TAX INCIDENCE

Tax incidence studies attempt to probe deeper into the effect taxes have on the state and its citizens. Rather than looking just at rates and total collections, tax incidence studies try to determine who bears the ultimate burden of the taxes that are levied. The Department of Revenue is required by statute to perform a tax burden study every four years that is to examine the amount of taxes and fees imposed on each economic sector, including the amount imposed on individuals employed in industries in each sector. The most recent publication was in December 2002 and it included information from 1999 taxes. Because the study emphasizes business sectors, the challenge has been to match employment information with income tax information of employees to examine the overall burden. However, privacy concerns prevent these data sources from being linked to each other, limiting the results of the study.

However, the analysis does include comparisons of sales tax and income tax burdens by income group, based on consumer expenditure information collected by the Census Bureau and statistics of income gleaned from federal income tax information. The sales tax results are as follows:

Imputed Sales and Use Tax Rate by Income Group
1995		1999
Adjust Gross Income Group	Imputed Sales Tax Rate	Adjust Gross Income Group	Imputed Sales Tax Rate
0 - 13,000	4.2	Less than 5,000	8.56
13,000 - 20,000	2.55	5,000 - 10,000	2.81
20,000 - 28,000	2.22	10,000 - 15,000	2.22
28,000 - 36,000	2.04	15,000-20,000	1.82
36,000 - 50,000	1.82	20,000-30,000	1.63
50,000 and over	1.48	30,000-40,000	1.35
		40,000-50,000	1.2
		50,000-70,000	1.11
		More than 70,000	0.98

This result is none too surprising since most people understand that sales tax is a regressive tax. This study also examines income tax liability for various income groups before non-refundable credits. This comparison eliminates the effect that economic incentive tax credits has on the relative share of income tax burdens while allowing withholding and the effects of child care credits to be considered in the comparison. What is shown below is somewhat more recent data from the 2001 Statistics of Income Report containing the same information. This information shows year-to-year changes in effective tax burdens from 1995 to 2001. It is based on returns filed, not necessarily households. This means that some of the lowest-income returns are minors earning part time income in a middle class home and some of the high –income returns may be two taxpayers in the household that divide income and assets for tax-planning purposes.

Analysis by Deciles of Nebraska Income Tax Burden Ranked by Federal Adjusted Gross Income, Resident Returns (Source: Nebraska Department of Revenue - http://www.revenue.state.ne.us/research/stat_2003/html/tableg1.htm)
Tax Year	Number of Returns	Federal Adjusted Gross Income						Nebraska Liability Net of Non-Refundable Credits
		First 7 Deciles mil.$	8th Decile mil.$	9th Decile mil.$	10th Decile mil.$	Top 500 Returns mil.$		First 7 Deciles mil.$	8th Decile mil.$	9th Decile mil.$	10th Decile mil.$	Top 500 Returns mil.$
1995	716,195	6,781.4	2,945.4	3,886.9	8,903.5	1,392.1		129.8	79.5	123.6	393.4	39.6
1996	729,023	7,143.2	3,141.0	4,148.7	9,529.3	1,281.8		140.6	86.9	135.6	445.6	49.8
1997(a)	739,103	7,976.3	3,372.4	4,448.8	10,586.5	1,564.1		135.2	84.9	132.8	427.8	48.8
1998(d)	748,163	8,505.6	3,572.1	4,724.8	12,042.1	2,221.4		153.9	97.2	154.3	521.6	59.4
1999(d)	757,222	9,001.7	3,779.8	4,995.6	12,666.5	2,113.2		167.8	106.6	168.6	576.7	69.7
2000(d)	763,282	9,472.5	3,964.3	5,243.1	13,607.8	2,529.4		184.1	113.8	180.5	607.0	71.9
2001(d)	757,159	9,476.0	3,965.1	5,224.2	12,205.1	1,717.4		182.6	112.1	177.4	553.4	59.2
2002(d)	752,974	9,495.1	3,958.0	5,228.7	11,989.6	1,641.2		176.3	110.6	175.6	536.7	54.2
2003(e)	751,000	9,968.1	4,063.9	5,387.4	12,459.8	1,784.3		190.5	119.3	190.6	588.5	62.8
Tax Year		Federal Adjusted Gross Income as Percent of Total (AGI Share Index)						Nebraska Liability Net of Non-Refundable Credits as Percent of Total (Net-Liability Share Index)
1995		30.12	13.08	17.26	39.54	6.18		17.87	10.94	17.02	54.16	5.45
1996		29.81	13.11	17.31	39.77	5.35		17.39	10.75	16.77	55.10	6.16
1997(a)		30.23	12.78	16.86	40.12	5.93		17.32	10.88	17.01	54.81	6.25
1998(d)		29.49	12.38	16.38	41.75	7.70		16.60	10.49	16.65	56.27	6.41
1999(d)		29.57	12.42	16.41	41.61	6.94		16.45	10.45	16.53	56.55	6.83
2000(d)		29.34	12.28	16.24	42.15	7.83		16.96	10.48	16.63	55.92	6.62
2001(d)		30.70	12.84	16.92	39.54	5.56		17.81	10.93	17.30	53.96	5.77
2002(d)		30.96	12.90	17.05	39.09	5.35		17.65	11.07	17.58	53.72	5.42
2003(e)		31.27	12.75	16.90	39.08	5.60		17.49	10.96	17.50	54.05	5.77
Tax Year		Effective Tax Rate (b)						Nebraska Tax Burden Index (c)
1995		1.91	2.70	3.18	4.42	2.84		0.59	0.84	0.99	1.37	0.88
1996		1.97	2.77	3.27	4.68	3.89		0.58	0.82	0.97	1.39	1.15
1997(a)		1.70	2.52	2.99	4.04	3.12		0.57	0.85	1.01	1.37	1.05
1998(d)		1.81	2.72	3.27	4.33	2.67		0.56	0.85	1.02	1.35	0.83
1999(d)		1.86	2.82	3.37	4.55	3.30		0.56	0.84	1.01	1.36	0.98
2000(d)		1.94	2.87	3.44	4.46	2.84		0.58	0.85	1.02	1.33	0.85
2001(d)		1.93	2.83	3.40	4.53	3.45		0.58	0.85	1.02	1.36	1.04
2002(d)		1.86	2.79	3.36	4.48	3.30		0.57	0.86	1.03	1.37	1.01
2003(e)		1.91	2.94	3.54	4.72	3.52		0.56	0.86	1.04	1.38	1.03

