Legislative Testimony: AM3093, Decoupling from CARES Act tax provisions

Chairwoman Linehan and members of the Revenue Committee, my name is Sarah Curry, and I am the Policy Director for the Platte Institute. I am here today to testify in opposition to AM3093.

It is no secret to any of the committee members that the Platte Institute supports conformity to the CARES Act tax provisions. While we encourage the state to make wise spending and budgeting decisions during this uncertain time, we believe the tax provisions in the CARES Act are necessary for our state’s economy to rebound from the crisis.

The CARES Act is an emergency economic relief measure and its tax provisions are well-targeted to help those most impacted by COVID-19. If the state decouples, the more than 42,000 Nebraska employers who required federal relief because of the pandemic will be the very same taxpayers who end up paying higher income taxes to the state.

There has been some confusion publicized about what this body did regarding conformity after the Tax Cuts and Jobs Act (TCJA) in 2018 – and whether this situation is the same. I would like to briefly address that. The TCJA is considered a structural reform law, which means it broadened the base to lower federal tax rates.

Nebraska conformed with all federal changes in the TCJA, however, the state created provisions like a personal exemption credit to mitigate the possibility of base broadening causing a net state income tax increase resulting from the law. In the case of the CARES Act, conformity is a net income tax reduction for Nebraskans.

These measures are intended to help businesses and jobs survive the pandemic. This amendment, in effect, is a tax increase on businesses trying to survive. Under this measure, a business would have a higher tax liability to the state then they would otherwise – that’s a tax increase.

Without a strong recovery, there will be less tax revenue to pay for property tax reforms in future years. According to the Nebraska Department of Labor’s figures, in 2020 alone the state has already seen 43 businesses close and another 19 issue layoffs. A tax increase makes it harder to employ people, and I’m afraid if AM3093 is enacted we will see more closures and layoffs this year.

The Platte Institute has been leading a coalition to provide flexibility for the use of CARES Act funds to make up for lost revenues. I have good reason to believe this flexibility will be included in the new federal relief plan released today, which is expected to permit states to use CARES Act funds to replenish general revenues, including any losses from conformity. If this committee is unable to conform to the CARES Act in its entirety, I ask you to please reconsider some of the provisions that will promote a strong economic recovery:

1. The net operating losses (NOLs) carryback allowance;
2. The Internal Revenue Code (IRC) 163(j) that limits the deductibility of business interest expenses;
3. And finally, we would ask that there be clarifying language to ensure PPP loans are not considered taxable. Our analysis tells us this is not the intent of the amendment, which we applaud, and we want to ensure this does not happen under a different interpretation.

Thank you. Although I did not go into detail regarding specific CARES Act provisions out of concern for time, I am happy to take any questions if you would like to discuss them.