LINCOLN — A little-known state study done by Gov. Dave Heineman's own administration is sparking debate over whether it's a bad idea to cut income taxes — an idea the governor has promoted.
The recent Nebraska Tax Burden Report, which was done by the State Department of Revenue, concluded that cutting state sales taxes would produce a much bigger economic boost than cutting income taxes.
The latter idea has been promoted by Heineman and state business groups as a way to grow the state's economy and population.
The report projected that a $100 million cut in state income taxes would create about $187 million in economic benefits and 1,788 new jobs. But a similar-size cut in state sales taxes would, it said, offer a bigger boost: about $304 million in new income and investments, and 2,615 new jobs.
Renee Fry, executive director of the Lincoln-based Open Sky Policy Institute, said the report validates her group's research that there's no economic boon in cutting income taxes. She said it's probably an economic loss when you figure in cuts in state services and the job layoffs that would be needed to offset the lost tax revenue.
“The Department of Revenue has modeled it, and it hasn't found that it will be this big economic development engine,” Fry said.
But the Governor's Office, through the Revenue Department, said that's an inaccurate reading of the report. State Tax Commissioner Kim Conroy said the report shows that an income tax cut would deliver economic benefits even though less than a sales tax cut.
“They made it sound like it didn't do any good for the economy,” said Conroy, who took over as director of the Revenue Department last month.
The report said that a $100 million cut in income taxes would increase disposable personal income by $122 million and lead to private investment of $65 million. It also would create about $6 million in tax revenue from increased economic activity. The cut, the report said, would deliver the most benefit to taxpayers with incomes greater than $100,000.
By contrast, a sales tax cut of equal size would do much more, generating $21 million in tax revenue and boosting income by $181 million and investment by $123 million.
Conroy said a sales tax cut translates immediately into economic impact, because people tend to take the money they save in sales taxes and spend it on retail goods. Higher-income taxpayers benefit most from income tax cuts, she said, because they pay most of the taxes.
Whether or not an income tax cut would benefit the state's economy has been a key point of argument in the ongoing debate over whether Nebraska needs to modernize its tax system.
That ball got rolling in January when Heineman proposed eliminating state income taxes, arguing that states that don't levy income tax, such as Wyoming, South Dakota and Texas, have grown faster than states, like Nebraska, that do levy it.
Heineman's plan quickly got shot down by state business and farm groups, which said the governor's proposed replacement for income taxes — new taxes on the inputs of companies and farmers, including equipment, fertilizer and seed — would be a job killer.
Now the governor and the Nebraska Chamber of Commerce & Industry are pushing for less-ambitious cuts in income taxes. They say Nebraska is uncompetitive because its top personal income tax rate is higher than all neighboring states except Iowa.
Barry Kennedy of the state chamber said the state's top income tax rate discourages high-skill workers from taking jobs here and hurts startup businesses, which often pay their taxes as personal income.
“I hear from employers on a pretty regular basis who are trying to recruit employees to Nebraska,” Kennedy said. “It does have an impact.”
The Omaha-based Platte Institute, which has been calling for cuts in income taxes, said Friday that 26 economic studies show there is a direct correlation between economic growth and income tax cuts.
The Open Sky group has said studies do not back up the idea that income tax cuts spur economic growth. It has supported cutting local property taxes by increasing state aid and taxing consumer services.
State Sen. Paul Schumacher of Columbus, vice chairman of the Legislature's special Tax Modernization Committee, said the new tax report as well as testimony before the committee indicate that minor cuts in income taxes, such as the one analyzed in the study, don't create an economic windfall.
The Tax Modernization Committee, a panel of 14 state lawmakers, was created after Heineman's initial tax plans were nixed. During recent public hearings across the state, the committee fielded the most complaints about high property taxes, not income taxes.
Another member of the tax committee, Omaha Sen. Heath Mello, said the new tax study showed that the economic impact of income tax cuts would be minimal and would benefit a small group of higher-income taxpayers.
“It provides some sound rationale that we should be very, very, very cautious in making any changes in income taxes,” Mello said. “That would help very few people.”
The tax impact study was started in the 1990s to provide state lawmakers with an unbiased, scientific analysis of potential tax changes. The report analyzes the impact, positive and negative, on all income groups and business sectors of the economy.