LB 804’s new state-level tax benefit raises concerns

LB 804 is being touted as necessary to bring Nebraska’s 529 savings plans into compliance with federal law. However, the language in LB 804 — a bill that will be the focus of a Revenue Committee hearing today — goes beyond allowing Nebraska’s educational savings plan to be used for private K-12 tuition. LB 804 also would create a new state-level tax deduction for private K-12 tuition, introducing a new drain on state revenue at a time when Nebraska is faced with another large budget shortfall.

By FY20/21, LB 804 would reduce state tax dollars by more than $5 million, and it’s fiscal impact would grow from there.

LB 804 would extend the state tax deduction for 529 investments — which presently is limited to higher education expenses and Achieving a Better Life (ABLE) accounts that are set up to pay expenses of disabled Nebraskans — to investments of up to $10,000 for private K-12 tuition in Nebraska 529 accounts. There is no minimum time that an investment must be in a 529 account, which means a taxpayer could invest $10,000 in a 529 account in December and then turn around and withdraw that same amount from the accounts in January and receive an immediate tax deduction.

In this way, 529 accounts, instead of serving their created purpose of incentivizing college savings, can be used as a mechanism to reduce state taxable income.

The Revenue Committee today also will hold a hearing on LB 728, which would create a new tax bracket for Nebraskans who earn more than $2.5 million for singles and $5 million for married couples filing jointly. Under LB 728, income above these levels would be taxed at 7.84 percent. According to its fiscal note, LB 728 would increase state revenues by more than $4 million its first year and increase revenues by more than $13 million annually by FY 21-22.

The Revenue Committee hearing starts at 1:30 p.m. in Room 1524. NET Nebraska will stream the hearings live.