Full tax exclusion for military retirement pay advanced

Nebraskans could exclude all of their military retirement benefit pay from state income tax under a bill that advanced from the first round of debate March 10.

Beginning in taxable year 2022, individuals may exclude 50 percent of their military retirement benefit income to the extent it is included in federal adjusted gross income.

LB387, introduced by Gordon Sen. Tom Brewer at the request of Gov. Pete Ricketts, would allow individuals to exclude 100 percent of that income.

Brewer said the bill would help Nebraska retain U.S. Strategic Command at Offutt Air Force Base and increase its chances for being selected to host U.S. Space Command headquarters.

The state Department of Revenue estimates that LB387 would reduce state income tax revenue by approximately $13 million in fiscal year 2022-23, $13.7 million in FY23-24 and $14.4 million in FY24-25.

Senators voted 45-0 to adopt a Revenue Committee amendment that includes provisions of LB6, introduced by Bellevue Sen. Carol Blood. They would allow a military retiree to provide a form 1099 from either the U.S. Department of Defense or the Office of Personnel Management to claim the exemption.

Creighton Sen. Tim Gragert supported the bill. He said it would show gratitude to service members and encourage talented and disciplined military retirees to start their civilian careers in Nebraska.

“The increased revenue the state will receive from income taxes paid at their new jobs will more than offset the income tax exemption for the military retirement benefits,” Gragert said.

Sen. Curt Friesen of Henderson said he voted against advancing the bill from the Revenue Committee. In addition to LB387, he said, the committee is considering proposals to exempt Social Security income from state income tax and cut state inheritance tax rates.

Friesen said approving those measures and others could limit the Legislature’s ability to provide additional property tax relief in future years.

“I know we’re all feeling giddy about the huge budget increases that we’re going to see this year because of the revenue that’s coming in above projections,” he said. “Down the road … somebody’s going to have to figure out how to pay for all this in a sustainable manner.”

North Platte Sen. Mike Groene said he supports the bill because it would improve the state’s workforce. However, he said, it would not benefit the many Nebraska veterans who do not receive military retirement pay.

Lawmakers voted 45-0 to advance LB387 to select file.