Bill would eliminate many tax exemptions, credits

The Revenue Committee heard testimony March 22 on a bill that would modify or repeal several sales tax exemptions, income tax deductions, credits and incentives.

<a href='http://news.legislature.ne.gov/dist22' target='_blank' title='Link to the website of Sen. Paul Schumacher'>Sen. Paul Schumacher</a>
Sen. Paul Schumacher

Introduced by Sen. Paul Schumacher of Columbus, LB373 would terminate the Build Nebraska Act, the Personal Property Tax Relief Act and the Property Tax Credit Act, along with several other exemptions and exclusions.

Schumacher said he introduced the bill so the committee could review the major tax exemptions, credits and deductions the Legislature has enacted or modified over the last decade.

The bill would prohibit new applications for the Nebraska Advantage Act, the Sports Arena Facility Financing Assistance Act, the Nebraska Job Creation and Mainstreet Revitalization Act and the New Markets Job Growth Assistance Act.

LB373 also would return income tax brackets and rates to 2007 levels and would eliminate the requirement that brackets be indexed for inflation.

The committee should scrutinize two exclusions in particular that appear to be used only by a small number of wealthy Nebraskans, Schumacher said.

The bill would repeal a dividends and capital gains deduction that, according to the state Department of Revenue’s 2016 Tax Expenditure Report, resulted in an approximate $21 million tax revenue loss in 2016.

The exclusion allows Nebraska residents or trusts to subtract from taxable income the capital gains they receive from the sale or exchange of a corporation’s stock acquired while the person worked for the company.

In 2014, 88 percent of the exclusion was claimed by taxpayers with a federal adjusted gross income (AGI) greater than $500,000, Schumacher said. Eighty percent was claimed by those with an AGI of more than $1 million. The exclusion was claimed on approximately 740 tax returns, or about one-tenth of one percent of all Nebraska taxpayers, he added.

LB373 also would eliminate a provision that allows Nebraska residents to exclude from taxation the income they receive from an S corporation or a limited liability company that is not connected with Nebraska sources. The report estimates that the exclusion resulted in approximately $84 million in lost tax revenue last year.

Eighty-five percent of this exclusion was claimed by taxpayers with an AGI of at least $1 million in 2014 (620 returns), Schumacher said. Sixty percent was claimed by those with at least $5 million in income (90 returns).

“It’s really, really hard to say why those breaks should be given,” he said.

Renee Fry, executive director of the OpenSky Policy Institute, testified in support of the bill. She said it would close tax breaks and loopholes used by a relatively small number of Nebraskans.

“I would encourage [the committee] to look closely at whether this revenue can better be spent elsewhere such as helping to address the budget shortfall or address concerns about property taxes,” Fry said.

Traci Bruckner of the Women’s Fund of Omaha also testified in support of LB373, saying that lawmakers should consider tax provisions in addition to spending cuts when trying to make up the current budget shortfall.

“When we’re faced with significant budget gaps as we are now, I think everything needs to be on the table, including all the tax provisions that we have authorized over the years,” she said.

However, Bruckner said, the group opposes the bill’s reduction in the state Earned Income Tax Credit from the current 10 percent to 8 percent of the federal credit. She said the credit is the only one in the bill aimed at helping low-income Nebraskans.

Testifying in opposition to the bill was Dave Mlnarik, executive director of the Nebraska Sports Council. Mlnarik said LB373 would remove the sales tax exemption for fees and admissions for certain sporting events and youth development organizations. This would increase fees for the Nebraska 150 Challenge and the Cornhusker State Games, as well as YMCAs.

“A sales tax would diminish the ability of the YMCAs to provide programs to the underserved, low-income children, individuals and families who need the YMCAs the most and have come to count on these programs,” he said.

Dick Ludwig, speaking on behalf of the Nebraska chapter of the Associated General Contractors of America, also testified in opposition. He said repealing the Build Nebraska Act would cut funding for 12 major transportation infrastructure projects in progress or in development.

“Any funding delay risks a project being more expensive to Nebraska taxpayers due to construction inflation and potentially starting the environmental [review] process all over again,” Ludwig said.

Scott Gubbels, executive director of Nelnet’s Innovation Hub, also opposed LB373. He said it would eliminate many tax incentives that help attract, retain and grow businesses in the state. The bill also would undo steps to modernize Nebraska’s tax code, such as indexing tax brackets for inflation, Gubbels added.

“I believe it is prudent and wise to periodically evaluate the effectiveness of tax policies implemented within the last decade,” he said. “However, there are several provisions within LB373 that eliminate or diminish a lot of great work done by some of you as well as your predecessors.”

The committee took no immediate action on the bill.

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