Nebraska Bill Would Protect Taxpayers From Federal Changes

By Christopher Brown

Nebraska taxpayers facing higher state tax liabilities as a result of the new federal tax law would receive relief under a bill that received first-round approval from the Nebraska Legislature.

The bill ( L.B. 1090) would restore personal exemptions—a casualty of the federal overhaul—for state taxpayers, increase the Nebraska standard deduction, and adjust individual income tax brackets.

The measure would prevent a $227 million increase in state tax revenue that the federal changes would have generated, according to Sen. Jim Smith (R), chairman of the tax-writing Revenue Committee, who sponsored the bill.

The bill passed its first-round test March 8 on a 38-0 vote. Two more votes in the single-chamber Legislature will be necessary before the bill moves to Gov. Pete Ricketts’ (R) desk. Smith expressed confidence that Ricketts would sign it.

“We want to make people whole for increases in their state taxes that will result from the federal tax reform bill,” Smith told Bloomberg Tax March 12. “We don’t want the state’s tax revenues to increase from what was supposed to be a tax cutting effort at the federal level.”

A spokesman for Ricketts didn’t immediately respond to a request for comment.

Personal Exemption Credit

The key change in the bill is the restoration of the personal exemption, Smith said. Previously, the Nebraska personal exemption credit was tied to the federal personal exemption. But when the latter was eliminated by the 2017 federal tax act ( Pub. L. No. 115-97), Nebraska taxpayers were in danger of a $209 million tax increase from that change alone, he said.

L.B. 1090 would create a new $134 state personal exemption that taxpayers could claim for themselves and each dependent beginning in tax year 2018.

The bill also includes an increase in the state’s standard deduction to offset the impact from other federal changes: repealing the phase-out for itemized deductions, eliminating some itemized deductions, and allowing immediate expensing of capital expenditures.

The standard deduction for single filers in Nebraska would increase to $6,750 from $6,370 and for married filing jointly to $13,500 from $12,700.

Nebraska also would continue using the consumer price index (CPI) to make inflation adjustments to personal exemptions, the standard deduction, and income tax brackets, rather than the chained CPI that was introduced under the federal law. The chained CPI benchmark grows more slowly over time and would generate $8 million more in Nebraska revenue during 2018, a figure that would grow to $31 million by 2020, according to a memo prepared by the Nebraska Department of Revenue.

Smith told Bloomberg Tax that $227 million represents the current best estimate of the bill’s impact on 2018 individual income tax revenue. A fiscal note projects the bill’s impact on fiscal year 2018-19 revenue at $326 million—a figure that Smith said encompassed revenue from 18 months.

Income Ceiling Rejected

Sen. Bob Krist, who has announced that he’s running for governor in 2018 as a Democrat, introduced an amendment that would have created an income ceiling for the new personal exemption credit.

Krist told Bloomberg Tax that its purpose was to make sure that lower- and middle-income taxpayers were protected from the effects of the federal tax law, but also that the state had a cushion in case estimates of the effects were wrong.

Krist also argued that higher-income taxpayers were more likely to benefit in other ways from the new law and were less in need of state-level relief.

But Smith opposed the amendment, arguing that all Nebraska taxpayers need to be made whole. The amendment failed on a 12-24 vote.

To contact the reporter on this story: Christopher Brown in St. Louis at ChrisBrown@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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