As can be seen from the tables, in 2003, the highest 10% of all returns earned more than 39% of all the federal adjusted gross income in the state and incurred 54% of all the tax liability. Nebraska's is a progressive tax system. Effective tax rates increase until the top 500 returns. The Tax Burden Index compares the share of the AGI with the share of the liability, and also shows the tax to be progressive until the top 500 returns.

While it is unknown what causes the effective tax burden to decrease for the very largest of the large returns, it may have to do with the prevalence of the special capital gains exclusion provision among these taxpayers.

The 1999 Tax Burden Study also for the first time utilized the Legislature's TRAIN model to analyze the impact of tax changes on economy. The TRAIN model is a Computable General Equilibrium model that calculates how each of 72 sectors in the Nebraska economy would be effected by a particular tax policy change. The 1999 Tax Burden Study analyzed the impact on consumption of a 10% across the board reduction in individual income taxes.

The model showed that there would be little or no change in consumption by any of the income groups below the $70,000 AGI group. However, for the above $70,000 income group, such a cut would increase consumption 8.33% in the metals and machinery sector, 1.25% in the retail sector, 2.85% in the printing and publishing sector, 1.72% in the real estate sector, and about 1.5% on most services sectors. The Department of Revenue hopes to use this approach for future Tax Burden Studies.

Before moving over to the Department of Revenue, Dr. Iksoo Cho used TRAIN to conduct a small tax incidence study pursuant to the requirements of the LB 407 Task Force study. In this study, Dr. Cho examined the impacts of a $100 million sales tax increase and a $100 million individual income tax increase on the Nebraska economy by sector. These results are shown below.

The Impact on Income and the Tax Burden

Increasing the sales tax would be expected to reduce disposable income, with the consequence that Nebraskans pay more taxes and receive less real income due to the negative economic effects of tax increases. The following table presents an income loss and an additional tax burden for each income group caused by sales and use tax increase.

