A rural senator told fellow Nebraska lawmakers Thursday that the “simplest” and most “straightforward” way to dig the state out of a $289 million budget deficit would be to pause the deep income tax cuts passed two years ago.

“While tax reductions are important, we also need to be responsible to the state budget,” State Senator Tom Brandt of Plymouth told the Legislature’s Revenue Committee. “Let’s pause and take a breath.”

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Under his proposal, Legislative Bill 171, the stair-stepped reductions in individual and corporate income tax rates passed in 2023 would be paused at 4.99 percent in tax year 2026 and would not drop further to 3.99 percent as the 2023 law prescribed.

That change, which Brandt maintained was “not a tax increase,” would provide an extra $497 million dollars to state coffers over the next two fiscal years, more than covering the budget gap and allowing funds to be devoted to property tax relief.

Supporters of the bill, which included the state’s major farm groups, said it would help fulfill promises by Governor Jim Pillen and state leaders to address the state’s worst tax issue, high property taxes, while providing the revenue to head off deeper budget deficits predicted in coming years. The tax rate could be cut further, they said, when state tax revenues allow it.

“Now is not the time to reduce income taxes if we are to realize property tax relief,” said Merlyn Nielsen, a Seward farmer, who said it was “clear to me that property tax relief has been pushed to the back of the line.”

Tax contradictions

The legislative hearing on sales tax exemptions pointed out several contradictions in state tax policies.

For instance, dry cleaning of uniforms by a business is tax exempt because it’s a “business input,” but if a banker needs suits dry cleaned, that’s taxed.

People buying a bottle of soda pop from a vending machine are not taxed, but those buying a cup of pop from a concession stand or fountain dispenser are.

Business leaders oppose pause

But the state’s business community slammed the idea of a pause, saying it would make Nebraska less competitive in attracting new employers and would renege on a promised tax reduction.

“This is absolutely the worst thing we could do,” said Bryan Slone, the president of the Nebraska Chamber of Commerce and Industry. Slone said that any “pause” in the income tax reductions would be viewed as a tax increase.

The debate over LB 171 renewed the differences exposed by the big tax cut passed in 2023. Advocates, like the business community, had long sought income tax cuts, and Iowa’s recent move to lower its tax rate to 3.8 percent accelerated the push.

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But critics questioned whether the state would run short of money to fund operations. One state senator, Machaela Cavanaugh, has called the current budget deficit a “manufactured crisis” due to the reduction in income tax revenue.

Right now, two neighboring states, South Dakota and Wyoming, have no state income tax. While a 3.99 percent rate would put Nebraska in line with Iowa, both Kansas and Missouri have higher rates of 4.7 percent and 5.8 percent respectively, according to Open Sky Policy Institute.

Nebraska’s ranking for the best business climate for taxes by the nonpartisan Tax Foundation has improved recently from 28th to 24th in the nation, which Rebecca Firestone of Open Sky called “a very good place to be” given the state’s small population.

Slone said that the state isn’t in a budget hole because of its spending, but because it’s devoting more and more money to property tax credits. He and other critics of LB 171 said the real answer to lowering property taxes was to find another way to finance those credits or to slow spending at the local level.

“Income tax reform will remain mission critical for states who want to remain competitive,” said former State Senator Jim Smith, now with the Platte Institute, a free-market think tank.

Steep climb

Brandt acknowledged during the hearing that his proposal was unlikely to advance from the eight-member Revenue Committee, but he said it should be considered given the future budget challenges faced by the state.

The senator presented two other bills to the committee on Thursday that would also address the state’s budget shortfall and provide more funds for property tax relief.

Those proposals prompted frustration from Brandt and at least one member of the Revenue Committee about opposition to past attempts to lower local property taxes.

“We are charged with trying to fix the (property) tax problem, and everything we try gets shot down,” said North Platte Senator Mike Jacobson.

Under Brandt’s LB 169, sales tax exemptions on about 20 items would be removed, from charter flights and dry cleaning to golf lessons and tattoos, raising about $37 million in new revenue. The senator’s LB 170 would impose sales taxes on soda pop and candy, and, as written, would raise taxes on cigarettes and liquor.

Brandt called LB 169 a “luxury tax” proposal, since the items identified in the bill are “optional” purchases. He called LB 170 a “sin tax” bill since it raises taxes on junk food, cigarettes and liquor.

Property tax relief push

The senator said he was disappointed that last year’s regular and special session did not result in expanding the sales tax base. Brandt said he had worked since then to craft a list of sales tax exemptions that fellow lawmakers felt most comfortable removing.

But the bills sparked a long line of opponent testifiers, as have similar past proposals to eliminate tax exemptions.

Critics called the new taxes regressive, since they shifted taxes onto lower-income Nebraskans and said they would be difficult and costly to implement. Some said the proposals represented a tax shift, not a tax reduction.

Others said it’s difficult to discern what is junk food and what isn’t because some candy bars don’t qualify as “candy” and lots of soda pop sold has no calories.

“This is not tax reduction,” said Slone of the State Chamber. “It’s just a change in who pays.”

Owners of Nebraska movie theaters testified that a new tax on their rentals of Hollywood films would be another burden for an industry still not fully recovered from the COVID-19 pandemic. They argued it would be a “’double tax” since customers already pay sales taxes on admissions and concessions.

Brandt said he removed hair care from his bill due to opposition from barbers and beauticians and that he would probably remove the proposed increase in liquor taxes due to concerns that it violates the federal Commerce Clause by favoring in-state liquor producers.

The Revenue Committee took no action on the three Brandt bills after the hearing Thursday.