2023 Nebraska Tax and Incentive Legislative Update: Nebraska Makes A Move To Improve Its Competitive Business Climate
In our “Nebraska Business Expansion Decision Guide,” we identified the 22 State and Local Site Selection Features that we experience are most commonly considered by companies when deciding where to locate, or expand, a business. These 22 Features collectively establish the framework for a State’s Business Climate.
This year’s Nebraska Legislative Session was particularly eventful in regard to the State’s Tax and Incentive Policies. The Legislature enacted several significant Tax and Incentive changes, which collectively improved the State’s Business Climate. These changes are positive impacts on at least 8 of the 22 State and Local Site Selection Features:
- Business State & Local Tax System
- Workforce Costs
- Quality of Life
- State & Local Incentives
- Skilled Workforce
- Personal State & Local Tax System
- Area Cost of Living
- Workforce Development
We’ll review below some of the most significant Tax and Incentive changes. The Legislature did leave for another day a number of important Tax and Incentive issues, which we’ll review as well.
In 2016, 2017 and 2018, Nebraska ranked 1st in the United States in New Projects per capita according to the annual report by Site Selection Magazine. By 2021 and 2022, Nebraska had fallen to 5th and 10th, respectively. Various reasons exist for this. A significant reason is that other States have been more proactive to improve their Business Climates.
Overall, the Legislature accomplished a great deal in 2023 to improve Nebraska’s Business Climate. The Wall Street Journal Editorial Board was impressed. It had this to say in a June 6, 2023 Editorial: “The gulf between high- and low-tax states keeps growing, and Nebraska is the latest to use budget surpluses to cut income and property taxes—and in a big way.”
Of course, there is still more work to do, as Nebraska is looking to be – and to create a reputation for being - among the best States in which to do business. The annual Business Survey of U.S. CEOs by Chief Executive Magazine rates States by CEOs’ impressions. Between 2020-2023, Nebraska’s State Business Climate has remained in the middle of the pack, moving from 28th, to 26th, to 28th and for now to 24th (#1 = Best). CEOs make the decisions, and their informed perception matters.
Tax Changes Impacting Nebraska’s Competitive Business Climate
Individual and Corporate Income Tax Rate Reduction
As several States around the United States have acted to reduce income tax rates, Nebraska needed to do so as well – or risk falling further behind in the race for tax competitiveness. Therefore, Governor Pillen lobbied for – and the Legislature passed – significant income tax rate reductions.
Nebraska’s top Individual Income Tax Rate will be reduced from the prior 6.84% top rate to a 3.99% top rate, on the following schedule:
- 6.64% rate for 2023;
- 6.44% rate for 2024;
- 5.20% rate for 2025,
- 4.55% rate for 2026; and
- 3.99% rate for 2027 and later years.
Similarly, Nebraska’s top Corporate Income Tax Rate will be reduced from its prior 7.5% top rate also to a 3.99% top rate, on the following schedule:
- 7.25% rate for 2023;
- 5.84% rate for 2024;
- 5.20% rate for 2025,
- 4.55% rate for 2026; and
- 3.99% rate for 2027 and later years.
Impact of These Changes. As companies look to develop and retain their employment base, especially in this time of workforce shortages, these personal tax reductions are very attractive to companies. As top tax rates are often considered in ranking States, this significant reduction in corporate taxes will also lead to a noticeable change in Nebraska’s competitive positioning.
Nebraska’s New Pass-Through Entity Tax
The 2017 Tax Cuts and Jobs Act limited the amount of State and Local taxes that individuals can annually deduct, as an itemized deduction, to $10,000. This limitation has impacted many Nebraska taxpayers, particularly owners of businesses who pay well over $10,000 in Nebraska taxes (including income and property taxes).
Nebraska’s new Pass-Through Entity Tax (PTET) law allows a pass-through entity, such as a partnership, LLC or S corporation, to make a voluntary election to directly pay the Nebraska income tax generated by the entity’s activity. This tax is paid on behalf of the entity’s owners. This direct payment has two impacts. First, it may simply be more convenient for entity owners to have the taxes on their entity’s income be paid by that entity, rather than through their individual returns. Second, the payment of State and Local income taxes by the pass-through entity constitutes a deductible business expense for federal income tax purposes. That expense is not limited by the $10,000 deduction cap otherwise placed on State and Local income taxes for individuals, often allowing business owners to avoid part of the impact of that cap.
In other words, the laws facilitate a real federal income tax savings. While the exact impact of this change will vary from business to business, many Nebraska business owners could see a federal income tax reduction of approximately $30 to $35 for each $100 of Nebraska income taxes paid.
Nebraska’s new PTET law is, like certain other States, retroactive to 2018. Taxpayers need not file amended returns to take advantage of this change. Instead, a pass-through entity can elect to pay the Nebraska income taxes for a prior year sometime in 2023-2025, generating a federal income tax deduction in the year paid. This payment will generate a refundable credit for the entity’s owners equal to their pro rata shares of the Nebraska income taxes paid.
In addition, Nebraska’s resident credit was amended to allow a resident to claim a credit for elective entity-level taxes paid to another State, if the other State’s PTET is similar to Nebraska’s PTET.
