Bill to speed up Social Security income tax phaseout advanced

Lawmakers gave first-round approval Jan. 25 to a proposal to speed up the eventual elimination of state taxation of Social Security income.

Lawmakers passed a measure in 2021, sponsored by Omaha Sen. Brett Lindstrom, which set the exemption on such income, to the extent that it is included in federal adjusted gross income, at 20 percent in tax year 2022. The exemption then is scheduled to increase 10 percent per year until reaching 50 percent in tax year 2025, with the stated intention of eliminating the tax entirely in 2030.

Lindstrom introduced LB825 this session to accelerate that schedule to a 20 percent annual increase, resulting in a 100 percent exemption in tax year 2025. Lindstrom said he has been working to eliminate state taxation of Social Security income since he came to the Legislature eight years ago.

“This is something that I came in fighting on, and I’m going to end fighting on,” he said.

The state Department of Revenue estimates that the bill would reduce general fund revenue by $59.6 million when fully implemented in fiscal year 2024-25, $70 million in FY2025-26 and $73.8 million in FY2026-27.

Saying competition between states is an important factor in public policy, Elmwood Sen. Robert Clements supported the bill. Older residents will be more likely to stay in Nebraska with passage of LB825, he said, rather than move to another state that does not tax Social Security income.

“We’re chasing people away with some of our tax policies,” Clements said.

Several senators also voiced support for the proposal but expressed concern about advancing a consequential tax cutting bill so early in the legislative session without first knowing how the governor’s budget adjustments and other bills may impact the state’s fiscal outlook.

Gering Sen. John Stinner, chairperson of the Appropriations Committee, said that while the state currently is flush with federal coronavirus relief funding, it is unclear how much that funding will stimulate the state’s economy. Many experts are warning of a coming economic slowdown, he said.

“We’re going to have to pick and choose [priorities],” Stinner said. “I want to make an informed decision.”

Sen. Matt Hansen of Lincoln also supported the bill but said it would be helpful to have a comprehensive picture of how LB825 would fit together with other revenue bills and spending proposals yet to advance from committees.

“It’s tough to make decisions not seeing the whole picture,” Hansen said. “It’s our obligation to view our overall tax structure, including both how [it] impacts individuals but also how it impacts the ability of the state to provide some of its necessary and required services.”

Elkhorn Sen. Lou Ann Linehan, chairperson of the Revenue Committee, said the proposal would not “break the bank.” She urged senators to use bills such as LB825 to return to taxpayers the over $400 million in revenue that was collected last year above what was anticipated.

“It’s not our money,” Linehan said.

Lawmakers voted 42-0 to advance the bill to select file.