When senators return to session next week, a big-ticket item they’ll consider is a tax incentive program for Nebraska businesses that could cost an estimated $990 million in foregone revenue.
The ImagiNE Act, or Legislative Bill 720, is the state’s latest tax incentive proposal. It would replace the Advantage Act, which expires in December. The ImagiNE Act would expire in December 2029.
The bill was introduced in 2019 and carried over into the 2020 legislative session. Due to COVID-19 concerns, the Legislature was suspended March 16.
Like the Advantage Act, the ImagiNE Act would offer tax breaks to businesses if they invest in the state’s economy and create jobs and also incentivize businesses to remain and grow in the state.
Through the Advantage Act and the tax incentive program prior to it, over the past 33 years, businesses have committed to investing more than $30 billion in the state and created over 100,000 jobs, said Sen. Mark Kolterman of Seward, a member of the Legislature’s Revenue Committee.
However, since the Advantage Act began in 2005, there is obvious room for improvement, Kolterman said. The guiding principles of the ImagiNE Act, which Kolterman proposed, were that it needed to be simple to administer, have transparency, have integrity and be competitive, he said.
“Companies like Twitter and iPhones, cellphones, didn't really exist back in 2005, so it's time to update it,” he said. “We'd like to see something put into place that more reflects what our economy looks like, what our marketing looks like in the country today.”
One major change from the Advantage Act is the Nebraska Department of Economic Development would both handle applications and administer the program. The Advantage Act was administered by the Nebraska Department of Revenue.
The new program also would have a more accelerated approval process and require regular reports from the state departments of economic development and revenue.
Kolterman said he thinks accountability would be improved with these new requirements.
“There's not been good accountability, and this new program, (LB)720, will create that accountability that the Legislature has been looking for,” he said. “We're working very hard to make sure that that happens.”
The new program also would provide several levels of qualification for different types and sizes of businesses. A proposed amendment, which has not been filed yet due to the Legislature’s suspension, offers the latest iteration of the bill.
Under the amendment, the program’s lowest investment level starts with rural manufacturing companies in counties with a population of less than 100,000. This level requires the hiring of five new full-time employees and $1 million of cumulative capital investment. On the other end, the highest investment tier for “mega projects” would require the hiring of 250 new full-time employees and $250 million in investment.
Agreements under the program would last for 15 years. Businesses in the rural manufacturing category would qualify for a tax credit of 4% to 7% depending on the amount invested, as well as a wage compensation credit for new full-time employees of 6%.
Businesses in the mega-project level would receive a full sales tax refund or exemption and full personal property tax exemption. Benefits vary in the levels in between.
Kristen Hassebrook, Nebraska Chamber of Commerce executive vice president for legislation and policy, said it’s important that the program is pay-for-performance, meaning companies won’t get any payouts until they create the jobs and invest money. She said it's an essential part of recruiting businesses in the state.
“It is really sort of the fundamental toolbox for economic development in our state,” Hassebrook said.
Renee Fry, OpenSky Policy Institute’s executive director, said there’s skepticism as to whether tax incentives really make a difference in recruiting businesses.
She cited a report from the Legislature’s Performance Audit Committee showing that businesses in some non-incentivized industries created as many, if not more, jobs as those industries that were incentivized.
“It's really hard to know what that trade-off is,” she said.
Fry said she’s heard that the program is supposed to be simpler, but that isn’t necessarily supported when reading the bill.
“Those just aren't borne out when you actually read this statute,” she said. “It's very complex, and it's still not very transparent.”
Fry said there also should be caps on how much the programs can cost. The Nebraska Advantage Act was proposed with a cost of between $50 million and $60 million each year but cost the state over $156 million in foregone revenue in 2018.
While applications for the Advantage Act will end in December, agreements will last beyond that. The department of revenue’s 2018 report showed that the Advantage Act will lead to an estimated $1.5 billion in cumulative revenue loss through 2028.
Under a proposed amendment, some businesses at lower investment levels are required to pay wages that are at least 70% of the state's average wage, or about $32,400 a year. Fry pointed out that a family of four earning this salary in Nebraska would qualify for public benefits.
“The mantra of the folks that are in support of LB720 are talking about creating high-wage, high-quality jobs,” she said. “So then we shouldn't be incentivizing jobs that are eligible for other public benefits.”
John Hansen, president of the Nebraska Farmers Union, also pointed out that the program hasn’t resulted in a net gain and has mainly benefited the state’s largest metropolitan areas.
“Historically, those programs have helped the folks who needed help, the least, the most, and the folks in the rest of the state, who needed a lot more help, got very little for those programs,” he said.
Hansen said proponents of LB720 haven’t taken these criticisms seriously enough and the bill is basically “more of the same.”
Paying out the program doesn’t take into effect the status of the state’s economy, Hansen said. The result is that these programs are paid out while things like the departments of health and human services and education take cuts.
“It’s like being on the state’s credit card,” he said.
Hansen said he views the elimination of the revenue department from the program as a step backward and a conflict of interest.
“There's less oversight because the same shop that's selling economic incentives is the one that's administering it,” he said.
Many see the ImagiNE Act as largely tied with property tax relief. Many senators, including Sen. John Arch of La Vista, hope both can pass when the Legislature resumes.
“I am still hoping for a compromise where both can get passed because I think both need to be passed,” he said. “They're both important to a large population in our state, and I think we need to responsibly come to some compromise.”