Nebraska Revenue Committee Must Be Ready for Reconciliation

Nebraska Revenue Committee Must Be Ready for Reconciliation

Nebraska’s Revenue Committee faces an unusual challenge this year. Federal lawmakers are likely to change the federal tax code in ways that will impact Nebraska’s revenue streams, and the federal changes will occur during the legislative session.  

Speaker Mike Johnson announced his intent to pass President Trump’s budgetary agenda within 100 days through the budgetary reconciliation process. According to Johnson, the bill would be on President Trump’s desk by, “in a worst-case scenario, Memorial Day.” 

So, what does this mean for Nebraska?  

State tax codes are written with the federal tax code in mind. For example, to define “income,” states directly adopt various provisions from the federal definition of income. This practice is called conformity. States conform with various provisions of the federal tax code, and decouple, or separate from, others. 

If President Trump makes good on his proposal for a new tax law in his first 100 days, the changes will occur in the middle of most state legislative sessions. Therefore, Nebraska’s Revenue Committee should keep a close eye on D.C. as it becomes clear what is in and what is out for Trump’s second turn at tax reform. 

One item to particularly focus on is full expensing. President Trump’s 2017 Tax Cuts and Jobs Act featured full expensing as one of its key pro-growth features. This policy allows companies making major capital investments to write off the cost of those investments against taxable income in the year the cost is incurred. Not only is this policy the appropriate definition of income, it also helps fuel growth and productivity through capital investments. 

Given the importance of reshoring critical supply chains, Nebraska should be ready to adopt full expensing in line with federal policymakers. Under current Nebraska law, businesses are allowed to write off 60% of the cost of their capital investments in the year the cost is incurred. Full expensing, by contrast, allows for 100% of the cost to be written off immediately.  

Nebraska can make a simple tweak to ensure it captures the full value of full expensing if the feds decide to put the policy back into law. Nebraska businesses can be given the option of 60% bonus depreciation, or whatever is provided in the federal Internal Revenue Code, based upon their preference. That way, Nebraska businesses are guaranteed at least 60% bonus depreciation (which is better than current federal policy), and have the up-side potential of 100% bonus depreciation if the federal government goes that way. 

Full expensing is but one of several important policies up for negotiation in a federal tax rewrite. Corporate net interest limitation and net operating loss could change, along with the standard deduction and child tax credit for personal returns. Nebraska lawmakers will need to wait and see how the debate shapes up. 

Finally, federal policymakers will debate the future of the state and local tax (SALT) deduction. The SALT cap limits the ability of taxpayers to deduct high state and local taxes against federal taxable income. The current SALT cap is $10,000, and this cap is set to expire at the end of 2025. The cap generates over $100 billion of federal revenue which is used to finance other tax cuts, and therefore will likely be preserved in some manner. 

The SALT cap enhances state tax competition. The lesson of the SALT cap is straightforward – compete or lose residents.  

While Nebraska lawmakers should focus on the details of federal tax changes, they also need to make sure to make the state tax code more competitive every year. Regardless of the final federal tax package, competition will remain the name of the game. 

Want more? Get stories like this delivered straight to your inbox.

Thank you, we'll keep you informed!