Analysis: Property tax reform depends on economic recovery
Lawmakers are set to hold a hearing today on decoupling the state’s tax code from federal CARES Act tax policies that provide emergency economic relief to those most impacted by COVID-19, which will reduce business and employee Adjusted Gross Income (AGI) in one way or another. Because these CARES Act policies will reduce many Nebraskans’ AGI at the federal level, those taxpayers will have a lower income tax liability at the state level as well. If the state decouples, Nebraskans who received federal relief because of the pandemic will end up paying higher income taxes to the state.
While some lawmakers have said their rationale for decoupling is to have money for property tax reform, if fewer businesses survive the current recession, there will be less tax revenue available to pay for property tax legislation in future years. While the property tax proposal before the Legislature is a step in the right direction, its full implementation requires a multi-year process, limiting its immediate impact on jobs and the economy in this crisis.
On the other hand, key tax provisions of the CARES Act enable employers to make more significant investments in their businesses this year, when Nebraskans need opportunities the most. However, if lawmakers are unable to conform to the CARES Act tax provisions in their entirety, there are still some provisions that should be held intact to promote a strong economic recovery.
The net operating losses (NOLs) carryback allowance is specifically designed to allow pass-through businesses (those filing through the individual income tax) quick and easy access to liquidity. This provision in the CARES Act allows businesses that incurred losses in 2018, 2019, or 2020 to deduct those losses against up to five years’ worth of past income taxes paid. Taxpayers would be allowed to file an amended return and receive a near-immediate refund of some of their past income taxes paid, which has been proven as an important tool[1] to help stabilize businesses during an economic recession.
The other provision that Nebraska should consider if complete conformity cannot be accomplished is the Internal Revenue Code (IRC) 163(j) that limits the deductibility of business interest expenses. Nebraska conformed to the TCJA’s 30% cap of EBITDA[2] through 2021 and then to 30% of EBIT[3] starting in 2022. The CARES Act lifts this cap to 50% of EBITDA for tax years 2019 and 2020 as a liquidity provision. If AM3093 is enacted, this would decouple from the CARES Act and keep Nebraska subject to the 30% net interest limitation.
Finally, and most importantly, lawmakers must ensure that Paycheck Protection Program (PPP) loan forgiveness is exempt from taxation. We know from statements made that it is not the intent of senators to tax PPP loans, but other states that have decoupled from portions of the CARES Act such as Colorado, Georgia, Iowa, North Carolina, and Wisconsin have all explicitly stated that these loans are not considered taxable. It is in the best interest of the more than 42,000 Nebraska businesses that needed aid during the pandemic that their loan forgiveness will be treated the same at the federal and state level, so clarifying language to ensure there is no confusion or window for alternate interpretation would be welcomed.
Overall, we know that tax policy has an important role to play in helping states recover from economic crises, and the COVID-19 pandemic is no different (in many cases it is much worse). Nebraska lawmakers need to look at what policies will aid in stronger economic growth in future years. Nebraska is lucky because, from a revenue standpoint, the state is in a much better situation than many others, but the tax policy decisions that are made in the remaining days of the 2020 legislative session will have far-reaching implications for how quickly jobs and wages are restored in Nebraska as the pandemic lingers into the latter half of the year.
[1] Prior to enactment of the Tax Cuts and Jobs Act (TCJA) in late 2017, the federal tax code allowed businesses to deduct current losses against up to two years’ worth of past income taxes paid, but the TCJA repealed NOL carrybacks in order to offset some of the law’s rate reductions and other pro-growth reforms.
[2] Earnings before interest, taxes, depreciation, and amortization
[3] Earnings before interest and taxes