Impact of This Change. This will allow businesses to reduce their federal income tax liability, improving Nebraska’s competitiveness and letting companies know Nebraska is favorable regardless of the form of entity a company wishes to use.
Tax Credits for Donations to Private Schools
Nebraska taxpayers may now claim a nonrefundable income tax credit for contributions made to nonprofits that grant scholarships to students to attend private school.
Eligible contributions from individuals, passthrough entities and corporations are capped at $100,000 annually, or up to 50% of their state tax liability. Contributions from estates or trusts are capped at $1 million annually, or up to 50% of their state tax liability. To qualify for the credit, a contribution may not have been claimed as a charitable contribution for federal income tax.
Only Nebraska resident students are eligible for the scholarships, which may be used at a qualifying privately operated elementary or secondary school. Priority for the scholarships will go to kids who live in poverty, foster care, experience bullying, harassment, or other victimizing behaviors, or have a parent or guardian who is serving in the military.
The Department of Revenue may grant $25 million in credits in 2024, 2025 and 2026. After that, if at least 90% of the credits are claimed, the annual limit will increase by 25%. Annual increases may continue until the total credit amount reaches $100 million.
Impact of This Change. This is intended to provide more families with real school choice and thus increase Nebraska’s attractiveness for families.
Tax Credits for Child Care
The Department of Revenue is authorized to approve up to $15 million each year in refundable income tax credits intended to help parents and legal guardians pay for childcare. Eligibility is based upon household income. A credit of $2,000 per child is available for households with income below $75,000, while households with income up to $150,000 may receive a credit of $1,000 per child. Because the credit is refundable, it can be received even if the credit exceeds the total tax liability of the parents or legal guardians.
In addition, individuals, estates, trusts and corporations may apply for a nonrefundable Nebraska income tax credit of up to $100,000 for contributions they make to eligible childcare programs. The Department of Revenue may annually approve $2.5 million in credits under this program.
Impact of This Change. This will effectively reduce the cost of childcare, which will make Nebraska a more attractive place for young families.
Retirement Income Exemptions
One hundred percent of Nebraskans’ Social Security income is now exempted from State income tax beginning in tax year 2024 rather than 2025. In addition, federal retirees may now exclude federal pension benefits from Nebraska taxation.
Impact of This Change. The more that Nebraska is attractive to retirees, the more it is attractive to companies to build their employment base here. These revised retirement exemptions will encourage more retirees, and near retirees, to stay in Nebraska, improving Nebraska’s overall competitiveness.
Changes to Nebraska Property Tax Credits
Nebraska increased the minimum amount of property tax credits for 2023 from $275 million to $360 million, with subsequent increases in later years. In addition, Nebraska eliminated the prior 5% cap on the school district tax credit’s allowable growth percentage for future years.
Limitation on School District Budget Increases
Nebraska now limits the amount by which a school district may increase its property tax request from one year to the next by 3 percent. There are exceptions based on a district’s growth in student enrollment, the number of limited English proficiency students in the district and the number of students in poverty in that district.
Notwithstanding this limitation, a district may exceed its property tax request authority by an amount approved by a 60 percent majority of voters at a special election. A school board may also vote to exceed a district’s property tax request authority by 4 to 7 percent, depending on the number of students enrolled, if at least 70 percent of its members approve.
Community College Levy Eliminated
Nebraska ended the ability of community colleges to levy property taxes after fiscal year 2023-24. After that year, the State of Nebraska will distribute funds to community colleges to offset their lost property tax revenue.
Impact of These Changes. Nebraska has long been known in Business Climate discussions as a high property tax State. All of these property tax changes are intended to reduce the cost of property tax for both businesses and individuals, which directly reduce the cost of doing business and the costs of living and working in Nebraska.
Incentive Changes Impacting Nebraska’s Competitive Business Climate
Reinstated the Nebraska Advantage Research and Development Credits
The Nebraska Advantage Research and Development Act, which provides State tax credits for companies which conduct Research and Development in Nebraska, had been closed to new applicants at the start of 2023. The State reopened the program for new applicants. As part of doing so, the State also eliminated the prior 21-year cap on credits, so companies conducting Research and Development in Nebraska can continue to claim credits for the life of their Research and Development activities.
Fixed E-Verify Requirements To Obtain Research and Development Credits
The Nebraska Advantage Research and Development Act previously contained certain provisions which the Department of Revenue was interpreting to mean that, if a company failed to perform a verification under the federal E-Verify system on each and every newly hired employee in Nebraska within a few days of hire, that company would lose its entire research and development credits for that year. This was true even if a non-verified employee had nothing to do with the company’s research and development.
The Legislature amended the Nebraska Advantage Research and Development Act to extend the timeframe for E-Verify verification to 90 days and to confirm that this E-Verify requirement only applied to employees engaged in research and development. In addition, the penalty for failure to E-Verify an employee will become a loss of the credit for the wages of that employee – not a loss of all credits for all Nebraska activities.
As initially proposed, this legislative fix would have applied retroactively, to confirm that companies may claim incentives they may have improperly lost in prior years due to the prior provision. The retroactivity provision was ultimately amended out of the final bill.
