Boiling tax policy down succinctly enough to fit in an editorial is hard, but here goes.
A small number of taxpayers is benefiting substantially from a little-known provision in state law that allows certain types of corporations to avoid paying Nebraska income tax on money they earned elsewhere. The Nebraska Department of Revenue estimates the cost to Nebraska at $83 million in the 2018 tax year.
Particularly concerning is that the money is not subject to the same tax structure that an average Nebraskan who works in another state experiences. Instead of receiving a credit from Nebraska for income tax paid to another state, it goes untaxed by Nebraska in this highly unusual arrangement.
This exemption fails to provide fairness in taxation. Accordingly, it’s why a proposal to eliminate this exclusion represents good policy.
Rather being taxed at the standard rates in Nebraska, the difference in income made in lower-tax or no-tax states isn’t being taxed to the same level here. A bill introduced by Omaha Sen. John McCollister, LB276, aims to tax all personal income made elsewhere at consistent levels, with the state giving credits for taxes paid elsewhere – the typical practice for an Nebraskan earning money in another state.
Going back in the history books, the measure was a late addition to an incentives package aimed at enticing ConAgra executives to keep their corporate headquarters in Omaha amid threats to relocate after InterNorth had decamped for Houston, where it would become Enron.
The move succeeded – until ConAgra left for Chicago a few years back. Though the company is gone, the tax exemption it inspired remains.
The only appearance of this provision in the legislative record came in 1987. It was a one-paragraph explanation of a committee amendment, with an Omaha senator outlining what he called “a fairly technical notion” on taxation.
Indeed, it’s deep into the weeds. But this lack of uniformity has cost the state a significant amount of money in its more than three decades of existence, including some not subjected to any state income tax when generated in states without income tax – two of which, South Dakota and Wyoming, border Nebraska.
Furthermore, only a few hundred Nebraskans – disproportionately, the state’s wealthiest residents – benefit from the present structure, at the expense of the remainder.
Research from the OpenSky Policy Institute found that 80 percent of the benefits from the program went to Nebraskans with taxable income exceeding $1 million in 2016, with 55 percent concentrated among those reporting more than $5 million of taxable income that year. All in all, between 700 and 800 taxpayers receive the lion’s share of this eight-figure exemption.
As a matter of tax parity and equity, the Legislature should end this costly policy while pursuing tax reform that benefits more Nebraskans.