Change in Sales and Use Tax Rate
	Changes in Disposable Income (in millions)	Additional Tax Paid (in millions)	Tax Burden Per Income
Group 1 (    0 -   5,000)	-0.211	2.63	2.505%
Group 2 (  5,000 - 10,000)	-2.553	5.031	1.360%
Group 3 ( 10,000 - 15,000)	-5.215	6.918	0.594%
Group 4 ( 15,000 - 20,000)	-7.229	8.239	0.432%
Group 5 ( 20,000 - 30,000)	-22.177	17.712	0.296%
Group 6 ( 30,000 - 40,000)	-25.604	16.769	0.228%
Group 7 ( 40,000 - 50,000)	-22.518	12.998	0.190%
Group 8 ( 50,000 - 70,000)	-33.324	17.641	0.189%
Group 9 ( above 70,000 )	-29.067	10.261	0.101%
Total	-147.898	98.199

When sales and use tax is increased, every income group loses some of their disposable income, which totals $147 million. Column 3 shows an additional tax paid by each income group and column 4 shows a tax burden as the share of their income. The increase in sales and use tax is typically regressive, with the highest burden on the lowest income group and the lowest burden on the highest income group

The next table presents an income loss and an additional tax burden by a change in an individual income tax. Every income group also experiences a loss of their disposable income, and an additional income tax burden, but the burden of tax increase is progressive.

Change in Individual Income Tax
	Changes in Disposable Income (in millions)	Additional Tax Paid (in millions)	Tax Burden Per Income
Group 1 (    0 -   5,000)	0.127	0.129	0.123%
Group 2 (  5,000 - 10,000)	0.526	0.584	0.158%
Group 3 ( 10,000 - 15,000)	-0.151	1.722	0.148%
Group 4 ( 15,000 - 20,000)	-0.589	3.208	0.168%
Group 5 ( 20,000 - 30,000)	-6.508	8.697	0.145%
Group 6 ( 30,000 - 40,000)	-10.398	9.673	0.132%
Group 7 ( 40,000 - 50,000)	-14.182	10.691	0.157%
Group 8 ( 50,000 - 70,000)	-27.852	25.18	0.270%
Group 9 ( above 70,000 )	-65.531	55.826	0.548%
Total	-124.558	115.71

Economic Impacts

The final table summarizes the economic impacts of the changes in taxes. The increase in the income tax and sales tax reduce industrial output by $121 million and $161 million, respectively. Employment in the private sector decreases by 2,076 jobs in the case of the income tax increase, and 2,649 jobs in the case of the sales tax increase.

This result indicates that an increase in the sales tax induces a more negative impact on the Nebraska economy than an increase in income tax.

Why is this so First, by exempting various items, including necessities and various consumer services, the state sales tax distorts consumption choices and allocation of resource so that it reduces the economic efficiency more than with the income tax. Second, the Nebraska economy – in reality and in the model – is considered to be a small open economy. Because the sales tax directly increases prices, the Nebraska economy might lose some competitiveness to the other states. For example, increased prices due to the sales tax encourage out of state mail order sales and cross-border purchases.

Impacts on Industries
	Sales Tax Increase	Income Tax Increase
Industrial Output (in millions)	-161.183	-121.108
Employment (Jobs)	-2649	-2076
Investment (in millions)	-5.996	-4.154

Business Tax Burden

Cline, Neubig, and Phillips of the accounting firm Ernst and Young, LLP, annually calculate total business taxes as a share of total taxes and as a share of gross state product. Because the study has been performed for five years now, it also examines year to year changes and trends.

According to this study, business taxes in the U.S. totaled $497 billion in 2005. This represents 44% of all state and local taxes collected in that year. The taxes considered in the study and the shares of each are shown in the following pie chart.

The study also examines the burdens imposed by each state. Nebraska's is shown by the following chart.
The Nebraska Chart clearly shows that property taxes and sales tax imposed on businesses are higher as a share of the total than is true nationally. Income taxes, unemployment insurance, licenses and other fees make up a smaller percentage. All business taxes represent about 46.8% of the total tax burden, slightly higher than the national average.

According to the Ernst and Young calculations, the taxes imposed by Nebraska on business represent 5.4% of the gross state product, which is above the national average and in a tie for 15th highest in the nation. Ranked higher are Wyoming (1st), and Kansas (tied - 12th). Ranked lower are South Dakota (tied - 20th), Iowa (tied - 36th), Colorado (tied - 40th) and Missouri (tied - 44th).

Our high ranking is business taxes is probably due to our high property and sales tax rates. These taxes are the largest burdens on businesses, according to the survey.

Additional Information:

The Study of Nebraska Tax Structure and Tax Burden (prepared by the Legislative Fiscal Office) 1999 Nebraska Tax Burden Study (prepared by the Nebraska Department of Revenue - 12/02)