Facing the prospect that newly-enacted federal tax reform could result in a $226 million state tax increase for Nebraskans, the Legislature's Revenue Committee on Wednesday began considering legislation designed to neutralize the impact on state taxpayers.
But one of the challenges in determining whether the solution proposed in LB1090 will neutralize the impact on individual taxpayers and be relatively revenue-neutral for the state is the unpredictability of individual taxpayer behavior, the committee was told.
When the state responded to 1986 federal tax reform in what was believed to be a revenue-neutral fashion, the change unintentionally resulted in increased taxes for some state taxpayers and stirred a political storm.
Sen. Jim Smith of Papillion, chairman of the Revenue Committee, said the purpose of legislative proposals that he's offering in response to federal tax cuts and the accompanying array of federal tax reforms would be to "keep (Nebraska) citizens and businesses whole."
George Kilpatrick, a Nebraska Department of Revenue attorney, told the committee that the proposal, which is supported by Gov. Pete Ricketts, was designed to try to "make sure (Nebraska) taxpayers aren't going to get hurt."
"We try to neutralize (the impact) to the greatest extent possible," he said, while recognizing that the federal tax changes affect different types of taxpayers in varying ways.
LB1090 would restore the $134 personal income tax exemption credit that was effectively repealed by the new federal law while also establishing a standard state tax deduction of $6,750 for single taxpayers and $9,900 for heads of households. State tax exemption credits had been tied to federal law.
Among other provisions in the bill is retention of an inflationary adjustment factor that was changed by the federal law.
Business organizations lined up in support of the bill.
Its provisions would "help to counter the accidental tax increase that will occur on Nebraskans if no action is taken," Platte Institute spokeswoman Nicole Fox said.
In a policy brief, the Open Sky Policy Institute expressed a preference for an alternative bill (LB1048) sponsored by Sen. Burke Harr of Omaha.
That bill would provide new state personal income tax exemption credits only for taxpayers whose adjusted gross income is no more than $200,000 for married couples and $100,000 for individuals.
That is "a more prudent path for lawmakers to take, as it prevents low- and middle-income residents from paying more state taxes and also would give the state some cushion if the impact of federal tax reform differs from projections," Open Sky's statement argued.
"If the projections do not perfectly predict the revenue impact of the federal changes, lawmakers will need to increase other revenues such as sales taxes and fees or continue to make cuts to key state services such as education.
"Given the revenue struggles we have, we recommend lawmakers take the more cautious approach," Open Sky stated in supporting Harr's alternative.