CHICAGO — Proposals by a trio of Midwestern Republican governors to dramatically cut state income taxes have run into opposition by GOP-led state legislatures.
Governors in Indiana, Ohio, and Nebraska have all proposed income-tax cuts as part of their new spending plans, which lawmakers are in the midst of hammering out.
If successful, the tax cuts could impact demand for those states' municipal bonds, particularly in Nebraska, which is eying doing away with the tax altogether, said a bond expert.
Indiana Gov. Mike Pence, who took office in January, wants to cut the Hoosier tax by 10%. Ohio Gov. John Kasich has proposed a 20% cut, and Nebraska Gov. Mike Heineman wants to eliminate the entire income tax.
Kasich and Heineman have proposed offsetting the lost revenue by broadening the sales-tax base.
Pence would dip into Indiana's sizable budget surplus to finance the $800 million income-tax cut for the first two years.
But the proposals are running into opposition from state Legislatures in all three states.
Indiana lawmakers dropped Pence's plan in their budget, and instead boosted spending on transportation infrastructure and K-12 education.
In Ohio, Kasich has run into opposition from influential groups and traditional allies, including the Ohio Chamber of Commerce, which have spent recent weeks urging lawmakers to oppose the governor's proposal.
Amid a groundswell of criticism, Nebraska lawmakers Wednesday voted for a compromise plan that would create a commission to study tax reform, including Heineman's income-tax proposal.
The Tax Modernization Commission would review various tax proposals and be required to report back to the full Legislature by Dec. 15, , with an eye toward passing tax reform by the end of the year.
Heineman, who supports the creation of the committee, proposed in January a plan to eliminate personal and corporate income tax and replace the revenue by closing 30 exemptions in the sales tax. The governor said the overhaul would make the state more competitive.
If Nebraska eliminated its income tax, it could make state bonds less attractive to in-state investors, said Matt Fabian, managing director of Municipal Market Advisors.
"Incremental changes in the state income tax generally have less of an effect on the value of those bonds than changes in the federal tax," Fabian said.
"But it does have an impact where the in-state tax goes away. In Nebraska, though it's tiny, there should be a movement of Nebraska investors into out-of-state bonds, and if the market is big enough to notice, you'll probably see some cheapening in Nebraska bonds," he . Fabian added that investors buy in-state debt for other reasons than just in-state tax exemptions..
Indiana and Ohio have much larger bond markets than Nebraska, but the incremental nature of the tax proposals will likely mitigate any big impact, Fabian said.
"With a 20% tax reduction, you could see an impact but it will be small," he said.
Kasich's plan would cut small-business income taxes by 50% and personal income taxes by 20%, while broadening the sales tax to most services and taxing oil and gas drillers.