For Release Wednesday, May 12, 2021

Capitol View
Commentary by J.L. Schmidt
Statehouse Correspondent
The Nebraska Press Association
Lawmakers Overwhelmingly Advance Phase-Out of Social Security Tax

      Nebraska is one of 13 states that still tax Social Security benefits. Lawmakers have given overwhelming first-round approval to a 10-year plan to phase that tax out, but with a healthy price tag when fully implemented.
      This could prove to be one of the biggest tax/revenue discussions of the session. Can we afford to do it? Can we afford not to?
      Colorado,ÊConnecticut,ÊKansas, Minnesota, Missouri, Montana, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia also collect state income tax on Social Security payments to at least some beneficiaries.
      Omaha Sen. Brett LindstromÕs measure (LB64) received 47-0 first-round approval. An analysis by the Institute on Taxation and Economic Policy shows the phase-out of state income taxation of Social Security income over a 10-year period would reduce state revenue by more than $130 million a year when fully implemented. Retirees in the top 20 percent of incomes -- those who make more than $114,000 -- will receive two-thirds of the tax cut created, the report says.
      A number of lawmakers have expressed concern that the estimated loss of anticipated future revenue could limit the prospects for additional property tax reduction. Lindstrom said "more people may decide to stay in Nebraska to retire" if they are relieved of that portion of their tax burden. He said the measure would also assist Nebraskans whom he described as "vulnerable seniors living on fixed income."
      Henderson Sen. Curt Friesen said other considerations, such as property tax rates and proximity to grandchildren, are as important to people as taxation of their Social Security benefits when it comes to deciding where to live.
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      Sen. Mike Flood of Norfolk suggested a phased-in approach that would assist Nebraskans at lower-income levels would be a better choice. He pointed to a proposal (LB237) authored by Sen. Tom Brewer of Gordon to tie Social Security tax exemptions to the level of a taxpayer's income, with a cap on eligibility set at $95,000 for a married couple and $80,000 for a single taxpayer.
      Brewer said his more targeted approach would "give relief to those who need it (and not) up to a cost that we can't manage."
      Revenue Committee Chairwoman Lou Ann Linehan of Elkhorn, who has promised a complete overhaul of the stateÕs tax system next year, said Nebraska is not competitive with neighboring states in terms of tax policy and that is a factor in prompting Nebraskans to move to southern states upon their retirement.
      Linehan said LindstromÕs bill is crafted as "a 10-year plan with plenty of off ramps," a measure that can be adjusted if necessary.
      Sen. Mark Kolterman of Seward said the Social Security tax break would allow Nebraskans who are limited to a fixed income to "live with greater dignity and better independence."
      Sen. Bruce Bostelman of Brainard said a stepped approach such as BrewerÕs would ensure the state would be able to continue needed property tax relief.
      ÒWeÕre going to have to start making some choices and some of them are going to be hard choices,Ó Friesen said. ÒBut weÕre going to have to look at what our priorities are and how we fund those priorities É weÕre going to have to start deciding how much money can we give away?Ó
      The OpenSky Policy Institute opposes the measure and said that retirees with incomes of more than $114,000 a year would receive two-thirds of the tax cut benefits while the bill proposes elimination of a current exemption that prevents retirees with incomes less than $75,000 from paying tax on their Social Security Income. That means while higher-income 
      
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seniors experience an immediate tax cut, low- and middle-income seniors experience an immediate tax increase.
      The think tank also cautions that any revenue reductions lawmakers pass could result in a commensurate reduction of federal relief dollars, as per a stipulation in the American Recovery Plan. Guidance from the U.S. treasury regarding the use of state surplus dollars to cut taxes is pending and until it comes, any tax reduction passed by the Legislature could cause a double fiscal hit with loss of revenue from the tax cut and having to refund an equal amount of federal dollars.
      Linehan said the state needs to be more competitive if we want retirees to stay in Nebraska.
      I agree, but I also like the approach of some former lawmakers who support OpenSky. They favor using the federal dollars to bolster the cash reserve or make one-time investments in key infrastructure initiatives. That would move the state forward without tying the hands of future legislators.
      LetÕs shelve this proposed exemption until we overhaul the entire tax system.

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J.L. Schmidt has been covering Nebraska government and politics since 1979. He has been a registered Independent for 21 years.