Session Review: Revenue
Senators passed legislation this year that authorizes a comprehensive study of Nebraska’s tax code.
Omaha Sen. Ernie Chambers introduced LR155, passed 40-0, which establishes the Tax Modernization Committee. The committee is directed to consider fairness, competitiveness, simplicity and compliance, stability, adequacy and complementary tax systems as it evaluates and recommends updates to Nebraska’s current tax code.
The committee comprises the members of the Revenue Committee and the chairperson of the following committees: Appropriations, Health and Human Services, Education, Agriculture and Planning. Two other members of the Legislature will be selected to serve on the committee by the Executive Board of the Legislative Council.
A preliminary report to the Legislature and the governor is due by Dec. 15 and a final report is due by Nov. 15, 2014. The committee will continue to meet at least once annually to review and evaluate the tax code.
Omaha Sen. Heath Mello introduced LB97, passed 47-0, which allows the establishment of land banks in metropolitan class cities or counties that have at least three first class cities — currently only Douglas and Sarpy. Land banks are tax-exempt political subdivisions that acquire, manage and develop vacant and tax-delinquent properties.
Under the bill, land banks can be created by passing a city ordinance or by way of interlocal agreements. Each land bank is required to have a seven-member board of directors appointed by the mayor and confirmed by a two-thirds vote of the governing body.
The bill also allows land banks to borrow money, issue bonds, procure insurance, enter into both private and public contracts, have priority over other bidders in tax foreclosure proceedings and sell property to private entities in which they will receive 50 percent of the collected property tax amount for five years after the sale.
Additionally, the bill caps a land bank’s legal title holdings at 7 percent of the total number of parcels of real property located in the municipality. Land banks are prohibited from exercising eminent domain rights to acquire private property and from collecting property taxes on a property that has been redeveloped under the Community Development Law, unless the authority enters into an agreement for the remittance of such funds to the land bank.
Omaha Sen. Steve Lathrop introduced LB104, passed 38-2, which incentivizes companies that create sources of renewable energy to locate in Nebraska. The bill expands the definition of qualified business to include renewable energy producers in the existing incentive tiers. It also defines sources of renewable energy to include wind, solar, geothermal, hydroelectric, biomass and transmutation of elements. Prospective wind energy developers will be required to invest a minimum of $20 million in qualified property.
The bill incorporates provisions from LB266, a bill introduced by Omaha Sen. Ernie Chambers, which would repeal a bill passed in 2012 allowing an increase in local option sales taxes. As amended into LB104, the provisions repealed the local option sales tax increase only in metropolitan class cities. Omaha is the only metropolitan class city in the state.
Malcolm Sen. Ken Haar introduced LB90, passed 47-1, which provides a tax credit to customers who generate electricity. It allows an offset of a customer-generator’s electricity production against their consumption. A customer-generator is defined as an end-use electricity customer that generates electricity on the customer’s side of the meter from a qualified facility.
Kearney Sen. Galen Hadley introduced LB296, passed 48-0, which provides higher tax deductions to persons making contributions to a Nebraska College Savings Program (NCSP) account. Current contributions to a NCSP account are exempt from state income tax up to $2,500 for a married person filing separately and $5,000 for a married couple filing jointly.
Under the bill, the amount of contributions exempt from income taxes will increase to $5,000 for a married person filing separately and $10,000 for a married couple filing jointly. An adult making contributions to an account established under either the Uniform Transfers to Minors Act or the Uniform Gifts to Minors Act — as well as rollover contributions from another state’s savings program — will be exempt under the bill.
The bill also establishes transfer of ownership procedures. In the case of the account owner’s death and there is no successor named, ownership of the account will transfer to the beneficiary.
Columbus Sen. Paul Schumacher introduced LB308, passed 48-0, which makes changes to the computation of income taxes. It eliminates the federal alternative minimum tax (AMT) calculation for individual state income tax purposes for taxable years beginning Jan. 1, 2014.
The proposed changes apply to estates and trusts required to pay state income taxes. The federal credit for prior year AMT for taxable years beginning in 2014 also is eliminated.
LB573, introduced by Omaha Sen. Burke Harr, creates a state definition of shareholder for purposes of employee stock ownership plans (ESOP).
Currently, individual stockholders in a qualified corporation can exclude from taxable income all extraordinary dividends paid on and the capital gain from the sale or exchange of capital stock of a corporation acquired through employment.
The bill designates an ESOP as a qualified corporation, allowing its individual shareholders to exclude dividends and capital gains from their taxable incomes. It also clarifies that an ESOP should not be treated as a single shareholder, but that each participant in an ESOP constitutes a separate shareholder.
Senators passed the bill on a 46-0 vote.
LB341, introduced by Lexington Sen. John Wightman, alters the procedure for purchasing tax sales certificates.
