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LB 405: Eliminate certain sales tax exemptions, corporate and individual income taxes, and the franchise tax and change other tax provisions

As introduced: LB 405 eliminates the income tax on individuals, estates, trusts, and corporations; eliminates the financial institutions franchise tax and select sales tax exemptions; changes reporting requirements for the Nebraska Tax Expenditure Report; and changes certain benefits under various tax incentive programs.

LB 405 eliminates the income tax on individuals, estates, trusts, and corporations, and the financial institutions franchise tax for tax years that begin or are deemed to begin on or after January 1, 2014. For taxable years beginning on or after January 1, 2014, no refundable or nonrefundable income tax credits will be allowed.

LB 405 eliminates the following sales tax exemptions as of October 1, 2013: renting or furnishing (for consideration) of any room by a health care facility licensed under the Health Care Facility Licensure Act or by an educational institution regularly used to house students; industrial machinery and equipment and repair parts by another state; property sold for delivery outside the state; nonprofit religious, service, educational, or medical organizations or their purchasing agent except for nonprofit mental health centers or nonprofit health clinics; rent-to-own property; occasional sales of agricultural or business machinery and property sold by religious organizations; prescription drugs, insulin, mobility enhancing equipment, durable medical equipment, home medical supplies, prosthetic devices, oxygen, and oxygen equipment; biochips; data centers; energy or fuel used in industry, agriculture, or by hospitals; water used for irrigation of agricultural lands and manufacturing purposes; manufacturing machinery and equipment; molds, dies, and patterns; containers; common carriers and railroads; aircraft fuel; aircraft temporarily stored in or repaired in the state; minerals, oil, and gas severed from real property; chemicals used in agriculture; semen and insemination services; mineral oil used as a dust suppressant; agricultural machinery and equipment; seeds and annual plants sold to commercial producers or for exclusively agricultural purposes; oxygen for use in aquaculture; and ingredient or component parts. LB 405 also eliminates the refund of sales tax paid on depreciable repairs or parts for agricultural machinery or equipment used in commercial agriculture.

LB 405 also limits the attainment and entitlement periods for all Nebraska Advantage projects to five years per period; and limits the investment credit to 5% for all Nebraska Advantage projects. The changes to Nebraska Advantage apply to all applications filed on or after the effective date of LB 405. For taxable years beginning on or after January 1, 2014, no refundable or nonrefundable income tax credits will be allowed.

Introducing Senator(s): McCoy

Committee: Revenue

Committee Hearing Date: February 6, 2013

Current Status: Indefinitely Postponed

Estimated Fiscal Impact: In FY 2013-14 and FY 2014-15, the Department will require additional staff due to an increase in administrative costs associated with new sales tax permit holders and changes to the tax incentive programs at a cost of $363,000 for FY 2013-14, and $285,000 for FY 2014-15.

It is estimated that the Department would realize approximately $186,000 in annual cost savings due to reduced programming expenses associated with the income tax program beginning in FY 2014-15. Additionally, the Department would realize significant savings in staff reductions beginning in FY 2014-15 due to a reduction in processing of individual and corporation income tax returns in FY 2016-17; the cost savings would be fully realized for an annual savings of $2,035,000. The Department will also realize annual savings of $140,000 due to the expiration of an audit contract with the Multistate Tax Commission beginning in FY 2015-16.

The proposal would also have the following impact on the Highway Trust Fund:

Fiscal Year; State Highway Capital Improvement Fund; Highway Allocation Fund

FY 2012-2013; $ – ; $ –

FY 2013-2014; $ 65,385,000; $ 11,539,000

FY 2014-2015; $ 89,382,000; $ 15,773,000

FY 2015-2016; $ 92,064,000; $ 16,247,000

FY 2016-2017; $ 94,826,000; $ 16,734,000

FY 2017-2018; $ 97,670,000; $ 17,236,000

FY 2018-2019; $ 100,600,000; $ 17,753,000

The Department estimates an increase in local option sales tax receipts of $397 million beginning in FY 2013-14.

Voices for Children’s Position: Oppose (see our testimony)

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