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Each year the Department of Revenue issues a report detailing the specifics of Nebraska’s tax incentive programs that target economic development and business growth. The annual release of these statistics renews discussion about the value and cost of Nebraska’s incentive programs by opponents and supporters alike. In addition to the revenue calculations and economic modelling provided annually by the Revenue Department, the Legislative Performance Audit Committee, which I chair, conducts detailed evaluations of the programs in light of the policy objectives established when they were passed into law.
Tax incentive programs elicit strong responses among proponents and opponents alike. Advocates argue for their necessity, and even expansion, to recruit new business and promote job growth in Nebraska. Opponents see the incentives as lost revenue that could be spent for other government programs. Discussion of both the pros and cons of Nebraska’s tax incentive programs is muddled by their complexity. Over the next several weeks, I will use this opportunity to provide constituents in District 38 with background on the various tax incentives, the evaluations of the programs, and the policy discussion around revisions or changes to Nebraska’s business incentives.
Although commonly referred to as an aggregate group, Nebraska has multiple economic development programs that provide tax incentives. The largest of these is the Nebraska Advantage Act, which became law in 2006. It replaced prior programs, including the Invest Nebraska Act, which stopped accepting new applicants. In addition to the main Nebraska Advantage Act, several smaller incentive programs focus on more specific economic targets. These include the Nebraska Advantage Rural Development Act, the Nebraska Advantage Microenterprise Tax Credit Act, and the Nebraska Advantage Research and Development Act.
Businesses are required to apply and qualify for the incentive programs. Each program has criteria for qualification of benefits, which vary between program and tier. The Advantage Act alone has six separate tiers, with subdivisions of some tiers. The amount of capital investment, number of full time equivalent (FTE) jobs created, and wage levels all determine eligibility for an incentive program. Depending on the program, business have between 5-7 years to attain qualification for the program, can accumulate benefits over a 6-10 year period, and can carryover and collect earned benefits for a period of time after their entitlement period. A business can participate in an incentive program for a maximum life of 10-15 years, depending on tier and program.
The tax incentives provided are also quite variable, depending on the program. Qualified businesses can receive a direct refund of sales and use taxes that are paid for the purchase of personal property and aircraft. A portion of the total investment in the business, between 3 and 15%, can be earned as an investment credit. These credits can be accumulated over years, and used to refund additional sales taxes, offset income taxes that are due, or reimburse for property taxes paid. Compensation credits can be earned, which are determined as a percentage of the total new full time equivalent jobs created each year, multiplied by the average wage of those new jobs. Thus, more new, higher paying jobs would earn the business more compensation credits. Those credits can be used of offset income tax withholding or income taxes due for those businesses. Credits earned do not have to be collected in a single year, can but can be applied over the span of the business’s participation in the program. Certain qualifying personal property can also receive an exemption from the business’s personal property tax liability.
As you can see, these programs defy a simple explanation and evaluation. As of 2016, 114 projects had qualified under the Nebraska Advantage Act alone since 2006. Those businesses earned $842 million in tax credits and collected $362 million of those qualified reductions. $473 million remain as outstanding credits capable of being collected in future years.
During that same 2006-2016 time span, the qualified projects of the Advantage Act made $7.4 Billion in new capital investment and created 13,993 new full time equivalent jobs in Nebraska. At the same time, $159 Million was provided in sales tax refunds, and $5.2 Billion of personal property value was given an exemption.
Evaluating the merits and drawbacks of these programs requires a deeper dive into the details of each specific program. In the coming weeks I will provide insight into the attempts to objectively evaluate these programs and determine whether or not they are meeting their intended objectives.