Gov. Dave Heineman touts his income tax cut proposal as a middle-class income tax cut.  But it would also give sizeable tax cuts to the wealthy in the next few years.

In fact, a Nebraskan with $1 million in taxable income will eventually get a hefty $9,000 income tax break each year under the plan.

In the first year, the Heineman tax cuts are aimed at the middle class. So a family of four with a taxable income of $50,000 (with standard deductions) will see a 20 percent decrease in income taxes, or a savings of $227 next year.

But Heineman’s plan also slowly reduces the state’s top tax rate —which would be applied to income above $90,000 — during the next four years.

Because the wealthy pay the bulk of the income tax — the top 10 percent pay 55 percent of Nebraska’s income taxes — their tax cut will be the most costly part of the proposal.

Economic development is the goal of the income tax cuts, say Heineman and supporters of his plan to reduce taxes for the wealthiest.

Retirees move to other states to avoid Nebraska’s high tax rate on the wealthy. And companies consider that rate when searching for a place to move or start doing business.

But opponents believe higher income tax rates for the wealthy create a fairer overall tax system, because property taxes and sales taxes hit middle and lower-income people harder.

For the first two years, the governor estimates the plan will cost about $432 million.

Opponents would rather see some of that extra tax revenue spent not on income tax breaks but improving services, like health care and education.

Senators will look at the cost and hear many of these arguments during a public hearing on the governor’s bill (LB331) Wednesday before the Revenue Committee.

What is Heineman’s plan?

The plan gradually reduces the top income tax rate that would be applied to income of more than $90,000 from 6.84 percent to 5.95 percent, in an attempt to get below “the 6 percent barrier.” 

That 6 percent is a tax rate used by many site selection committees and businesses looking to expand, said Nebraska’s Tax Commissioner Doug Ewald.

Opponents and supporters agree Nebraska has one of the most progressive income systems in the region — higher rates for the very wealthy, low rates for the poor.

They disagree on whether that progressive system is good or bad.

Arguments for tax breaks for the wealthy

Nebraska’s high tax rate on the wealthy makes it less competitive in attracting businesses and jobs, supporters say.

In fact, Nebraska has one of the highest income tax rates for top earners among surrounding states, and is one of the few states left with an estate tax, says Barry Kennedy, president of the Nebraska Chamber of Commerce and Industry.

Heineman also recommends eliminating the estate tax on estates worth more than $1 million, which will also help with economic development, Kennedy says.

A chamber study several years ago indicated Nebraska’s income tax rates were very competitive at the lower level.

But once you got above $75,000, only Iowa and Minnesota had rates more onerous than Nebraska.

And two bordering states (Wyoming and South Dakota) don’t even have an income tax, Kennedy said.

In comparisons with surrounding states a decade ago, Nebraskans with incomes of $50,000 and below did well on income taxes, but by the $150,000 income level, Nebraskans were the highest taxed, said John Cederberg, a local certified public accountant.

He doesn’t believe the comparative situation has changed much in recent years.

“It’s always really neat to get a Union Pacific,” said Cederberg, who closely follows state tax and economic development issues. “But that doesn’t happen in a state of our size every year.”

The principal growth of jobs in this state are with closely held companies that are growing and putting on additional employees, he said.

These companies, because of the way they are organized, often pay the individual income tax rates. So the tax rate for the highest incomes becomes important to them, he explained.

“These are the people that Missouri and the Front Range of Colorado are competing for. If our tax is going to be higher than Missouri or Colorado, it makes it easier to move the business to the Front Range. And it works against us. That is where the tax climate is important,” said Cederberg.

“If we are going to grow jobs in our state, we’ve got to make changes,” Heineman has said.

Arguments against tax breaks for the wealthy

Wealthy Nebraskans do pay a higher percentage of their income for taxes. But they have more disposable income to begin with, opponents to the governor’s plan point out.

By focusing only on income tax, the governor misses the real overall tax burden paid by lower-income Nebraskans, says Milo Mumgaard, executive director of the Nebraska Appleseed Center for the Law in the Public Interest.

Studies that lump all local and state taxes together — sales tax, property and income — show poorer and middle income people pay a higher percentage of their income in taxes than do rich people, he said.

High income tax rates for the wealthy help offset the bite of property tax and sales tax on lower income Americans, he said.

Appleseed favors a tax system that reflects the ability to pay taxes, and that means a progressive tax structure where the wealthy pay a higher percentage.

A flat tax (everyone paying the same percentage of their income) is not a fair tax, Mumgaard said. If someone barely has enough to pay for basic needs, they should not have to pay the same percent of their income for taxes that someone who has huge quantities of investment income pays, he said.

Mumgaard said he’s not too concerned about rich people who leave the state or won’t settle here because of our income tax rates.

Most people are worried about how they pay their day-to-day bills, how they save for their kids education.

They are not hiring accountants to figure out how they are going to make marginally more money through tax rates, he said.

“We may miss out on some of these folks (because of our income tax rate), but I don’t think it would be a big detriment to the state overall.”

Some opponents would rather see a cut in property taxes or the sales tax rate.

And some believe state leaders should spend part of the additional tax revenue on improving programs, like providing better access to health care, helping rural communities create new jobs, or improving education.

“In general I don’t think this proposal, overall, is a good idea,” said Chuck Hassebrook, with the Nebraska Center for Rural Affairs.

“The only clear and consistent winners are people at the top income, who will receive a permanent tax cut of more than 10 percent, plus the elimination of the estate tax” he said.

“The governor has talked about the importance of making it possible for young Nebraskans to build lives here. There are better ways to do that than by cutting income and estate taxes.”

“If we took half that money to help our rural areas grow new small businesses or insure our schools are adequately funded, in my judgment that would be a better benefit to Nebraska families than income and estate tax cuts,” Hassebrook said.

Reach Nancy Hicks at 473-7250 or nhicks@journalstar.com.