Decoupling from changes to federal tax law set out in the recently-passed CARES Act would give the state time to assess whether the middle of a pandemic and record-breaking economic downturn is the right time for $250 million in tax cuts.
That was the recommendation of Adam Thimmesch, a tax professor at the University of Nebraska’s law school, speaking on a recent OpenSky webinar.
“States should decouple from these changes and maintain the status quo,” he said. “States don’t have borrowing capacity like the federal government. States generally aren’t in a position to provide stimulus funding. State revenues are down. People are struggling. States are funding critical public services. We have to rely on the federal government for stimulus based funding. They can borrow; they can handle it.”
As a so-called “rolling conformity” state, Nebraska automatically adopts the federal tax changes unless the Legislature intervenes. If the Legislature doesn’t act, the changes could cost the state $250 million over the next three years, according to the Department of Revenue, which estimates $230 million of that would be in tax breaks for businesses.
Decoupling now would give the Legislature extra time to consider which changes, if any, make sense for Nebraska. “We have to make tax policy — we have to make fiscal decisions for us,” Thimmesch said. “Decoupling allows Nebraska to do that and with a greater knowledge of our needs. If the Legislature were to decouple, and then consider this later, we’ll have a better idea of which businesses are hurting.”
The bulk of the revenue loss comes through a provision allowing businesses that pay through the personal income tax, like S-corps and LLCs, to offset other income with “excess business losses” going back to 2018. That means a taxpayer who generated a profit this year but had losses in 2018 would be able to apply the provision and obtain a refund of taxes paid in earlier years. As such, companies unaffected by the pandemic can benefit because of the retroactivity. Furthermore, many businesses have received federal funding to assist with COVID-related revenue loss, such as grants from the Paycheck Protection Program.
This provision benefits only high income earners, Thimmesch said, as married taxpayers filing jointly would need to have at least $500,000 to be able to take advantage of it. You can read more about this in our recent policy brief.
The Legislature, however, doesn’t have to take an “all or nothing approach” to decoupling, Thimmesch said. The state can instead accept or reject specific pieces of the federal law, depending on what it believes is best for the state and its budget.
For instance, it could decide that the state can afford a $6 million loss due to changes in how charitable donations are deducted and adopt that piece of the CARES Act while rejecting other, more costly, pieces.
Video of the webinar can be accessed here and you can download a PDF of Thimmesch’s slides here.
Also, if you haven’t done so already, please register for our July 23 webinar about revisions to the state’s revenue forecast with Appropriations Chair John Stinner and former Sen. John Kuehn, who is a member of the Nebraska Economic Forecasting Advisory Board.
