LINCOLN – State income tax on Social Security benefits would be eliminated for the majority of Nebraska’s seniors under a bill introduced by Sen. Jeremy Nordquist of Omaha.The Legislature’s Revenue Committee heard testimony on LB17 on Jan. 30. The bill would exempt Social Security benefits from state income taxation for incomes of $80,000 or less for couples and $60,000 or less for individuals.
The committee also debated a bill, LB74, introduced by Sen. Charlie Janssen of Fremont that would exempt Social Security benefits from state tax at all income levels.
Nordquist said Nebraska is among the top 10 worst states for retirees and the goal of his bill is to make the state more retiree friendly.
“We are only one of five states that tax Social Security at the same level as the federal government,” Nordquist said.
Like the federal government, Nebraska currently taxes 50 percent of Social Security benefits for individuals earning between $25,000 and $34,000 a year. Above $34,000, 85 percent of benefits are taxed. Below $25,000, Social Security benefits are exempt from taxes.
Nordquist said those federal income thresholds were set in 1984 and have not changed since then. He said LB17 represents the 1984 numbers adjusted for inflation.
Mark Intermill, a lobbyist for the American Association of Retired Persons, which supports the bill, said that for a single person in 1984, $25,000 was 525 percent of the federal poverty line. “Today, $25,000 is closer to 200 percent of the poverty line,” he said.
Sen. Paul Schumacher of Columbus expressed concern over the bill’s $31 million price tag. He said the lost revenue would have to be made up in cuts to education or healthcare, or the tax burden would have to be shifted elsewhere.
Attorney James Cavanaugh of the Nebraska-based Cavanaugh Law Firm, which specializes in Social Security disability benefits, said that money would be made back when seniors with more disposable income pay for goods and services in their communities.
“Where does that money come back?” Cavanaugh asked. “Sales tax from things they would buy.”
He said seniors have paid into Social Security their entire lives and their benefits should not be taxed. “This is not an entitlement program,” Cavanaugh said. “This is a right.”
David Drozd of the Center for Public Affairs Research at the University of Nebraska at Omaha presented neutral testimony on the bill. He cited census data showing a high number of retired people leaving the state.
Drozd said this could have negative consequences for Nebraska, including a loss of political representation. “Nebraska will lose a congressional seat if people between the ages of 55 and 74 continue to leave the state,” he said.
Schumacher questioned the causal relationship between higher taxes and retirees leaving the state. He said a number of factors could contribute to people deciding to leave, including family and a warmer climate.
Sen. Galen Hadley of Kearney echoed these sentiments and wondered, if taxes are so much lower in Iowa, why isn’t Council Bluffs larger than Omaha? Why don’t more people resettle across the river?
Drozd acknowledged that his data does not show a causal relationship, only a correlation between higher taxes and retirees leaving the state.
The Revenue Committee will soon take up the issue of income taxes on a much larger scale when it debates Gov. Dave Heineman’s proposal to eliminate all state income taxes – both individual and corporate. To make up for the lost revenue, the proposal would end $2.4 billion in sales tax exemptions for things like agricultural machinery and medical equipment.