Federal tax cuts could raise Nebraska taxes by $220 million
LINCOLN, Neb. (AP) — Nebraska taxpayers could end up paying more to the state this year unless lawmakers halt automatic changes that were triggered by the Republican congressional tax plan, including the elimination of popular tax exemptions.
The tax law signed by President Donald Trump would result in an additional $220 million for state government this year, according to the Department of Revenue. The potential cash windfall is already dividing lawmakers, some of whom say the state should use the revenue to help balance the budget.
Nebraska's system is changing because lawmakers have connected many parts of it to the federal tax code, leading to automatic shifts when Congress passes new tax legislation. A taxpayer's federal adjusted gross income, which is used to calculate their tax debt, also helps determine their adjusted gross income in Nebraska.
Lawmakers have introduced two bills that seek to negate the effects on most taxpayers, but at least one of the proposals will face resistance from senators who want to use the extra revenue to avoid state budget cuts. Lawmakers face a projected $173.3 million shortfall that they're required to address.
One measure by Sen. Jim Smith of Papillion would preserve Nebraska's personal exemption, which taxpayers can claim for themselves and their dependents to reduce their taxable income. The value of each Nebraska exemption was based on the federal exemptions, which were eliminated under the congressional tax plan. Smith introduced the legislation at the request of Gov. Pete Ricketts.
If Smith's bill passes, Nebraska taxpayers could continue to claim credits for themselves and each of their dependents. For the 2018 tax year, each credit is worth $134.
If lawmakers don't adjust the state tax system, the credits would vanish. A family of four would then have to pay an additional $536 a year.
"We have to make an adjustment at the state level to make sure families and individuals don't have that tax increase," said Smith, chairman of the tax-focused Revenue Committee.
The personal exemption change is by far the largest piece of the federal tax law that would affect state tax collections. Smith's proposal also makes a series of smaller changes that could affect individual Nebraska tax bills.
A second bill by Sen. Burke Harr of Omaha would keep Nebraska's personal exemptions but impose income limits on who can qualify. The bill would exclude individuals with a federal adjusted gross income of more than $100,000 and married couples with incomes greater than $200,000.
Harr said the state should keep some of the excess revenue, at least temporarily, until state officials understand how the federal plan will affect Nebraska's tax collections. He said it's not yet clear whether the federal changes will prompt taxpayers to change their behavior.
"My bill is trying to hold as many people as possible harmless while acknowledging we're in a fiscal crunch," said Harr, a Revenue Committee member. "I think we need to be really cautious about what we do with tax policy based on the federal changes until we understand what all the implications are."
Smith's bill is expected to face opposition from state Sen. Adam Morfeld of Lincoln, who argued the federal changes could help state lawmakers balance the budget without making cuts.
Morfeld said he supports "targeted tax cuts" in years when state tax collections aren't lagging but argued that reducing revenue now could do long-term damage to state agencies and the University of Nebraska. Taxpayers who pay more to the state will still likely see a net savings because of the federal tax cuts, he said.
"I'm not comfortable with anything that cuts revenue when we're in a revenue shortfall," he said.
Sen. Paul Schumacher of Columbus said the bills to adjust Nebraska's tax system will likely get rewritten before the session ends as lawmakers learn more about the federal tax changes. But he said it's important for lawmakers to act this year.
"It probably would be unfair, particular to lower-income families, to take away their exemptions," he said. "Something has to be done there."
Lawmakers should err on the side of caution when deciding how to adjust the state tax system, said Renee Fry, executive director of the OpenSky Policy Institute, a tax policy think tank.
Fry said many of the federal law's effects on the state remain unclear, and bills that change Nebraska's tax system could lead to a state revenue loss.
Harr's bill is a "nice middle ground" that doesn't raise taxes on low- and middle-income families but gives the state a financial cushion, she said.
"It provides some flexibility if the Department of Revenue's estimates aren't spot on," she said, adding that higher-income families would still get a federal tax cut.