RevenueSession Review 2022

Session Review: Revenue

Among the proposals advanced by the Revenue Committee this session is a package of bills that cut individual and corporate income tax rates, speed up the phaseout of state taxation of Social Security income and expand a program intended to offset property taxes used to fund education.

Income tax cuts, property tax relief

LB873, as introduced by Sen. Curt Friesen of Henderson, would have eliminated community colleges’ general fund levy authority. As amended, it instead contains several major tax proposals heard by the committee this session.

The amended provisions of LB939, introduced by Elkhorn Sen. Lou Ann Linehan, will cut Nebraska’s top individual income tax rate in several steps from the current 6.84 percent to 5.84 percent by tax year 2027.

LB873 also includes the amended provisions of LB938, sponsored by Linehan, which continue the phased-in reduction of the state’s top corporate income tax rate approved by the Legislature last year. The bill will cut the rate from the current 7.5 percent to 5.84 percent by 2027.

Also included are the provisions of LB825, introduced by Sen. Brett Lindstrom of Omaha. His proposal will exempt all Social Security income from state income taxation, to the extent that it is included in federal adjusted gross income, by tax year 2025.

The bill also includes the provisions of LB723, introduced by Albion Sen. Tom Briese. The proposal is intended to ensure that a refundable state income tax credit does not fall below its current amount of $548 million. The credit, created in 2020 under the Nebraska Property Tax Incentive Act, is based on property taxes paid to schools.

Under LB873, the credit amount will increase to $560.7 million for tax year 2023 and then increase by an allowable growth percentage of up to 5 percent beginning in tax year 2024.

Finally, the bill creates a similar refundable tax credit under the Nebraska Property Tax Incentive Act based on the amount of property taxes paid to a community college.

For calendar year 2022, $50 million in credits are available. The total then will increase annually, reaching $195 million in taxable years that begin during calendar year 2026. After that, the total will increase by the allowable growth percentage.

LB873 passed on a vote of 43-0.

Sales and use tax

The Convention Center Facility Financing Assistance Act turns back 70 percent of the state sales tax collected by onsite retailers and nearby hotels to political subdivisions to help pay off bonds used to build convention and meeting center facilities.

Under LB927, introduced by Sen. Rich Pahls of Omaha and passed on a vote of 38-2, political subdivisions also may use state turnback tax assistance to acquire, construct, improve and equip nearby parking facilities.

This includes any parking lot, garage or other parking structure that is located within 600 yards of a convention and meeting center facility but is not directly connected to it.

Up to $150 million may be appropriated to a single convention center project under LB927, an increase from $75 million under existing law.

The bill also contains a provision under which a municipality is eligible for a grant under the Community and Civic Center Financing Act only if it partners with a certified creative district and is not otherwise prohibited from receiving a grant. The provision applies between July 1, 2023, and June 30, 2024.

Grant applications must include a notification of approval from the Nebraska Arts Council. A grant may not be less than $100,000 or more than $250,000.

LB927 contains the provisions of LB818, introduced by Linehan, which allow state assistance under the Sports Arena Facility Financing Assistance Act to be used for parking facilities within 700 yards of a sports arena facility.

The bill also increases the total amount of state assistance for a sports arena facility from $50 million to $100 million and repeals a current provision that prohibits state assistance from being paid out for more than 20 years after the issuance of the first bond for the facility.

The Convention Center Facility Financing Assistance Act requires a portion of turnback revenue appropriated to a metropolitan class city to be distributed equally to areas with a high concentration of poverty for certain purposes. Omaha is the state’s only metropolitan class city.

LB927 does not change those purposes but specifies that 55 percent of the funds be used to showcase important historical aspects of those areas and assist with the reduction of street and gang violence. The remaining 45 percent must be used to assist small business and entrepreneurship growth.

Also included in LB927 are provisions of LB1250, introduced by Sen. Ben Hansen of Blair. They update a law passed last year that requires certain political subdivisions to participate in a joint public hearing before increasing their property tax request by more than a certain amount. Counties must notify affected taxpayers of the hearing by postcard.

Among other changes, LB927 requires the county clerk or his or her designee to organize the hearing. It clarifies that the cost of creating and mailing the postcards must be divided proportionately among participating political subdivisions based on the total number of parcels in each.

Senators also approved a bill containing several state sales and use tax proposals considered by the committee this session.

The current collection fee for merchants — the amount they are allowed to retain when remitting the taxes — is equal to 2.5 percent of the first $3,000, or $75, in sales or use tax collected each month.

