Nebraska lawmakers this morning will debate on LB 1074, which includes an amendment to detach — or “decouple” — from tax changes made in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The bill also includes an amendment that would create a new $22 million state-level tax write-off for a small subset of wealthy Nebraskans affected by a $10,000 cap placed on the amount of state and local taxes (SALT) they can deduct at the federal level.
Decoupling would prevent large state revenue loss
Decoupling from the CARES Act tax changes — the vast majority of which are business tax cuts that benefit those with high incomes — would prevent what the Department of Revenue predicts would be a $250 million state revenue loss over the next three years.[1] About $187 million of the three-year revenue loss would be caused by the CARES Act’s excess business loss provision, which is accessible only to a select number of high-income taxpayers.
As University of Nebraska tax law professor Adam Thimmesch noted in our recent webinar regarding the CARES Act tax changes, state lawmakers don’t have to decouple from the CARES Act changes in their entirety. Rather, they can choose to decouple from some changes while maintaining others that make sense for the state. (Read a recap of Thimmesch’s presentation here.)
SALT provision would reduce state revenues to largely benefit high-income taxpayers
Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), taxpayers could deduct unlimited amounts of SALT, including state and local income, real estate and property taxes, from their federal taxable income. The TCJA imposed the cap as a way of broadening the tax base and offsetting other tax cuts included in the legislation that largely benefitted high-income taxpayers, such as a reduction in the federal corporate income tax.[2]
AM 3235 would allow those Nebraskans who paid more than $10,000 in SALT to deduct whatever couldn’t be deducted at the federal level from their taxable income at the state level.[3]
At the federal level, taxpayers can reduce their taxable income by choosing to take either the standard deduction — $24,800 for couples married filing jointly — or to itemize their deductions, which includes reducing their taxable income by SALT paid. That means only those taxpayers with itemized deductions in excess of $24,800 would benefit from a workaround to the cap.
Both the Tax Foundation and the Institute on Taxation and Economic Policy (ITEP) find the cap largely impacts only the wealthiest of taxpayers. In 2019, the Tax Foundation estimated that eliminating the cap wouldn’t impact those in the bottom two income quintiles – the lowest-income 40% – and have only a negligible effect on those in the third and fourth quintiles, as those taxpayers would benefit from an increase in the standard deduction also set out in the TCJA.[4] ITEP also looked at the potential state-level impact of a SALT cap repeal and found that, in Nebraska, almost 70% of the benefits would flow to the wealthiest 1% of households.[5] The taxpayers who would benefit from a repeal also are the ones most likely to benefit from a workaround as proposed in AM 3235.
LB 1074 is the first item on the Legislature’s agenda this morning. NET Nebraska will stream the debate live.