RevenueSession Review 2021

Session Review: Revenue

The Revenue Committee advanced bills this session that cut Nebraska’s top corporate income tax rate and will exempt military retirement pay and a percentage of Social Security income from state income tax.

Income tax

Lawmakers voted 42-1 to cut the state’s top corporate income tax rate by approximately one-half of 1 percent over the next two years.

LB432, introduced by the Revenue Committee as a placeholder bill, contains amended provisions of LB680, introduced by Elkhorn Sen. Lou Ann Linehan, and provisions of several other bills heard by the committee this session.

Linehan’s proposal reduces the state’s top corporate income tax rate, which applies to income in excess of $100,000, from 7.81 percent to 7.5 percent for tax years beginning on or after Jan. 1, 2022, and before Jan. 1, 2023. The rate will fall to 7.25 percent for tax years beginning on or after Jan. 1, 2023.

The bill states the intent of the Legislature to further reduce the rate to 7 percent for tax years beginning on or after Jan. 1, 2024, and before Jan. 1, 2025, and to 6.84 percent — the current top individual income tax rate — for tax years beginning on or after that date.

The corporate income tax rate on the first $100,000 of income remains at 5.58 percent.

LB432 also includes provisions of LB597, introduced by Sen. Joni Albrecht of Thurston. They create a $2,000 refundable state income tax credit for the parent of a stillborn child if a fetal death certificate is filed and if the child had advanced to at least the 20th week of gestation and would have been a dependent of the individual claiming the credit.

Also included in the bill are provisions of LB299, introduced by Omaha Sen. Mike McDonnell, that allow any rural or suburban fire protection district, airport authority, city, village or nonprofit corporation to provide and maintain enhanced cancer benefits for paid and volunteer firefighters, the combined total of which cannot exceed $50,000 in the firefighter’s lifetime.

Beginning with tax year 2022, an individual’s federal adjusted gross income will be reduced by the amount received by or on behalf of a firefighter for cancer benefits under the act.

Under the provisions of LB564, also introduced by McDonnell, Nebraska educational savings plan trust accounts may be used to pay for the cost of certain apprenticeship programs.

Finally, the provisions of LB254, introduced by Sen. Matt Williams of Gothenburg, extend the sunset date for the Beginning Farmer Tax Credit Act from Dec. 31, 2022, to Dec. 31, 2025.

The committee also advanced a bill to reduce taxation of Social Security income in Nebraska over several years with the intention of eliminating it entirely.

LB64, sponsored by Omaha Sen. Brett Lindstrom and passed on a vote of 41-0, sets the exemption on such income, to the extent that it is included in federal adjusted gross income, at 5 percent in tax year 2021. The exemption will increase to 20 percent in 2022 and then rise 10 percent per year until reaching 50 percent in tax year 2025.

The bill states legislative intent to continue incremental reduction of the tax — reaching 100 percent exemption in tax year 2030 — but passage of new legislation will be required to complete the process.

Nebraskans may exclude all of their military retirement benefit pay from state income tax under another bill approved by lawmakers this session.

Under LB387, introduced by Sen. Tom Brewer of Gordon at the request of Gov. Pete Ricketts, individuals may exclude 100 percent of their military retirement benefit income to the extent it is included in federal adjusted gross income, beginning in tax year 2022.

The bill, passed on a 47-0 vote, also includes provisions of LB6, introduced by Sen. Carol Blood of Bellevue, which 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.

Sales and use tax

Lawmakers voted 45-0 to pass a bill containing several sales and use tax exemptions, including one for inputs used to manufacture ethanol.

Under LB595, introduced by Thurston Sen. Joni Albrecht, state sales and use taxes may not be imposed on the gross receipts from the sale, lease or rental of — and storage, use or other consumption in Nebraska of — all catalysts, chemicals and materials used in the process of manufacturing ethanol and the production of coproducts.

The bill also includes provisions of LB672, introduced by Sen. Dave Murman of Glenvil, that define agricultural machinery and equipment for the purposes of an existing sales and use tax exemption.

Under LB595, agricultural machinery and equipment are defined as tangible personal property used directly in cultivating or harvesting a crop, raising or caring for animal life, protecting the health and welfare of animal life or collecting or processing an agricultural product on a farm or ranch.

The definition now includes header trailers, head haulers, header transports and seed tender trailers.

