Nebraska’s major tax incentive programs are expensive and have long tails that cause the state to forgo revenue for decades. The programs also lack transparency regarding how the incentive dollars are used and this makes it difficult for Nebraskans to know if incentives are a good investment. Two proposals before the Revenue Committee today — LB 1025 and LB 1045 — would help address these issues and in so doing help protect funding for other vital services and ensure tax incentives are a good use of state resources.
LB 1025 would reduce Nebraska’s future incentive liability
As the Legislature debates LB 720 — the state’s third major incentive package in 30 plus years — now is an opportune time to consider LB 1025, the Tax Credit Buy-Back Act. LB 1025 would offer companies with outstanding credits under the Nebraska Advantage Act the chance to sell them back at $0.25 on the dollar. Research shows that companies value a dollar into the future at a significantly discounted rate.[1] LB 1025 leverages this principle in a way that would help Nebraska alleviate some of its considerable future tax incentive liability. Companies would have to sell back at least $50,000 worth of credits to help ensure the credit buyback is worth the administrative cost to the state and each dollar allocated to the buy-back program would net a $4 reduction in Nebraska Advantage liability.
Nebraska Advantage creates a significant liability to the state in the upcoming years. Through FY 28 alone, the Department of Revenue projects that businesses will use nearly $1.6 billion in tax credits and sales and use taxes — an average of $175 million per year. This is money the state will not collect. Should LB 720 be enacted, the state would be leveraged well beyond its historical levels of incentive liability.
LB 720 debate highlights need to address long term liability
If the Legislature were to pass LB 720, LB 1025 would provide a reduction in other tax incentive liabilities to help ensure the fiscal health of the state. The state saw a historical average of roughly $100 million to $150 million per year in tax expenditures from LB 775 — its original incentive program. When Nebraska Advantage was passed and ramped up, however, the state’s tax incentive liability became significantly more volatile. The addition of Nebraska Advantage to the state’s incentive portfolio has led to reduced revenues of more than $200 million in a single year three times since 2013.
LB 720 would be yet another expensive addition as it is projected to reduce state revenues by nearly $1 billion through FY 31.[2] When combined with the liability of LB 775 and Nebraska Advantage, projected revenue loss will exceed $2.4 billion through FY 28 alone.[3] In fact, based on Department of Revenue numbers and the fiscal note for LB 720, the state won’t see incentive revenue reductions dip below $200 million per year and will see nearly $300 million in reduced revenues within three years. LB 1025 would give the state a tool to help buy down some of its substantial incentive liability.
LB 1025 can help offset the effect of incentive programs’ “long tails”
The design of Nebraska’s tax incentive programs has been such that even when they sunset, they don’t go away for a significant amount of time. For example, LB 775 ended in 2005 but has provided and will continue to provide tax credits to businesses until 2025. Nebraska Advantage will provide incentives until 2040 or 2050 depending on the tier. LB 1025 can help minimize the outyear fiscal impact in a way that is beneficial to businesses that choose to utilize the buyback option.
LB 1045 would add needed transparency to Nebraska’s tax incentive programs
LB 1045 would create the Taxpayer Transparency Act, which would require more reporting about every company receiving tax incentives from every program currently available and those that become law in the future. With regard to project-specific tax incentive information — that is, information about benefits directly distributed to a company — Nebraska Advantage and LB 720 only report a project’s name, location and two-year sum of tax credits used and sales taxes refunded. No additional information is provided.
LB 1045 would require reporting of the employment and investment added by incentivized companies, which would give taxpayers a sense of the activity being subsidized. The bill also would require reporting of yearly information stating the investment tax credits earned by a company, wage tax credits earned, tax credits used, sales tax refunds received, wage credits used to keep employees’ state income tax withholding, and personal property exempted from taxation.
LB 1045 also would provide much more information related to the total incentives received by a company, both within a specific incentive program and across all state tax incentives. The bill would require the reporting of the aggregate amount of tax credits and sales tax refunds received to date under the agreement, the aggregate amount of wage credits used against employee state income tax withholding to date, and the aggregate amount of tax credits and sales tax refunds to date from all tax incentive programs. This would give taxpayers an idea of how much companies have been historically subsidized by the state.
Measure would treat tax incentives more like other spending
Tax incentives and other tax expenditures are spending done through the tax code and LB 1045 would help put incentives on par with other state appropriations, which are scrutinized every budget cycle. In doing so, LB 1045 would shed much-needed light onto the state’s tax incentives, which would help lawmakers and other state leaders evaluate the programs.
Conclusion
If the Legislature passes LB 720 this year without buying down some of the state’s nearly $1.6 billion Nebraska Advantage liability, reductions to the state’s revenues will become increasingly volatile, threatening services vital to Nebraskans and other priorities such as property tax relief. The passage of LB 1025 would be a step in the right direction in reining in the state’s incentive programs and protecting funding for vital services and other priorities. LB 1045 also would be a positive step as it would provide information about our incentive programs that would help Nebraskans understand how incentives stack up in comparison to funding for other priorities, such as K-12 education and property tax relief.
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