LB984, introduced by Columbus Sen. Mike Moser and passed 45-0, increases the fee to 3 percent of the first $5,000 remitted each month, or $150, beginning Oct. 1, 2022.

The bill also includes the provisions of LB881, introduced by Sen. Terrell McKinney of Omaha, which exempt feminine hygiene products from state sales and use tax and require detention facilities to supply them to female prisoners free of charge.

Also included are provisions of LB941, introduced by Sterling Sen. Julie Slama, which prohibit imposition of state sales and use tax on the gross receipts from the sale, lease or rental of net wrap — plastic wrap used in the baling of hay — purchased for use in commercial agriculture.

Tax credits and incentive programs

Businesses that employ felons may apply for a state income tax credit under a proposal passed by lawmakers on a vote of 47-0.

Under LB917, introduced by Sen. Justin Wayne of Omaha, a business is eligible for a nonrefundable state income tax credit equal to 10 percent of the wages paid to an individual who has been convicted of a felony.

The credit applies to wages paid during the first 12 months of the individual’s employment.

The state Department of Revenue may approve up to $5 million in credits each year beginning in tax year 2023, and the total credit per employee may not exceed $20,000.

Senators also approved a measure updating Nebraska’s main business tax incentive program.

LB1150, introduced by the Legislative Performance Audit Committee, contains several proposals related to the ImagiNE Nebraska Act, passed in 2020, and other state tax incentive programs.

Under the bill’s provisions, ImagiNE Nebraska Act applications must include the most recent taxable valuations and levy rates for all qualified locations. They also must include a program schedule for job training activities and the city and state where recruited employees lived if tax credits are used for those purposes.

The provisions of LB817, introduced by Elkhorn Sen. Lou Ann Linehan, make several technical changes requested by the state Department of Revenue, including allowing the department to obtain employees’ Social Security numbers to confirm the number of new employees at a qualified location.

The provisions of LB502, introduced by Sen. Michael Flood of Norfolk, allow certain businesses receiving tax incentives under the Nebraska Advantage Act to use a direct pay permit, as is allowed under the ImagiNE Nebraska Act. The measure applies only to certain data center projects.

The provisions of LB985, sponsored by Seward Sen. Mark Kolterman, change the definition of base year — which is used to measure employment growth for tax incentive purposes — under the ImagiNE Nebraska Act.

Under that measure, if an applicant increased the number of equivalent employees at a qualified location in 2020 or 2021 in response to the COVID-19 pandemic, the base year will be 2019. The provision applies to applications made in 2021 or 2022.

The provisions of Flood’s LB1094 also update the ImagiNE Nebraska Act. Under that proposal, the time worked by employees in their Nebraska residence is considered spent at a qualified location if the employee works at both locations.

Also included in LB1150 are the provisions of LB457, introduced by Sen. John McCollister of Omaha, which require the department to notify each metropolitan and primary class city of the total amount of local option sales tax refunds that are estimated to be paid to taxpayers during the following calendar year under certain tax incentive programs.

LB1150 passed on a vote of 44-1 and took effect immediately.

Additional tax incentives are available for certain livestock modernization or expansion projects and other qualifying rural Nebraska businesses under another bill advanced by the committee this session.

LB1261, introduced by Glenvil Sen. Dave Murman, increases the amount of tax credits available each year under the Nebraska Advantage Rural Development Act from $1 million to $10 million beginning in 2022.

The bill also extends the deadline for applications under the act from Dec. 31, 2022, to Dec. 31, 2027, and increases the maximum credit amount available for certain livestock modernization or expansion projects from $150,000 per application to $500,000.

LB1261 includes provisions of LB596, introduced by Sen. Joni Albrecht of Thurston, under which retailers who sell and dispense ethanol blended gasoline formulated with a percentage of at least 15 percent by volume of ethanol are eligible for a refundable state income tax credit.

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

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

LB364, introduced by Linehan, fell four votes short of a successful first-round cloture motion last session. It returned to the agenda this year after Linehan designated it as her priority bill for the 2022 session.

The bill would have allowed 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 have been eligible for the scholarships, which could have been used to pay tuition and fees at a qualifying privately operated elementary or secondary school in Nebraska.

After eight hours of debate on general file, Linehan filed a motion to invoke cloture, which would have ended debate and forced a vote on LB364 and any pending amendments.

The motion failed on a vote of 28-14, ending further consideration of the bill. Thirty-three votes were needed.

Property tax

Veterans with a partial disability from a service-connected injury would have qualified for a homestead exemption under a bill considered this session.

