Happy Meal Tax Cut Bad for Nebraska

LB 1097 proposes to undertake the following:

— Replace the four current personal income tax brackets with three brackets starting at $0, $36,000 and $72,000 for married couples
— Indexes brackets for inflation starting in 2018
— Lowers personal income tax rates for all brackets
— Lowers corporate income tax rates

The Fiscal Note for LB 1097 estimated a loss in General Fund revenue to the state ranging from $140.7 million in fiscal year 2014-2015 to $645.3 million when fully implemented in fiscal year 2018-2019.

“Perhaps the most important question to ask is, who benefits from LB 1097?” Bailey asked. “The Institute on Taxation and Economic Policy estimates that about 61 percent of LB 1097’s tax cuts would go to the top 20 percent of income earners – those who earn over $92,000. Only seven percent would go to the bottom 40 percent of taxpayers – those who earn less than $37,000.”

Bailey’s report references data from the OpenSky Policy Institute and the Institute on Taxation and Economic Policy showing the following:

— About 31 percent of tax cut benefits of LB 1097 will go to the top 5 percent of Nebraska earners (those who earn more than $168,000 annually).
— About 16 percent of the tax cut benefits of LB 1097 go to the state’s top 1 percent of earners (those who earn more than $388,000 annually).
— The average taxpayer in the top 1 percent of earners would receive an annual tax cut of about $6,600, about $550 per month.
— Middle-income taxpayers (between $37,000 and $60,000 annually) would receive average tax cuts of about $239 annually, or about $20 per month.
— Lower income taxpayers would receive even less. The lowest 20 percent income group (below $21,000 annually) would receive a tax cut of $25 annually, or about $2 per month; the second lowest income group ($21,000 to $37,000 annually) would receive a tax cut of $122 annually, or about $10 per month.

“Twenty dollars per month for middle-income taxpayers is equivalent to about one Happy Meal at McDonalds each week,” explained Bailey. “Lower income earners wouldn’t even be able to buy the Happy Meal.”

“In addition to the regressive nature of the tax cuts, meaning those at the bottom of the income scale will receive fewer tax cut benefits, LB 1097 has significant long-term consequences,” Bailey added.

According to Bailey’s report, those long-term consequences would include the following:

— LB 1097 would wipe out the current state budget surplus and create a large state budget deficit. LB 1097 would wipe out the projected $109 million surplus and leave the state with an estimated $929 million shortfall as the tax cuts grow through fiscal year 2018.

— State investments in items like education, health care, job training, roads and safe communities would become hostage to the budget deficit caused by LB 1097.

— The state budget could make up for the loss of revenue from LB 1097 by tapping the state’s cash reserve fund. This has been proposed by supporters of LB 1097 and tax cuts in general.

“However, the current balance of the cash reserve fund is $679 million – squarely within recommended amounts,” said Bailey. “In our view it is fiscal malpractice to use a one time, major withdrawal from the state’s reserves for permanent changes in the state’s tax system. That leaves the state potentially unprotected from another economic downturn that needs the cash reserve fund to mitigate damage to necessary state investments.”

“In the long-term LB 1097 will not provide any benefits to middle class or lower income taxpayers,” concluded Bailey. “LB 1097 also has the potential to endanger vital state investments that are in the best interests of middle class and lower income Nebraskans, the state as a whole and Nebraska’s economy.”

A full copy of the report can be viewed and downloaded at: http://www.cfra.org/www.cfra.org/Crumbs-for-the-Middle-Class