Last week, I discussed the progress made by the Legislature this year to curb property taxes. This week, I’m addressing the work done on income taxes and social security taxes at the state level.

Currently, Nebraska’s current top marginal income tax rate of 6.64% ranks 31^st among all states. Although this is in the middle of the pack nationally, it is higher than any of our surrounding states. Wyoming and South Dakota have no state income tax, Colorado’s is 4.40%, Missouri’s is 4.95%, Kansas’s is 5.7%, and Iowa’s is 6.0%. However, Iowa’s Legislature has voted to reduce their highest rate to 3.9%. If we want to attract more industry to Nebraska, it is imperative that we have a competitive income tax rate.

Passed this year, LB754 was a Revenue Committee bill that made changes to our income tax system. First, LB754 lowers the rate for the top two individual income tax brackets and the corporate income tax bracket to 3.99% by 2027. The rate for the lowest income tax bracket is 2.46%.

Some have criticized the adjustments as tax cuts for the wealthy, but it is important to note how quickly individuals can move through our state income tax brackets. If you are a single person (or married but filing separately), you start to pay income taxes on income over $3,440 (Bracket 1). Bracket 2 taxes income between $3,441 – $20,590, Bracket 3 between $20,591 – $33,180, and Bracket 4 taxes any income above $33,180. If you work 40 hours per week, $33,180 represents an hourly income of $15.95/hour. Current Census data show that the median household income in Nebraska is $66,644, the average household income is $87,815, and the per capita income is $35,189. Only 6.2% of Nebraska households are “high-income” households that make over $200,000 per year.

If the rate for the top two tax brackets was 3.99% today, like it will be in 2027, that rate would apply to individual income over $20,590 and dual-income filers over $41,190. The 3.99% rate would kick in below the median, average household, and per capita individual income levels. Clearly, most Nebraskans will get a tax cut.

In addition to cutting income tax rates, LB754 also exempts 100% of Nebraskans’ Social Security income from state income tax beginning in tax year 2024. Previously, our Social Security tax was set to phase out in 2025. LB754 also allows federal retirees to exclude the amounts received as annuities under the Federal Employees Retirement System or the Civil Service Retirement System from their federal adjusted gross income.

Finally, LB754 was amended to include provisions of LB318, which authorizes the Nebraska Department of Revenue to approve up to $15 million in refundable income tax credits each year for parents and legal guardians paying for child care. The tax credit is available to qualified individuals whose child receives qualified care, is enrolled in a childcare subsidy program, or the household income is below 100 percent of the federal poverty level. The amount of credit available is based on the taxpayer’s total household income. Similarly, the measure allows for credits for contributions up to $100,000 to establish or operate eligible childcare programs. Lastly, tax credits available under the School Readiness Tax Credit Act for childcare providers and employees are increased. These provisions will go a long way toward helping make childcare more affordable and solving our challenges with workforce shortages.

Many have asked if these cuts and credit programs are sustainable. Only time will let us know how our economy will perform, but the Legislature was careful to preserve a cash reserve (rainy day fund) of nearly $1 billion. In addition, the budget approved for the next two years provides for only a 2% increase in spending. Historically, we have always had at least a 3% increase in revenue. I am optimistic that this is indeed a sustainable plan.

The income tax cuts and credits in LB754 are just one piece of the puzzle. When paired with the school funding and property tax reduction measures I discussed last week, we are doing everything we can to keep Nebraska competitive and protect taxpayers like you from being over-taxed. As a rural Senator, I will continue to advocate for an equal amount of property tax reductions to match any income tax reductions. Since the State does not assess property taxes, the only way the State can impact local property tax rates is to increase state aid to public schools, in turn allowing local taxing authorities to reduce property tax requests and/or give property taxpayers a direct property tax rebate. The Legislature is doing both.

Please continue to reach out with questions about laws passed this session or issues to address next year. You can reach me at mjacobson@leg.ne.gov or 402-471-2729. My door is always open!