Nebraska auditor details ‘staggering’ impact of corporate tax incentives on state budget options

LINCOLN —  Jumping into the discourse over Nebraska’s budget shortfall, State Auditor Mike Foley sent a letter to state senators Monday alerting them of the financial weight of previously-passed business tax incentive laws.

In a 20-page letter, he wrote that over the next four fiscal years, Nebraska companies stand poised to call in more than $1.5 billion in corporate tax incentives, an expense he said would significantly impact the availability of state general funds.

The auditor’s letter focuses on the Nebraska Advantage Act, adopted in 2005, and a newer version called the ImagiNe Nebraska Act of 2020.

He also highlighted the state’s “steadily increasing delinquent tax balances,” which Foley noted were generally unrelated to business tax incentives but still could constitute “hundreds of millions of tax dollars owed but not collected” by the Nebraska Revenue Department.

“When you combine over $1.5 billion in business tax incentives to be used over the next four fiscal years plus potentially hundreds of millions of dollars more in uncollected tax proceeds, the result is a staggering loss of revenue to the state  — all of which must be counterbalanced in some way,” Foley said in a media statement.

He added: “The Legislature must be made aware of these facts in order to pursue sound fiscal policies.”

33,000 jobs in two decades

Before he was auditor, Foley served as lieutenant governor under then-Gov. Pete Ricketts and before that was a state senator. He acknowledged that he supported economic development tax incentives.

But with lawmaker turnover and the “crush” of so many other policy matters and responsibilities, Foley said he suspects that “many senators may not be fully informed of how yesterday’s legislative decisions will most assuredly influence tomorrow’s policy choices.”

The auditor said he and his team recognize the benefit of business-focused economic incentive programs in that they can spur construction, investment and jobs to expand the tax base that helps pay for public services.

Foley acknowledged data from the Nebraska Department of Revenue indicating that corporate tax incentives reportedly have led to more than $25 billion in qualifying capital investments since 2006 and helped create more than 33,000 new full-time Nebraska jobs.

“Whether the claimed benefits are accurate or not, the significant tax breaks now being paid to corporate taxpayers are real and measurable,” Foley said. 

The auditor‘s team concluded that the Nebraska Advantage and ImagiNE Acts appear to contain some “operational inadequacies” that could result in the legislation becoming a “drain” as opposed to a “boon” to the state economy. 

Gov. Jim Pillen said he appreciated Foley’s report. He said that when the “current iteration” of tax incentives passed, Nebraska was a high tax state. He described Nebraska now as competitive from an income tax perspective.

“I am of the firm belief that we need to refocus our tax incentive strategy and make them more people-focused and less company-focused,” Pillen said in a statement. “All Nebraska’s tax credit and relief programs should be focused on working class Nebraskans, not Fortune 500 companies.”

Probe goes back decades

Foley said he does not mean to “opine” on the merits of the tax incentives, but hoped that the information he compiled for lawmakers would “prove worthy” of review in the Legislature’s search for additional revenue sources.

Lawmakers are starting to debate more fully on the floor different components of the two-year budget that by law must be balanced. The session ends June 9, and the latest projected shortfall is $289 million.

Last week the Legislature advanced to a second round of debate a package that would help close the budget gap by about $71 million, partly by clawing back several business-focused incentives and other initiatives that had been previously approved by Pillen and the Legislature.

The auditor’s Monday letter is based on several sources, including financial data found in the state’s accounting system and tax incentive reports, some dating back more than 25 years.

Foley explained incentives under the two key laws, Advantage and ImagiNE: A qualifying company earns annual credits for meeting specific employment and investment benchmarks, and those credits may be used at a later date for any of the following benefits: credit refunds of sales and use taxes paid; credit refunds or offsets of income taxes paid, and credit refunds of real property taxes paid. Additional benefits include direct refunds of sales and use taxes and personal property tax exemptions.

“Regardless of how the credits are used to receive a tax benefit, the result is a reduction of the state’s tax revenues,” said the letter. 

Under the Advantage Act, Foley said, participating companies have already qualified for $2.6 billion in tax credits, and about $1.4 billion remains unused. As of November, the letter said, requests by 57 businesses were pending to claim more credits.

‘Serious deficiencies’

Foley said that over the next four years, the Revenue Department projects the state will cover more than $1.1 billion in tax credits and direct sales and use tax refunds. That amount, in addition to the $421 million for the ImagiNE program, accounts for the $1.5 billion expense that the auditor foresees over the next four fiscal years.

He said the tax credits also impact other smaller political subdivisions. Said Foley: “When qualifying businesses use credits earned to obtain a refund of prior tax payments, including local-option sales and use taxes levied by municipalities, those local communities are denied an important source of revenue.”

He said that since 2005, nearly $163 million in local sales and use taxes have been refunded to qualifying companies, “resulting in a direct reduction of tax revenues originally intended” for the municipalities.

Foley pointed out “serious deficiencies” in state processes that check on businesses using tax incentives. He said the Department of Revenue is supposed to perform an initial qualification audit and, after that, periodic audits to verify the information. He said those are the department’s only mechanisms for ensuring that participating companies qualify for the benefits received.

The audit team reported that 14 of 20 companies reviewed lacked a timely qualification audit and 17 of those 20 never had a maintenance audit.

“Without the proper and consistent performance of qualification and maintenance audits, the department is incapable of confirming the occurrence of reports for either qualified capital investments or increases in new jobs — both of which were expected when the (Advantage Act) was being promoted to the Legislature,” he said.

The audit noted that the Advantage Act contained no limits on the amount of investment and compensation credits that companies may earn or use. The ImagiNE law did cap the total new annual tax incentives that can be granted.

Business chamber perspectives

Bryan Slone, outgoing CEO of the Nebraska Chamber of Commerce and Industry, said the 2005 Nebraska Advantage Act served the state’s economy through challenging economic times, and needed modernization. He described its successor, the ImagiNE Act, as a streamlined incentive program with “more targeted incentive benefits and reasonable structural caps on the potential state budget effect.”

In designing ImagiNE, Slone said, “the Legislature helped avoid the same tax administrative delays and uncertainties that have plagued the Nebraska Advantage Act.”  He said ImagiNE is “relevant to today’s economy, while fiscally constrained.”

Slone said Nebraska should still review business tax incentives periodically, in part to measure competitiveness with other states.

“With all of the economic uncertainties these days and a slowing of the economy, we need now more than ever to continue to remain focused on jobs, people attraction and retention, business expansion in our communities and economic growth.”

Heath Mello, president of the Greater Omaha Chamber of Commerce and former state senator, said his network remains steadfast in support of business tax incentives as “critical tools” in attracting and retaining quality jobs and investment.

Mello said a recent analysis from a site selection group ranked Nebraska 45th nationally in economic incentives. He called that a “disappointing” indicator of Nebraska losing opportunities to other states, “depriving” Nebraska of growth and tax revenue.

“The Chamber urges policymakers to stand firm in defense of Nebraska’s economic competitiveness and ensure we are positioned to win in an increasingly competitive national marketplace,” Mello said.