Current law provides an exemption for qualifying veterans who are drawing compensation from the U.S. Department of Veterans Affairs because of a 100 percent service-connected disability.

Under LB853, introduced by Sen. Jen Day of Omaha and as amended on general file, qualifying veterans who are at least 50 percent but less than 100 percent disabled due to a service-connected disability also would have qualified.

As amended, LB853 includes the provisions of LB1080, introduced by Bellevue Sen. Rita Sanders. That proposal would have allowed veterans with a 100 percent service-connected temporary disability to qualify for a homestead exemption.

The bill advanced to select file but was not scheduled for second-round debate.

A proposal to limit annual increases in the amount of property taxes collected by public school districts stalled on the first round of debate after a failed cloture motion.

Under LB986, introduced by Sen. Tom Briese of Albion, a district’s property tax request — the amount of taxes requested to be raised through its levy — could not have exceeded its property tax request authority, which the state Department of Education would have calculated annually.

After eight hours of general file debate over several days, Briese filed a motion to invoke cloture, which failed on a vote of 28-21, ending further consideration of the bill. Thirty-three votes were needed.

Other measures

LB310, introduced by Elmwood Sen. Robert Clements and passed 37-1, cuts inheritance tax rates on beneficiaries and increases the amount of property value that is exempt from the tax. The measure applies to estates of individuals who die on or after Jan. 1, 2023.

Under the bill, immediate relatives will pay inheritance tax on the clear market value of property over $100,000 received by each person, up from $40,000. The tax rate remains 1 percent.

LB310 also decreases the rate from 13 to 11 percent for remote relatives and increases the exemption from amounts more than $15,000 to amounts over $40,000. A third rate that applies to all other beneficiaries decreases from 18 to 15 percent, and the applicable exemption amount increases from $10,000 to $25,000.

Under LB310, any interest in property passing to beneficiaries younger than 22 is not subject to inheritance tax.

The proposal includes the provisions of LB377, introduced by Sen. Wendy DeBoer of Bennington, which expand the definition of relatives for purposes of the inheritance tax to include certain step relatives.

Nebraska educational savings plan trust accounts may be used to repay student loans under a bill advanced by the committee this session.

Under LB864, introduced by Creighton Sen. Tim Gragert and passed 47-0, accounts may be used to pay the principal and interest on the qualified education loan of a beneficiary or the beneficiary’s sibling. The bill caps aggregate total payments at $10,000 per person.

Under LB1273, introduced by Sen. Eliot Bostar of Lincoln and passed 47-0, a retired individual who was employed full time as a certified law enforcement officer for at least 20 years and who is at least 60 at the end of the taxable year may reduce their federal adjusted gross income by the amount of health insurance premiums they paid during the taxable year.

The change goes into effect in tax year 2023.

The bill includes the provisions of LB1272, sponsored by Hastings Sen. Steve Halloran, which increase a current tuition waiver for eligible law enforcement officers from 30 percent to 100 percent. The waiver applies to resident tuition charged by any state university, college or community college.

Voters will decide whether to allow Nebraska’s commercial service airports to enter into certain revenue-sharing contracts with airlines under a measure approved by lawmakers on a vote of 47-0.

LR283CA, also introduced by Bostar, will place a proposed amendment to the state constitution on the November 2022 general election ballot.

If approved by voters, the measure will allow any city, county or other political subdivision that owns or operates an airport to expend its revenues to encourage or develop new or expanded regularly scheduled commercial passenger air service.

The committee also advanced a proposed constitutional amendment that would replace Nebraska’s tax system with retail consumption and excise taxes, but it failed to advance from the first round of debate.

If passed by the Legislature, LR264CA, introduced by Sen. Steve Erdman of Bayard, would have placed the question on the November 2022 general election ballot. The change would have gone into effect Jan. 1, 2024, if approved by voters.

The measure failed to advance to select file on a vote of 19-14. Twenty-five votes were needed.

A proposal to create a fund that Nebraska’s governor could have used to attract and retain “high-impact” business projects or facilities stalled on select file after Speaker Mike Hilgers of Lincoln requested that lawmakers pass over it.

Under LB729, introduced by Omaha Sen. Brett Lindstrom, the governor would have been authorized to approve payments from the fund based on an analysis of an applicant’s business activity by the state Department of Economic Development and upon the director’s recommendation that doing so would be a net economic benefit to the state.

After approximately one hour of second-round debate, lawmakers moved to the next item on the agenda without voting on LB729. The bill was not scheduled for further debate.

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