Legislative Testimony for LB1090, State Adjustments Due to Federal Tax Reform

Good afternoon, Chairman Smith and members of the Revenue Committee.  My name is Nicole Fox, and I am the Director of Government Relations for the Platte Institute.  I am here today to testify in support of LB1090.

The last major change to the federal tax code was in 1986, and Nebraska along with all of the other states with broad-based income taxes at the time conformed to the federal changes.[1] 

The conforming legislation allowed states to collect a revenue windfall and the big question at the time was if states were going to spend the additional revenue or choose tax cuts.  In 1987, the year following federal tax reform, 35 states made changes to their income tax, in addition to conforming to the federal law.

The same situation is before this legislature as it was 30 years ago – the need to conform to federal tax code changes. I have included in my testimony a table of major tax changes that took place in last year’s federal tax reform and how it impacts Nebraska’s tax code for your information. In some cases Nebraska’s tax code conforms to the federal code, and in some other instances, the state decouples from specific federal provisions.

Because the new federal tax changes included many base-broadening provisions, most states will experience a revenue increase, and Nebraska is expected to receive approximately $200 million according to the Department of Revenue. The vast majority of filers will receive a tax cut at the federal level, but they could easily see a state tax increase unless the state acts to prevent one.

LB1090 creates a new state personal exemption. Federal tax reform removed the federal personal exemption, which Nebraska is tied to under current state law.  The state has its own standard deduction, and LB1090 increases that deduction amount. Both of these provisions will help to counter the accidental tax increase that will occur on Nebraskans if no action is taken.

In addition to a tax increase on Nebraskans, there are other important aspects to consider.  When states conform to the current version of the Internal Revenue Code it offers greater certainty and reduces both administrative and compliance costs. It also cuts down on tax planning.

According to a Tax Foundation report[2], when states comply with the federal tax code, it allows state administrators and taxpayers to rely on federal statutes, rulings, and interpretations, which are generally more detailed and extensive than what any individual state could produce. Conformity provides consistency of definitions for those filing in multiple states, and reduces duplication of effort in filing federal and state taxes. It permits substantial reliance on federal audits and enforcement, along with federal taxpayer data. For the filer, it can make things easier by allowing the filer to copy lines directly from their federal tax forms. Federal conformity has been often referred to as “delegating up,” by allowing states to conserve legislative, administrative, and judicial resources while reducing taxpayer compliance burdens.

The federal tax reform changes will promote economic growth across our country, including Nebraska.  It is not unprecedented for Nebraska or any other state to comply with federal tax code changes, and I ask you to support LB1090 and make the needed adjustments as this body did in 1987 after the last major tax reform.

Thank you and I’m happy to take any questions.