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Could Nebraska's proposed tax cuts be blocked by federal COVID relief bill?

Could Nebraska's proposed tax cuts be blocked by federal COVID relief bill?

LINCOLN — Nebraska’s $1.7 billion windfall from President Joe Biden’s American Rescue Plan may come with a twist that could thwart some state lawmakers’ plans for tax relief.

One clause of the $1.9 trillion plan says states cannot “either directly or indirectly” use their federal dollars to cover a loss of state tax revenue caused by a tax cut enacted by a state. If that happened, a state would be required to repay the amount of the tax cut to the federal treasury.

A Lincoln-based think tank, the Open Sky Policy Institute, issued a warning to state lawmakers last week that proposals to phase out state taxes on Social Security income and eliminate taxes on military pensions, among other things, might come with a bill seeking repayment to Uncle Sam.

“Sit tight,” said Renee Fry of Open Sky, urging state senators to be cautious and seek clarification from the feds.

But Gov. Pete Ricketts, who proposed the pension tax elimination and supports the Social Security move, sees it differently. State tax revenue is so strong, he said, that it won’t be reduced, even if the tax cuts are passed.

“We’re going to be able to proceed with the plans we have,” he said.

2021 appears ripe for tax cuts — including popular but pricey proposals like those on Social Security and military pensions. Some legislative leaders have noted favorable conditions such as the state’s robust tax collections, rosy economic forecasts and the federal funds headed to Nebraska to offset the impact of COVID-19.

The Nebraska Legislature’s Revenue Committee, which reviews bills dealing with taxation, has advanced several proposals to reduce taxes and grant new tax credits. If the full Legislature approves, Nebraska would phase out state taxes on Social Security benefits, boost the tax exemption on military pensions from 50% to 100%, and offer new tax credits for railroad spurs and youth sports complexes. State taxes would also be diverted to help construction work on the CHI Health Center and for sewer infrastructure projects.

Two top budget officials in the Legislature said that they were aware of the concern about the federal dollars and that it bears some watching. But they noted that it took several months to get clear federal guidance about the use of money from last year’s Coronavirus Aid, Relief and Economic Security Act, and that will probably be the case with the new federal relief program.

“It’s causing us some pause right now,” said State Sen. John Stinner of Gering, who chairs the budget-writing Appropriations Committee. “We’re going to sit and wait and kind of understand it better.”

Tom Bergquist, who leads the Legislative Fiscal Analyst, said that the new federal money will be kept in a separate fund and that it appears that if the Legislature only affects state general funds with tax cuts, Nebraska wouldn’t need to refund anything to the feds.

Where it might get tricky, Bergquist said, is if the state cuts taxes and then later uses the federal funds to “backfill” a reduction in state revenue.

The Rescue Plan was passed by Congress and signed into law by Biden last week, so information is still trickling out. It is expected to deliver $1.77 billion to Nebraska, including $976 million to the state, $667 million to local governments and $128 million for capital construction projects.

Stinner emphasized that the Appropriations Committee is proposing to fully fund state aid to K-12 schools, easing school district worries that the state might reduce its payments because schools are slated to receive millions of dollars from the Rescue Plan.

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Reporter - Regional/state issues

Paul covers state government and affiliated issues. He specializes in tax and transportation issues, following the governor and the state prison system. Follow him on Twitter @PaulHammelOWH. Phone: 402-473-9584.

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