Also included in LB595 are provisions of LB182, introduced by Elkhorn Sen. Lou Ann Linehan. They exempt from state sales and use taxes the gross income received from the lease or use of towers or other structures primarily used in conjunction with the furnishing of internet access service, agricultural GPS locating services or certain over-the-air radio and television broadcasting.

Finally, under provisions originally introduced by Linehan in LB350, the proceeds of sales and use taxes imposed on the sale or lease of motorboats, personal watercraft, all-terrain vehicles and utility-type vehicles will be credited to the state Game and Parks Commission Capital Maintenance Fund until 2027 rather than 2022.

The state will turn back new sales tax revenue to cities to help them build sports complexes under a bill passed on a vote of 45-0.

Under LB39, introduced by Omaha Sen. Brett Lindstrom, a political subdivision alone or working with a nonprofit organization can apply for state assistance to build sports complexes — facilities that are used primarily for competitive sports and contain a certain number of sports venues such as outdoor arenas or baseball, softball or multipurpose fields.

The turnback applies to state sales tax collected by new businesses located within 600 yards of the exterior boundary of a sports complex for the period of time beginning on the date the project commenced and ending four years after its completion date.

Under the bill, 30 percent of state sales tax revenue related to an eligible sports arena facility will be transferred to the Civic and Community Center Financing Fund.

If the sales tax revenue relates to a sports complex, 83 percent of those funds will be transferred to the Support the Arts Cash Fund and used to fund a competitive grant program for first class cities that have creative districts within their boundaries and a 10-year plan to bring about economic and workforce development initiatives.

The remaining 17 percent of those funds will be transferred to the Convention Center Support Fund and distributed to areas in metropolitan class cities with a high concentration of poverty to showcase important historical aspects of those areas or to help reduce street and gang violence.

LB39 took effect immediately upon passage.

Residential water service in Nebraska will no longer be taxed under another bill passed by lawmakers this session.

LB26, introduced by Sen. Justin Wayne of Omaha and passed on a vote of 41-2, exempts the gross receipts received from the sale, lease or rental of and storage, use or consumption of residential water service.

Property tax

Certain political subdivisions must hold a joint public hearing before increasing their property tax requests under a bill passed on 42-0 vote.

Under LB644, introduced by Sen. Ben Hansen of Blair, counties, cities, school districts and community colleges must participate in a joint public hearing and pass a resolution or ordinance before increasing their property tax request by more than an allowable growth percentage.

The bill requires counties to notify affected taxpayers of the hearing by postcard, the cost of which will be shared by the political subdivisions seeking to increase their property tax request.

The hearing must be open to public testimony, and the agenda may include only the proposed property tax request increase.

LB644 also includes provisions of LB189, introduced by Hastings Sen. Steve Halloran, that require a political subdivision’s governing body to make provisions in its next budget to pay a refund of real or personal property taxes. The measure also repeals a provision allowing political subdivisions up to five years to pay the refund.

Lawmakers also approved a bill intended to shift the cost of school bonds away from owners of farm and ranch land.

Under LB2, introduced by Sen. Tom Briese of Albion and passed on a vote of 36-6, agricultural and horticultural land is valued at 50 percent of its actual value for purposes of school district taxes levied to pay the principal and interest on bonds approved by a vote of the people on or after the act’s operative date.

A proposal to limit increases in property taxes collected by local governments stalled on the first round of debate after a failed cloture motion.

Under LB408, as introduced by Briese, a political subdivision’s property tax request — the amount of property taxes requested to be raised through its levy — could not exceed the prior year’s request by more than 3 percent.

A political subdivision could exceed the limit by an amount approved by a majority of registered voters in a primary, general or special election.

Under a pending Revenue Committee amendment, a political subdivison’s property tax request for any year could not exceed the previous year’s request multiplied by 103 percent. The limit would apply to property tax requests set in 2022 through 2027.

The amendment also would allow a political subdivision to exceed the 3 percent limit for no more than two consecutive years with a majority vote of its governing body. The political subdivision’s property tax request would be reduced in subsequent years so that the increase would not exceed 9 percent over a three-year period.

The limit would not apply to the portion of a political subdivision’s property tax request that will be derived from its real growth value, or the increase in real property valuation due to improvements — such as new construction and additions to existing buildings — and the annexation of property.

