Why the CARES Act is a different situation than the Tax Cuts and Jobs Act of 2017

Nebraska, like every state, is experiencing economic uncertainty amid the COVID-19 pandemic. The state will need to use caution as it makes revenue and spending decisions throughout this crisis. However, several structural tax changes have already been made at the federal level that will promote a stronger economic recovery in Nebraska.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The relief package amended several provisions in the federal tax code with the intent to provide economic assistance to individuals and businesses impacted by the global COVID-19 pandemic.

The federal tax changes in the CARES Act provide income tax relief to employers and employees to aid them in their recovery from the pandemic. Nebraska uses rolling conformity to the federal tax code, meaning these changes automatically affect the Nebraska Revenue Act, and influence Nebraska tax receipts.

Decoupling from any federal tax changes requires state legislation. On the first day of the reconvened legislative session, Sen. Tom Briese introduced an amendment, AM3093, to the Department of Revenue’s annual technical corrections bill, LB1074, to decouple, or dissociate, the Nebraska tax code from the CARES Act.

Many lawmakers and policy leaders have incorrectly stated that this proposal is like the Legislature’s approach to the Tax Cuts and Jobs Act (TCJA) in 2018, however, the reasoning behind the state legislation for these two federal changes are drastically different.

Nebraska conformed, or accepted, all the changes in the TCJA. However, LB1090 adopted in 2018, amended some of Nebraska’s own tax code to prevent certain base-broadening features of the TCJA from imposing state income tax increases on Nebraskans.

For example, LB1090 created a new state personal exemption credit to compensate for the elimination of the federal personal exemption. Nebraska also increased its standard deduction to offset some of the base-broadening effects of conformity.

Finally, Nebraska maintained its use of CPI for All Urban Consumers[1] as the formula for inflation-indexing state individual income tax brackets, the personal exemption credit, and the standard deduction because this calculation was more generous to state taxpayers.

Decoupling from the CARES Act would serve to make Nebraska’s tax code more harmful to businesses impacted by the pandemic. The Department of Revenue has provided an estimate of how the tax changes will impact Nebraska tax receipts, which also shows the amount of tax that businesses will be subject to if the state decides to decouple.

_{[1] The Consumer Price Index for All Urban Consumers (CPI-U) is a monthly measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services. The CPI-U is based on the spending patterns of urban consumers.}