
“We’ve got everybody working together,” he said. “We’ve got lobby groups, instead of saying ‘No, no, no’ to ideas, people are coming forward with ideas.”
What about pausing the income tax cuts?
“We can’t be satisfied with 3.99%,” Pillen said. “I could be a big strong advocate of let’s extend our income tax conversation to get it down to 3% by 2032, for example.”
Pause called wrong-headed
One argument being advanced about “pausing” the income tax cuts is that it wouldn’t be a “tax increase” but just a delay in the planned decreases.
But opponents, especially Nebraska’s business groups, have argued that a deal was a deal and it would be wrong-headed to reverse course on the income tax cuts.
As a possible show of concern about the possibility, the executive committee of the Greater Omaha Chamber of Commerce scheduled a meeting to discuss the issue of pausing the income tax cuts.
The chamber has also expressed concerns about a companion bill to LB 388, which increases state aid to K-12 schools and lowers tax levies, and whether it might harm a key economic development tool, tax-increment financing or TIF.
Conservative groups opposed hike
Pillen’s proposed 1-cent hike in state sales taxes was assailed by conservative groups as a tax increase, by business groups as a “tax shift” that didn’t lower taxes, and by progressive groups as hurting low-income Nebraskans. It lacked the 33 votes last week to advance.
His administration had defended the tax hike as rebalancing the state’s three main sources of taxes, which currently has about $5 billion a year being paid in property taxes and less than $3 billion being paid in sales taxes. Officials also maintained that high property taxes were forcing hardship on homeowners and making farmers less competitive and that a shift to sales taxes wouldn’t be noticed.
Pillen initially called for a 40% reduction in local property taxes, as well as an increase in per-student “foundation aid” to K-12 schools from $1,500 to $3,000. LB 388, as advanced by the Legislature’s Revenue Committee, offered a reduction of about 30%.
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