Currently, property owners who become delinquent on their taxes are subject to a tax sales process. Individuals can pay the delinquent property taxes and receive a lien on the property in return. Investors can purchase the certificates at an annual tax sale.
Among other changes, the bill eliminates the current bid down process used in selling tax certificates and instead implements a round robin format. Bidders will be required to register and pay a $25 fee to participate in the sale.
Senators passed the bill on a 42-0 vote.
Wightman introduced LB55, passed 45-0, which allows county officials to continue or terminate county assessment function contracts previously held by the state Department of Revenue.
LB153, introduced by Fullerton Sen. Annette Dubas, expands the types of projects that will qualify for funding under the Civic and Community Center Financing Act to include construction of recreation centers.
LB28, introduced by Hadley, changes the late filing date for personal property tax returns. Currently, taxpayers must meet a July 31 deadline for late personal property tax filings. The bill changes the deadline to June 30. Taxpayers missing the deadline will face a penalty of 25 percent of the tax on the value added. Senators passed the bill on a 43-0 vote.
LB34, also introduced by Hadley, revises current definitions under the Nebraska Advantage Act. The current definition of taxpayer includes any person who is subject to sales and use taxes and withholding. It also includes specific entities, including corporations and partnerships, that are subject to the same taxes.
The bill, passed 46-0, eliminates the specific references and substitutes the word entity in its place. It also allows flow-through entities and cooperatives to qualify as taxpayers even though all or some portion of the partners or members are political subdivisions or exempt entities.
Schumacher introduced LB613, passed 47-0, which codifies the state’s ability to issue subpoenas.
A legislative committee may receive approval by a majority vote of the Executive Board to issue a subpoena with regard to a specific inquiry or investigation. The committee may require any state agency, political subdivision or individual to provide information relevant to the investigation within 30 days of the initial request.
LB82, also introduced by Schumacher, would have allowed taxpayers to pay extra taxes in return for a future income tax credit. The credit would be adjusted for inflation with an interest calculation equal to the T-Bill rate of return. Revenue raised by the tax investments would have been earmarked for highway construction projects. The bill failed to advance from general file on a 22-15 vote.
State Income Taxes
Omaha Sen. Beau McCoy introduced two bills, LB405 and LB406, that would have eliminated state income taxes by discontinuing sales tax exemptions.
LB405 would have eliminated income tax on individuals, estates, trusts and corporations. To replace the estimated $2.4 billion in lost revenue from the elimination of the income tax, the bill would have eliminated nearly half of the state’s current sales tax exemptions.
Exemptions that would have expired under the bill include those on purchases of:
• manufacturing, agricultural and industrial machinery and equipment;
• insulin, prescription drugs and durable medical goods;
• rooms used to house students at educational institutions;
• hospital equipment;
• fuel used in irrigation, farming, manufacturing or by hospitals; and
• equipment built in state and sold outside Nebraska.
LB406 was introduced as an alternative to LB405 that would exempt only a portion of retirement income from income taxes: up to $12,000 for married couples filing jointly and $6,000 for single persons. Social security income was not exempt under the bill.
The state would have seen a loss of approximately $300 million in revenue from the elimination of the corporation income tax, financial institutions franchise tax and earned income tax credit. To recover the projected loss in revenue, the bill would eliminate sales tax exemptions including:
• mobility enhancing, durable medical equipment and home medical supplies;
• energy or fuel used in industry, agriculture or by for-profit hospitals;
• molds, dies and patterns used in manufacturing;
• chemicals used in agriculture; and
• seeds and annual plants sold to commercial producers or for exclusively agricultural purposes.
The refundable Nebraska Advantage Research and Development income tax credit also would have been eliminated. The bill authorized a nonrefundable income tax credit, which could be carried forward for five years.
Both bills were indefinitely postponed by the committee.
Economic Forecast
The Nebraska Economic Forecasting Advisory Board maintained the current fiscal year revenue projections during an April 25 meeting at the Capitol. The board provides an advisory forecast of general fund receipts used by the Legislature to craft the state’s budget.
Total projected revenue receipts for fiscal year 2012-13 were maintained at $3.87 billion, which is based on an estimated growth rate of 5.4 percent.
The board raised its projections for FY2013-14 and FY2014-15. Projections were set at $3.98 billion for FY2013-14, which is based on an estimated 3.6 percent growth rate. Projections for FY2014-15 were set at $4.14 billion, which is based on an estimated 4.7 percent growth rate.
Members also voted to include an addendum to the forecast stating the board’s belief that there will be a one-time $125 million increase in state revenue, above the forecast amount, for FY2012-13 that results from capital gains liabilities incurred in 2012.
The next board meeting is scheduled for Oct. 24.