After eight hours of debate on general file, Briese filed a motion to invoke cloture, which ceases debate and forces a vote on the bill and any pending amendments. The motion failed on a vote of 29-8. Thirty-three votes were needed. LB408 was not scheduled for further debate this session.

A bill that would provide additional state aid to school districts that rely heavily on property taxes failed to advance from the first round of debate.

Under LB454, as introduced by Henderson Sen. Curt Friesen, a school district would be eligible for a property tax stabilization payment if its property tax requirement — defined as the difference between the district’s needs and the amount of state aid it receives — exceeds 70 percent of its needs for the school year.

A Revenue Committee amendment replaced the bill. Under the amendment, a school district’s property tax requirement would have to exceed a smaller percentage of its needs each year in order for the district to qualify for a stabilization payment, from 70 percent in school fiscal year 2021-22 to 55 percent for school fiscal year 2024-25 and after.

Unlike the original bill, the amendment would not reduce the valuation of agricultural and horticultural land for the purposes of school district taxation.

LB454 failed to advance to select file on a vote of 23-12. Twenty-five votes were needed.

Tax incentives

The state will provide matching funds for the development of industrial rail access business parks under a bill passed on a 49-0 vote.

Under LB40, introduced by Sen. Mike Groene of North Platte, a nonprofit economic development corporation may apply to the director of the state Department of Economic Development for up to $30 million in matching funds to cover a project’s development costs. The director could approve up to $50 million in matching funds under the act.

Matching funds could be used for site acquisition and preparation, utility extensions and rail spur construction for the development of a new industrial rail access business park, including expenses incurred to help an initial tenant in the manufacturing, processing, distribution or transloading trades.

Qualifying projects must be located in a county with a population of fewer than 100,000 inhabitants.

Upon legislative appropriation of funds, the state will provide $2 of matching funds for each dollar invested up to $2.5 million. For a larger investment, the state will provide $5 in matching funds for each dollar invested.

Businesses that invest in urban areas with high poverty and unemployment rates may qualify for tax incentives under another bill passed by lawmakers this session.

Under LB544, introduced by Omaha Sen. Justin Wayne and passed on a vote of 49-0, taxpayers may apply to the director of the state Department of Economic Development for tax credits based on their level of investment and the number of new employees they hire.

To qualify, a business must be located in a primary or metropolitan class city and in an economic redevelopment area in which the average rate of unemployment is at least 150 percent of the state average and the average poverty rate is 20 percent or more for the area’s federal census tract.

Taxpayers may use the credits to offset income, sales and use or real property taxes or to reduce income tax withholding. No taxpayer may earn a credit that exceeds $50,000.

The director may not approve further applications once the expected incentives from approved projects total $8 million, and no new applications may be filed after Dec. 31, 2031.

Senators also passed a bill intended to modernize the state’s small business tax credit.

Under the Nebraska Advantage Microenterprise Tax Credit Act, a business with five or fewer full-time employees can apply to receive a refundable tax credit designed to help decrease the cost of startup and expansion.

The program, which offers a tax credit to approved microbusiness taxpayers for new investment or employment equal to 20 percent of the investment amount — up to a maximum of $10,000 — had been set to expire in 2022. Total credits approved under the program are limited to $2 million annually.

LB366, introduced by Sen. Tom Briese of Albion and passed on a 44-1 vote, extends the program expiration date through 2032. It also raises the maximum lifetime tax credits claimed by any individual from $10,000 to $20,000.

Finally, the bill strengthens reporting requirements and allows certain family members of a person who has received the maximum credit also to participate in the program — as long as ownership is not shared and the businesses are completely separate.

The changes made by LB366 apply only to applications made after the bill’s operative date.

Lawmakers passed two measures that update the provisions of a major tax incentive program passed in 2020.

LB18, sponsored by Seward Sen. Mark Kolterman and passed on a vote of 34-10, makes three changes to the ImagiNE Nebraska Act, a business tax incentive program that replaced the Nebraska Advantage Act.

Currently, the act requires that all qualifying new full-time jobs be filled by individuals who reside in Nebraska. The bill removes this provision and instead requires that an individual in a qualifying job be employed in the state and be subject to Nebraska income tax on compensation received.

LB18 also changes the definition of two qualifying business activities under the ImagiNE Nebraska Act to clarify terms and conform with a recent U.S. Supreme Court decision.

