Department of Revenue study shows income tax cut would not pay for itself

Department of Revenue study shows income tax cut would not pay for itself

LINCOLN — A $100 million income tax cut would not generate enough economic growth to pay for itself, a tax burden study released Friday by the Nebraska Department of Revenue shows.

A hypothetical $100 million personal income tax cut would result in a net loss of $94 million in tax revenue and largely benefit Nebraskans with the highest incomes, the 2012 Nebraska Tax Burden Study found. According to the study, the majority of the income tax reduction — 62 percent — would go to households making $100,000 or more, roughly the wealthiest 16 percent of Nebraskans. Furthermore, the top 5 percent of Nebraska earners would get 41 percent of the income tax cut.

“The Department of Revenue study shows an income tax cut would not pay for itself,” said Renee Fry, executive director for the OpenSky Policy Institute. “This means cuts to education, health care and other vital services would be required.”

The study noted that some of the income tax cut may leave the state as “individuals seek investment opportunities, not only within the state, but also in other states and other countries.” The study also shows that the actual income tax rate paid by most Nebraskans – including those with the highest incomes – is lower than the state’s top rate of 6.84 percent. For example, the average income tax rate paid by the state’s top 500 earners in 2012 was 4.62 percent.

Below are some excerpts from the report:

On income tax cut leaving the state

“Nevertheless, an extra portion of savings may not directly relate with investment in Nebraska since individuals seek investment opportunities, not only within the state, but also in other states and other countries.” P. 19

On income tax cuts benefitting higher income groups

“It implies that a tax policy, which reduces the income tax rate, would have more economic benefit for higher income groups.” P. 20

On income growth of higher earners in contrast to low and middle income earners

“…we can see the index has generally decreased for the bottom seven deciles since 1995. A possible explanation for the decrease in the burden index is that AGI for the higher income group grew more rapidly compared to the lower AGI group.”  P. 25 (NOTE: The average income of the state’s top 500 earners more than doubled from 1995 to 2012, increasing by about $4.7 million or 161 percent. By comparison, Nebraskans in the eighth decile — those with incomes ranging from $62,484 to $82,533 in 2012 — saw their incomes grow about 75 percent in the same time period.)