LINCOLN — Nebraska's practice of taxing retirees' Social Security benefits is driving the elderly — and their spending power — out of the state, a panel of state legislators was told Wednesday.
Nebraska is one of only five states that fully tax the government checks that retirees receive.
Al Mumm of the Nebraska Alliance for Retired Americans said studies show that spending by senior citizens creates jobs and provides economic benefits that several states have recognized by adopting specific policies to attract and retain them.
"Keeping retirees in the state is a sound economic development strategy," Mumm said.
He was among several advocates, ranging from the conservative Platte Institute to the liberal Bold Nebraska, that testified in favor of the bill introduced by State Sen. Jeremy Nordquist to eliminate state income taxes on Social Security benefits.
Nordquist's Legislative Bill 976 was one of five proposals presented to the Legislature's Revenue Committee as alternatives to Gov. Dave Heineman's tax-cut package.
Heineman is pushing cuts of $130 million a year in individual income and corporate income taxes. And he has proposed the elimination of inheritance taxes, which are paid to counties and amount to about $42 million a year.
But while Heineman has touted his package as benefiting the hardworking middle class and being more important than projects of the University of Nebraska and other groups, critics have said it misses the mark and could result in increases in the most hated tax in Nebraska: the property tax.
The most ire has been aimed at the governor's inheritance tax proposal, which county officials have said might force job layoffs and increases in local property taxes.
After a 3½-hour hearing, lawmakers said they have more work to do to determine whether Nebraska can afford tax cuts this year.
"This is all going to get hashed out in executive session," said State Sen. Abbie Cornett of Bellevue, the committee's chairwoman, referring to the semiprivate discussions between senators before a bill is advanced.
Eliminating taxes on Social Security benefits has been discussed before but appeared to get a bigger push Wednesday, given this year's discussion about cutting other taxes.
Nordquist said Kiplinger's magazine recently rated Nebraska as having the third worst tax climate for retirees because of the Social Security benefits tax. He said LB 976 would help hundreds of seniors in every corner of the state.
"It's real tax relief for real people," said another supporter, Omaha attorney-lobbyist Jim Cavanaugh. "This tax works a real hardship on people with limited income and, oftentimes, poor health."
Roger Rea, a retired teacher representing the state teachers union, said none of Nebraska's neighboring states fully taxes Social Security benefits. He said a study of state workers and teachers found that 10 percent move out of the state upon retirement and said the tax was among the causes.
If Nebraska could reduce its out-migration of those retirees to 1 percent, it could realize $125 million in additional revenue, Rea said.
"This is an untapped economic resource in Nebraska," he said.
Some senators, including Galen Hadley of Kearney, expressed doubt that a poor tax climate was forcing seniors to move away. He said it had to do with another kind of "climate" — the weather.
Nordquist's bill comes with a pricetag of $75 million a year, but AARP officials offered an amendment that would cut the fiscal impact to $8 million by limiting the tax cut only to retirees with lower incomes.
The four other bills presented Wednesday would:
» Provide a property tax break of about $150 to $160 for the average homeowner by extending the state's homestead tax exemption program. Omaha Sen. Heath Mello said Nebraska gets its lowest scores for high property taxes and said his LB 976 offers more help for the middle class than the governor's plan. Mello said Heineman's income tax cuts provide 55 percent of their relief to the wealthiest 20 percent of Nebraskans.
» Slow the increase in property taxes paid by farmers and ranchers. Supporters of Sen. Lavon Heidemann's LB 1061 said ag producers are paying an unfair share of the cost of K-12 education through property taxes, which have increased 54 percent in the past five years. Ag land is now assessed at 75 percent of its value for tax purposes. Heidemann's bill would lower that by 2 percent a year over five years, to 65 percent.
» Slightly lower inheritance taxes by increasing exemptions and lowering some tax rates. Lexington Sen. John Wightman, a lawyer who deals in estate work, said it would be unfair to counties to eliminate inheritance taxes completely a year after the Legislature ended state aid to counties. Few people, he said, complain about paying inheritance taxes. He said his LB 1102 would allow counties to adjust by making the revenue loss more gradual.
» Repeal the state's alternative minimum tax. The tax is paid by some taxpayers who claim numerous deductions and is imposed at a very high rate, 29.6 percent of a taxpayer's federal alternative minimum tax liability. Cornett, who introduced the idea, said if Nebraska wants to improve its lackluster 30th ranking by the conservative Tax Foundation for best business tax climate, it could make as big a bang by eliminating its alternative minimum tax as it could by eliminating inheritance taxes. She said Nebraska is among only eight states that impose the alternative minimum tax.
After the hearing, Cornett said she did not support a slight cut in inheritance taxes because that would not help the state's tax ranking, which has been one of Heineman's stated goals.
"It's all or nothing," Cornett said.
Several Revenue Committee members said they hoped to schedule a joint meeting with the budget-writing Appropriations Committee so the two panels can resolve the tax and spending goals of the Legislature this year.
Contact the writer:
402-473-9584, paul.hammel@owh.com
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