(EDITOR’S NOTE: This is a revised version of the Policy Brief that we published on April 26. This version has been revised to reflect the bill as currently amended.)

LB 432, which will soon be up for debate on select file, would give a sizable tax cut to corporations and their shareholders. The vast majority of the tax cut would go out of state and the revenue losses created by the bill would threaten services that Nebraskans need.

The bill, as amended, would lower the top corporate tax rate from 7.81% to 6.84%, as originally proposed in LB 680, reducing state revenues by nearly $105 million over the next two budget cycles.[1]

Lowering the top rate will mostly benefit out-of-state entities at the expense of Nebraskans

According to the Institute on Taxation and Economic Policy, 83% of the tax cut would flow out of the state, leaving just 17% for Nebraska residents. This is because the large majority of corporate tax payments are made by highly-profitable, multistate corporations,[2] which is particularly true for those paying the top corporate rate. Ownership of these companies is dispersed around the country and world, meaning very little of their taxes paid actually come out of the pocket of Nebraskans. Furthermore, most of the stock in these corporations is likely to be owned by individuals or institutions located out of state. These characteristics demonstrate that a very minimal amount of any corporate tax cut will return to the Nebraska economy in the form of spending or investment. To illustrate, a recent study from the Minnesota Department of Revenue assumed that 90 percent of the stock in corporations subject to Minnesota tax was owned by nonresidents.[3]

Cutting the rate is also unlikely to result in any economic growth. Both the Congressional Budget Office (CBO) and Mark Zandi, co-founder of Moody’s Analytics, have found that corporate tax cuts aren’t an effective way to stimulate the economy, with the CBO writing that “increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products.”[4]

As a result, the state would be narrowing its tax base to benefit non-Nebraska residents, leaving future Legislatures to decide which other taxes to raise or which vital services to cut, many of which are shown to grow economies, like good schools.

Cutting the top corporate rate would benefit a very small subsection of businesses

In 2017, only 1,624 of the 19,685 C-corps that filed returns in Nebraska earned enough to have any of their income taxed at Nebraska’s top rate of 7.81%, which only applies to income over $100,000.[5] That’s just 8.25% of corporations operating in the state. Furthermore, those C-corps with income taxed at the top rate had an effective tax rate — their actual taxes paid as a percent of their income — of just 6.19%.[6]

Nebraska’s corporate tax is based on sales in the state, not location, so companies can’t reduce their liability by moving

Nebraska has what’s known as “single-sales factor apportionment,” which means that a corporation only pays taxes on their sales in Nebraska, regardless of where they are located. Because most multinational corporations would be making similar amounts of sales in Nebraska regardless of where they are headquartered, their corporate tax liability won’t change even if they move from Nebraska to another state.

LB 432 could cause Nebraska to have to return federal relief dollars

Another important factor to keep in mind as senators debate LB 432 and other tax-cut measures this session is that any revenue reductions lawmakers pass could result in a commensurate reduction of federal relief dollars, as per a stipulation in the American Recovery Plan. Guidance from the U.S. treasury regarding the use of state surplus dollars to cut taxes is pending, and until it comes, any tax reduction passed by Nebraska lawmakers could put the state in position to experience a double fiscal hit as it could end up forgoing revenue from the tax cut and then having to refund an equal amount of federal dollars.

Conclusion

LB 432 provides tax breaks to primarily non-Nebraskans, and does not help the state accomplish its economic development goals. We would be better served by protecting our tax base and using that revenue to make targeted investments in those areas shown to boost economic growth, such as infrastructure and our educational system.

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[1] Nebraska Legislature, “Fiscal Note, LB 432,” May 5, 2021, accessed at https://nebraskalegislature.gov/FloorDocs/107/PDF/FN/LB432_20210505-152201.pdf on May 5, 2021. The amended bill also would create a tax credit for stillborn children, provide certain benefits to firefighters with cancer and allow Nebraska Educational Savings Trust accounts to be used for apprenticeship expenses.

[2] Michael Mazerov, “Cutting State Corporate Income Taxes is Unlikely to Create Many Jobs,” September 14, 2010, accessed at https://www.cbpp.org/research/cutting-state-corporate-income-taxes-is-unlikely-to-create-many-jobs on April 30, 2021.

[3] Minnesota Department of Revenue, “2021 Minnesota Tax Incidence Study,” accessed at https://www.revenue.state.mn.us/sites/default/files/2021-03/2021%20Tax%20Incidence%20Study_0.pdf on April 30, 2021.

[4] Congressional Budget Office, “Statement of Douglas W. Elmendorf, Director: Policies for Increasing Economic Growth and Employment in 2012 and 2013,” Nov. 15, 2011, accessed at https://www.cbo.gov/sites/default/files/cbofiles/attachments/11-15-Outlook_Stimulus_Testimony.pdf on March 26, 2021.

[5] Nebraska Department of Revenue, “Business Income Tax Data: Analysis of Corporate Income Tax,” accessed at https://revenue.nebraska.gov/research/statistics/business-income-tax-data on March 15, 2021.

[6] Nebraska Department of Revenue, “Business Income Tax Data: Analysis of Corporate Income Tax,” accessed at https://revenue.nebraska.gov/research/statistics/business-income-tax-data on March 15, 2021.