Legislative Testimony for LB153 & LB263: Change provisions relating to the taxation of military retirement benefits

Good afternoon, members of the Revenue Committee.  I am here to speak briefly in a neutral capacity on an expansion of Nebraska’s tax exemption of military retired pay from the income tax.
 

Many states have taken initiatives to find ways to reduce the burden of taxation for its military residents and retirees.  There is competition among states wanting to attract and keep military retirees – and Nebraska is one of those states competing.
 

At of the end of 2018, twenty-three states do not levy any tax any military retirement pay while twenty-one states offer special considerations for military retirement income or other pension plans.  Currently, there are only 7 states that do not offer a special tax treatment of military pensions.[i] (See table below)
 

The military is very important to Nebraska, specifically Eastern Nebraska, where many of our veterans currently reside after their service at Offutt Air Force Base.  Iowa exempted all military retirement in 2014[ii], and due to Offutt’s close proximity to the Iowa border, we understand why this legislation is being introduced.
 

A lot of the states Nebraska is competing with for veterans and income have no retirement income tax because they have no income tax at all, or they offer significantly lower property taxes. If we value this policy, we have to do something about eliminating other tax expenditures so we don’t neglect the overall goal of tax reform.  
 

The reason for our neutral testimony is because when these veterans are deciding where to live after leaving the military, taxes on military pensions are only one part of the equation. 
 

Active military members are generally eligible for retirement after 20 years of service. After this time, many of them get civilian jobs, and as a result, they pay income taxes, sales taxes, and most importantly in Nebraska – property taxes.  Many of these veterans have lived in several places, and while we know that the decision of where to live might not only be based on tax rates, we do know that it is a factor in the final decision.  Nebraska’s high taxes will remain for these veterans once they enter civilian life and could be a contributing factor causing them to move away from Nebraska.
 

Two recent examples show that even states with exemptions can face challenges, in part due to their overall tax and economic climate.  Maryland, home to the U.S. Naval Academy, partially exempted military pensions from the state’s income tax despite a budget deficit in 2015.  Connecticut, also facing a budget shortfall in 2015, increased taxes on businesses in order to exempt its income tax on military retirement.[iii] 
 

Data collected from the U.S. Department of Veterans Affairs found that both Maryland and Connecticut lost some of their veteran population between 2015 when the exemptions were enacted and 2017.[iv]  (exact population figures in endnotes)
 

This is an important discussion to have as the committee considers how to address property tax reform this year.
 

We make the assumption that some tax expenditures are going to be adopted for one reason or another.  Under that circumstance, it’s even more important to prioritize and discard some of the other expenditures in the tax code if the committee believes an expansion of the exemption for military retirement is really valuable for the state.  By eliminating inefficient tax expenditures where possible, the savings can be used to make improvements to the overall tax code with fewer barriers for everyone.
 

At a time when the Legislature must fund core government services, is pressured to find a solution to the high property tax problem and fund the additional cost of Medicaid expansion – it only makes sense to eliminate some of the less impactful tax expenditures if this is a high priority.

There are many aspects to the issues of tax expenditures that deserve a longer discussion, but if policymakers work to make the tax system less of an economic consideration for Nebraskans, it can help to reduce the justification for increasing tax expenditures.

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