Legislative Testimony for LB276: Change provisions relating to the taxation of income from certain small business corporations and limited liability companies

Legislative Testimony for LB276: Change provisions relating to the taxation of income from certain small business corporations and limited liability companies

Good afternoon, members of the Revenue Committee.  I am here today to testify in opposition of this bill.


The result of LB276 will be a net tax increase on the shareholders of S-Corporations and Limited Liability Companies (LLCs) in Nebraska.  Because these types of businesses are treated as ‘pass-through’ entities to their shareholders, these individuals will bear the increased cost of doing business if this provision is repealed.


The Platte Institute believes this bill, if enacted, would increase the effective tax rate of many Nebraska businesses, both large and small.  Moreover, this bill does nothing to aid the state in its journey towards lower taxes or a tax reform plan; it only raises taxes on small businesses and their shareholders.


Many states have a ‘throw-back’ provision[1] for their C-Corporations, however, Nebraska does not.  There was a change on the taxation of corporations in the federal 1986 tax reform.  Because of this change, the Legislature chose to establish parity between the taxation of multi-state taxable income of C-corporations and that of S-corporations and LLCs in 1987.  That parity would no longer exist if this legislation is adopted.


We recognize that Nebraska does have a credit for income taxes paid to other states, but due to Nebraska’s high-income tax rate in the region, this credit is not enough to keep many of these shareholders from moving to a lower taxed state. 


For example, there will be no credit for taxes paid in South Dakota or Wyoming because these two states have no income tax, so all that income will now be subject to the Nebraska tax.  In the case of Kansas and Missouri, because those states have lower income tax rates then Nebraska, the credit will not satisfy the entire tax liability because the Nebraska tax will be applied to any income that exceeds the amount taxed by those lower taxed states.


Some might say people do not move due to tax rates, but we are already seeing the state of New York having to deal with a large budget shortfall because many residents left for lower taxed states.[2]


Another concern is on page 10, lines 11-13 where the bill states, “…shall include in Nebraska taxable income, to the extent includable in federal gross income, their proportionate share of such corporation’s or limited liability company’s federal income.” 


We were unable to find in the Nebraska statutes a definition of “federal gross income” or “federal income”.  If this is not defined, the effect of this legislation would be to equate gross revenues, before expenses, to the Nebraska taxable income.  Any changes should be stated in terms of ‘federal adjusted gross income’ to avoid this.


I encourage the committee to vote in opposition to LB276 to keep taxes from being increased on small businesses and to not detrimentally affect Nebraska’s economic growth. Thank you and I would be happy to take any questions from the committee.


[1] The “throwback rule” mandates that sales into other states or to the federal government that are not taxable will be “thrown back” into the state of origin for tax purposes.

[2] The combined state and local tax rate for high-income New Yorkers is the second highest in the nation. Due to New York's progressive tax structure, the top one percent of earners account for nearly half of the state's income tax revenue.

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