Bill Summary, LB 401(1997) - Income Tax Reduction


LB 401 temporarily reduced individual income tax rates, temporarily increased the personal exemption credit, temporarily increased the percentage of income tax revenue dedicated to school districts as a form of state aid (often referred to as the "income tax rebate for schools"), provided a temporary deduction to selfemployed workers for family health insurance expenses, and requires a $40 million transfer to the General Fund in 1999.


LB 401 reduced individual income tax rates in all four of the state's income brackets for 1997 and 1998.  The new tax rates would be 2.51 percent for taxpayers in the lowest income bracket (previously 2.62 percent), 3.49 percent for taxpayers in the second lowest income bracket (previously 3.65 percent), 5.01 percent for taxpayers in the second highest income bracket (previously 5.24 percent), and 6.68 percent for taxpayers in the highest income bracket (previously 6.99 percent).  The changes represented an average decrease of 4.35 percent in the income tax rates.


LB 401 increased the personal exemption credit to $86 per dependent for 1997 (up from $76) and to $88 per dependent for 1998 (up from $78).  (Thereafter, current law provides that the amount of the credit will be $65 per dependent, indexed for "cumulative inflation since 1993.")


LB 401 also increased school districts' income tax rebate percentage from 20 percent to 21.28 percent for income tax revenue attributable to tax year 1997 and to 21.25 percent for income tax revenue attributable to tax year 1998.  (However, Laws 1996, LB 1050, capped the amount of the statewide income tax rebate in a given year at $102.3 million.)


In addition, LB 401 permitted self-employed taxpayers to claim a deduction on their state income tax return for the amount of qualified health insurance expense that was disallowed for federal income tax purposes.  Specifically, a self-employed individual may claim a deduction for the amount of qualified family health insurance expenses that section 1620)(1) of the Internal Revenue Code disallows as an adjustment in determining the amount of federal adjusted gross income (AGI).  However, self-employed taxpayers who itemize their health insurance deductions for federal income tax purposes may not claim an adjustment that exceeds 7.5 percent of the taxpayer's federal AGI.


Finally, LB 401 required the State Treasurer to transfer $40 million from the Cash Reserve Fund to the General Fund on June 15, 1999.


LB 401 passed 38-7 and was approved by the Governor on June 5, 1997.