LINCOLN — The state’s retirees can probably expect a new tax break on Social Security income to be passed by the Nebraska Legislature this year, though the amount of that tax break remains up in the air.
On Monday, state lawmakers gave 47-0 first-round approval — two short of unanimous — to a bill that would phase out all state income taxes on Social Security checks after 10 years.
Nebraska is one of only 13 states that tax Social Security, which backers of Legislative Bill 64 say gives the state a black eye when older people look for a place to retire.
But the main sponsor of the bill, State Sen. Brett Lindstrom of Omaha, told his colleagues Monday that he’s planning to pare back the tax break. He wants to lessen its financial impact, which is projected to grow to a major-league chunk of state tax revenue, almost $140 million a year after a decade.
That $140 million figure had several senators questioning if the measure was too ambitious, forcing future cuts in state services and school aid.
That could force some “tough choices” in the future, said Sen. Curt Friesen of Henderson.
“We’re gong to have to start deciding how much money we can give away, and what our revenue stream will look like in the future,” Friesen said, urging caution.
Lindstrom accepted an amendment to LB 64 that extended the period to phase out taxes on Social Security from his originally proposed five years to 10 years. That spreads out the fiscal impact over a longer period of time.
But Sen. Mike Flood of Norfolk offered a less expensive alternative to LB 64 — ironically, one that Lindstrom has introduced in past years — that drew a lot of vocal support.
That amendment would limit the tax break on Social Security to only those couples with less than $95,000 in annual adjusted gross income ($80,000 for an individual). Under Flood’s amendment, only those couples with less than $75,000 a year in income would get a 100% exemption, and only after five years.
Those with incomes between $75,000 and $95,000 would get a partial tax exemption on their Social Security income, ranging from a 20% to 80% tax break.
The fiscal impact of the proposal, which was introduced this year as LB 237, was much less than LB 64, rising to $36 million after five years. Flood’s amendment would expand a current tax break on Social Security, which exempts all taxes for those with incomes of less than $43,000 for an individual and $58,000 for a couple filing jointly.
The Legislature’s top budget watcher, Sen. John Stinner of Gering, who heads the Appropriations Committee, praised the talk of a compromise on LB 64 as much-needed fiscal “reshaping” when the Legislature has only $143 million left to spend on bills or devote to tax breaks.
“We have to show a lot of flexibility to fit all of these fiscal notes together,” he said.
In the end, Flood withdrew his amendment but promised to bring it up again during second-round debate.
Lindstrom said LB 64 will probably be amended to lessen the fiscal impact during that debate. By then, legislators will have a much clearer picture of the state’s future fiscal status. A state tax forecasting board meets Thursday to give a new projection of future tax revenue.
Lawmakers advanced from first-round debate several other bills that involved tax breaks or tax credits Monday, including:
LB 26, which would exempt residential water bills from sales taxes. It represents about a $9 million annual tax break. Supporters of the bill, introduced by Sen. Justin Wayne of Omaha, said it was unfair to tax people on a necessity like drinking water.
LB 682, which sets aside $15 million a year for the New Markets Job Growth Investment Act and extends the act through 2029. The act provides tax credits for investors in companies seeking to expand.
LB 84, which would make a new generation of smaller and safer nuclear-generating facilities eligible for tax credits through the ImagiNE Act, which was passed last year. Sen. Bruce Bostelman of Brainard said “micro” reactors and small modular reactors can employ seven to 300 employees in high-paying jobs. Developers such as billionaire Bill Gates are looking to build such facilities, he said, which can provide clean, carbon-free energy.