Tax exclusion for military retirement income advanced

Senators gave first-round approval Jan. 13 to a bill that would allow military retirees to exclude half of their military retirement benefit pay from state income tax.

Under current law, retirees may, within two years after their retirement from the military, choose either of two options to exclude military retirement benefit pay from state income tax. The retiree may elect to exclude 40 percent of his or her benefit pay for seven consecutive taxable years or 15 percent for all taxable years beginning with the year in which he or she turns 67.

LB153, introduced last session by Gordon Sen. Tom Brewer on behalf of Gov. Pete Ricketts, would repeal those options and instead allow military retirees to exclude 50 percent of their military retirement benefit income to the extent included in federal adjusted gross income.

Brewer said the majority of those who retire from the military after being posted to Offutt Air Force Base move to other states that offer more generous tax benefits than Nebraska.

He said LB153 would entice more of those veterans, many of whom go on to start second careers, to stay in Nebraska and contribute to the state’s economy. It also would help persuade the U.S. Air Force to maintain its facilities at Offutt when it makes basing decisions, he said.

Brewer introduced an amendment, adopted 45-1, that would change the exclusion’s effective date from taxable years beginning or deemed to begin on or after Jan. 1, 2020, to Jan. 1, 2021.

The Legislative Fiscal Office estimates that, with a 2021 effective date, the exclusion would reduce state income tax revenue by approximately $4.9 million in fiscal year 2020-21. It would reduce revenue by approximately $12.6 million in FY2021-22, $13.3 million in FY2022-23 and an additional $14 million in FY2023-24.

Sen. John Lowe of Kearney supported LB153, saying those who serve in the military choose to put their lives at risk, often for less pay than they would have earned in another career.

“When the time comes for these individuals to retire,” he said, “the very least we can do is to allow them to have half of [their] retirement pay tax-free.”

Bellevue Sen. Carol Blood also supported the bill. She said a military pension is a “just reward” offered in exchange for years of dangerous assignments and time away from family and should not be treated as income for tax purposes.

Lawmakers voted 46-0 to advance LB153 to select file.