LINCOLN — Quietly, so far, a proposal has moved through the Nebraska Legislature that holds promise for improving a less-than-stellar ranking of the state's business tax climate.
The bill would allow businesses to spread out operating losses over a longer period of time — a particular benefit to startups — and would repeal the state's alternative minimum tax, benefitting a small group of taxpayers with incomes generally more than $100,000.
Legislative Bill 308 has the backing of the state's leading business groups, a powerful ally in making tax changes, and has seen no opposition so far.
But the idea, like a handful of others this year dealing with tax reforms, might be put off because of its financial cost and so it can be included in a comprehensive study of the state's tax system scheduled during 2013.
Even Gov. Dave Heineman, who has called the state's tax ranking “mediocre” and supports elimination of the alternative minimum tax, said recently the first priority for the Legislature should be tax relief for a broader swath of Nebraskans, including senior citizens and veterans.
That is a not-so-subtle jab at the Legislature's Revenue Committee for failing, so far, to advance a bill that would provide a tax break on military pensions and Social Security benefits.
It sets up an interesting battle over tax breaks in the last 38 days of the legislative session as lawmakers begin weighing how much new spending, or tax breaks, the state can afford as it crafts a new two-year budget.
Right now, $16 million to $18 million is available to spend on new ideas, such as repealing the alternative minimum tax, and there are new spending and tax-cut proposals totaling about $185 million.
Senators will have to decide what their “few” top tax priorities are for 2013, said State Sen. Heath Mello of Omaha, chairman of the budget-writing Appropriations Committee.
Will it be smaller, less-expensive tweaks such as expanding a tax break for contributions to kids' college savings plans? Or do senators prefer bigger-ticket tax cuts such as granting a sales tax break for wind farms or repealing the alternative minimum tax, each of which would cost about $8 million a year.
Mello said that people shouldn't forget that the Legislature has already provided comprehensive tax breaks for average taxpayers by lowering state income tax rates. That change, which eventually will cost $55 million a year, was passed a year ago.
Sen. Kate Sullivan of Cedar Rapids, who heads the Legislature's Education Committee, said she is concerned.
Her top priority will be increased state aid to K-12 schools, she said, which might leave tax break bills on the sidelines until next year, after the planned study of tax policy is completed.
“None of this is going to be easy,” Sullivan said.
The business community has for years been seeking a repeal of the alternative minimum tax.
The alternative minimum tax was created on the federal level to ensure that some high-income taxpayers who had lots of tax deductions paid at least a “minimum” amount of income tax as an “alternative” to regular income taxes.
Because Nebraska at that time piggybacked on the federal income tax system, a state alternative minimum tax was born. Even after the state uncoupled its state income tax system from the federal system, the state minimum tax stayed in place.
Only those taxpayers who pay a federal alternative minimum tax must pay Nebraska's minimum tax, which is about 29 percent of what's owed at the federal level.
Only about 2 percent of Nebraska taxpayers — about 17,000 — pay the state alternative minimum tax.
Almost all have adjusted gross incomes higher than $100,000, according to the Open Sky Policy Institute, which examines state tax matters. That will open LB 308 to criticism that it benefits the well-heeled.
Renee Fry, executive director of the institute, said that while the alternative minimum tax might not represent the best state tax policy, more study is needed before it is eliminated.
But supporters of the bill, including the Nebraska Chamber of Commerce and Industry and Lincoln and Omaha chambers, maintain that the alternative minimum tax no longer fulfills its purpose, and eliminating it would simplify state tax policies.
John Cederberg, a Lincoln accountant who has helped craft state tax policies in the past, said that the alternative minimum tax was created when tax shelters in real estate and oil drilling were common, which isn't the case now.
Columbus Sen. Paul Schumacher, vice chairman of the Revenue Committee, said that the alternative minimum tax now captures some middle-income taxpayers along with the wealthy. Eliminating it, he said, would be an inexpensive way to improve the state's attractiveness to new businesses, adding that only eight other states still have a state version of the alternative minimum tax.
Another aspect of LB 308 would extend the period, from five to 20 years, that companies can deduct net operating losses from their state taxes. That would also bring Nebraska in line with many other states and the federal government, which already allow 20 years.
Supporters say the move would particularly aid startup companies, which typically have operating losses in their early years. The cost of that change would not kick in for five years but is estimated at $8 million a year in less tax revenue.
Passage of LB 308 could help improve Nebraska's tax ranking. The Tax Foundation now lists Nebraska No. 31 for its business tax climate.
Last year Maine jumped from 37th to 30th in those rankings by passing a similar bill.
There's plenty of argument about the value of such rankings and whether they can convince a company to move to the state.
But Cederberg, the tax authority, said that chief financial officers of companies do pay some attention to such ratings, and it can't hurt Nebraska to get out of the bottom 20.
“Improving our rankings would be helpful in getting attention, at least not negative attention, from CFOs,” he said.
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