Based on the ambiguous wording of the prior statute, and the audit appeals we are working on, a number of defenses exist to the Department of Revenue’s “one strike and you’re out” E-Verify approach. For more detail, see our article in Issue 2, 2023 of the Nebraska CPA Magazine.
Impact of These Changes. Companies across-the-board realize the need to continually develop, create and change. As a State, we need the mindset that recognizes this. Both of these changes help with that important image and will encourage existing companies to conduct Research and Development in Nebraska.
Good Life Transformational Projects Act
The Legislature passed the Good Life Transformational Projects Act. This allows the Department of Economic Development to approve applications to enact “Good Life Districts.” Such districts would have to meet certain development cost and job creation thresholds. In addition, for districts in counties with at least 100,000 inhabitants, an applicant must show that at least 20% of sales would be to non-Nebraska residents, that the project will attract retail businesses not yet in the market and that the project would attract at least 3 million visitors annually.
Retail sales occurring within a Good Life District would incur a reduced State sales tax rate of 2.75%. The remaining 2.75% of tax would go toward financing the development of the District.
Impact of This Change. This change is intended to attract big developments, along with retailers not previously in the Nebraska market with the potential to enhance Nebraska’s quality of life.
Improvement to Imagine Nebraska Act for Waste Treatment and Disposal Facilities
The State amended the Imagine Nebraska Act to allow certain Waste Treatment and Disposal Facilities to qualify for incentives. The Imagine Nebraska Act was enacted in 2021 as the successor to the 2005 Nebraska Advantage Act. The addition of this new qualified business activity provides a solid indication that Nebraska is willing to continue to develop its principal incentive platform.
Impact of This Change. This change is intended to allow an additional industry to earn Imagine Nebraska incentives, which shows Nebraska is committed to ongoing enhancement of its principal incentive platform.
The Legislature also passed the following changes that impact Nebraska’s overall Business Climate:
- The State created a State income tax credit for retail stores that sell biodiesel.
- The State will direct taxes collected on the sale of aircraft to a specific fund that will be used to construct, repair and improve infrastructure at Nebraska’s airports.
- The State authorized Nebraska’s highway commission to issue bonds to facilitate faster completion of highway construction.
- The State revised Nebraska’s tax sale certificate process to require grantees of tax deeds to pay any surplus, using either the property’s assessed value or its sale price, to the prior owner.
Impact of These Changes. Each of the incentive changes is intended to drive additional economic activity to the State, through direct financial assistance or the support of improved infrastructure. The revisions to Nebraska’s tax sale certificate process are intended to eliminate a potentially unfair – and unconstitutional – property seizure. These improve Nebraska’s overall competitiveness.
A Look Ahead
The Legislature considered, but did not adopt, the following proposals for improving Nebraska’s Business Climate. Most of these were rejected due to their projected cost.
State Income Tax Deduction for Property Taxes Not Deductible Under Federal Law
The Legislature did not adopt a proposal that would have allowed Nebraskans to deduct, from their Nebraska taxable income, the portion of their property taxes that they could not deduct on their federal return. For example, assume that an individual paid $10,000 in Nebraska income taxes and an additional $9,000 in property taxes. That individual now can only deduct the $10,000 of Nebraska income taxes as an itemized deduction on their Nebraska income tax return.
Under this proposal, the individual could have deducted the $9,000 in property taxes on their Nebraska return.
The Legislature did not adopt a proposal to create a 30-day filing and withholding threshold for both remote employees and their employers. Remote employees who work for a short time in Nebraska – and primarily in another State – would not have owed Nebraska taxes until they are present for over 30 days in Nebraska. In addition, employers would not have needed to withhold State income taxes until the 30-day threshold was exceeded.
The Legislature also did not adopt a proposal that would have confirmed that non-Nebraskans are not subject to Nebraska’s income tax if they do not travel into Nebraska. Nebraska is one of a few States that impose Nebraska income tax on individuals for income earned from Nebraska businesses even if that work is performed remotely.
Full Expensing of Research and Development Assets
The Legislature did not adopt a proposal that would have allowed businesses who spend on machinery and equipment used in research and experimentation to fully expense those assets in the year purchased.
A Great Step Forward
These Tax and Incentive changes were the result of efforts by many members of the Nebraska Business Community from around our great State, such as the Nebraska State Chamber of Commerce and the Greater Omaha Chamber of Commerce. These Tax and Incentive changes, led by Governor Pillen and enacted by the Nebraska Legislature, collectively enhance Nebraska’s overall competitiveness in attracting and retaining businesses and workforce to Nebraska, impacting each of the State and Local Site Selection Features highlighted above. As Governor Pillen has stated: “Our tax policy chases our kids and grandparents out of the State. We can’t grow Nebraska that way.”
Business Climate is never a static dynamic. Let’s continue to encourage our Business and Nebraska’s Leadership to continue to press for even further improvements as today’s competition quickly changes into the future.
A copy of our updated “Nebraska Business Expansion Decision Guide” can be downloaded at www.NebraskaStateTax.com, or you can email us for printed hard copies.