A tax burden study released last week by the Nebraska Department of Revenue contradicts claims that income tax cuts will lead to economic growth.
A hypothetical $100 million personal income tax cut would result in a net loss of $94 million in tax revenue and largely benefit the state's highest earners, the 2010 Nebraska Tax Burden Study found.
"This Department of Revenue study shows an income tax cut would not lead to an economic boom for the state," said Renee Fry, executive director for the OpenSky Policy Institute. "In that regard, the study mirrors the findings of several others that repeatedly show income tax cuts don't lead to economic growth."
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." This echoes another recent study, which was conducted by the Institute on Taxation and Economic Policy and showed about 40 percent of the benefit from cutting the state's top income tax rate would leave Nebraska.
The Department of Revenue study data also shows that the actual income tax rate paid by most Nebraskans – including the state's highest earners – is significantly 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 2010 was 3.26 percent.
The study did not appear to account for the number of jobs that teachers and other public employees would lose under such a tax cut, Fry said, but it did show that any increased economic activity associated from cutting the income tax would not be near enough to pay for the tax cut.
"This means cuts to education, health care and other vital services would be required," Fry said. "Simply put, income tax cuts do not pay for themselves."
Below are some excerpts from the report:
On income tax savings leaving the state
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"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. 17
On income tax savings benefitting higher income groups
"It may imply that a tax policy which reduces the income tax rate would have more economic benefit for higher income groups." P. 18
On income growth of higher earners in contrast to low and middle income earners
"… we can see that the index has generally decreased for the bottom seven deciles since 1995. A possible explanation for the decrease in the burden index is because AGI for the higher income group grew more rapidly compared to the lower AGI group." P. 23 (NOTE: The average income of the state's top 500 earners more than doubled from 1995 to 2010, increasing by about $3.4 million or 123 percent. By comparison, Nebraskans in the eighth decile – those with incomes ranging from $58,613 to $77,022 in 2010 – saw their incomes grow about 64 percent in the same time period.)