Under LB84, sponsored by Sen. Bruce Bostelman of Brainard and passed on a 47-0 vote, a renewable energy firm that uses nuclear energy to produce electricity is eligible for tax incentives under the act.

Lawmakers also approved a measure that changes the way in which passthrough entities claim a refundable income tax credit under the Property Tax Incentive Act.

The act, passed last year as part of LB1107, requires passthrough entities, trusts and estates to allocate the credit — which is based on school property taxes paid — in the same proportion that income is distributed to shareholders, partners, members or beneficiaries.

LB181, sponsored by Elkhorn Sen. Lou Ann Linehan, allows passthrough entities, trusts and estates to distribute the credit in the current manner for taxable years beginning or deemed to begin before Jan. 1, 2021.

For taxable years beginning or deemed to begin on or after that date, the credit will be claimed at the entity level.

The bill passed on a 46-0 vote and took effect immediately.

Other measures

Voters could amend Nebraska’s constitution to replace property, income, sales, inheritance and estate taxes with a state consumption tax under a proposal that failed to advance from the second round of debate.

If passed by the Legislature, LR11CA, sponsored by Bayard Sen. Steve Erdman, would place the question on the November 2022 general election ballot.

The amendment would prohibit the state and its political subdivisions from imposing a tax on property, income, inheritances, estates and the retail sale of services and most goods effective Jan. 1, 2024.

It would require the Legislature to enact a consumption tax that applies to the purchase of services and new goods, except for fuel, beginning on that date. The Legislature also could authorize political subdivisions to enact their own consumption taxes.

LR11CA failed to advance to select file on a vote of 23-19, two votes short of the number required.

A bill that would create a tax credit scholarship program for private school students stalled on general file after a failed cloture motion.

LB364, introduced by Sen. Lou Ann Linehan of Elkhorn, would allow individuals, passthrough entities, estates, trusts and corporations to claim a nonrefundable income tax credit of up to 50 percent of their state income tax liability on contributions they make to nonprofit organizations that grant scholarships to students to attend private school.

Only Nebraska residents would be eligible for the scholarships, which could be used to pay tuition and fees at a qualifying privately operated elementary or secondary school in Nebraska.

Students would be eligible for the scholarships if, among other requirements, they are a dependent member of a household with a gross income that does not exceed the eligibility guidelines for reduced-price meals under the National School Lunch Program.

As introduced, LB364 would allow the state Department of Revenue to grant $10 million in credits in 2022. After that, if at least 90 percent of the credits in any given year are claimed, the annual limit would increase by 25 percent.

A pending Revenue Committee amendment instead would limit the total amount of credits available each year to $5 million.

The amendment also includes the amended provisions of LB531, introduced by Albion Sen. Tom Briese.

Under his proposal, taxpayers who make a qualifying financial contribution to certain child care and early childhood education programs in Nebraska could apply for a nonrefundable income tax credit equal to a portion of the contribution. Contributions would have to promote or enhance quality child care and early childhood education programs.

An eligible child care or early childhood education program would have to be enrolled in the quality rating and improvement system developed under the Step Up to Quality Child Care Act and meet other requirements.

Individuals, estates, trusts and corporations could claim the credit, which could not exceed $25,000 per taxpayer in any single year. Up to $5 million in credits would be available each year.

After eight hours of first-round debate, Linehan filed a motion to invoke cloture, which failed on a vote of 29-18.

The state highway commission could issue up to $400 million in bonds over the next six years to speed completion of Nebraska’s expressway system under a bill discussed on general file this session.

LB542, as introduced by Sen. Lynne Walz of Fremont, would authorize the commission, upon recommendation of the state Department of Transportation, to issue up to $400 million in bonds to accelerate completion of highway construction projects under the Build Nebraska Act. Annual debt service could not exceed $30 million.

Lincoln Sen. Mike Hilgers, speaker of the Legislature, said he would “park” LB542 until next session and retain its priority status. He said lawmakers should wait to consider the proposal in light of a potential federal infrastructure bill that could include significant roads funding for states.

Lawmakers moved to the next item on the agenda without voting on LB542 or the amendment.

Finally, the committee advanced a proposal that would cut state inheritance tax rates while increasing the amount of property value that is exempt from the tax, but it was not scheduled for first-round debate.

LB310, sponsored by Sen. Robert Clements of Elmwood, would cut rates approximately in half on each of the three classes of beneficiaries subject to the tax over three years while allowing exemptions to increase.

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