Taxes in Nebraska > Sources of Major State and Local Taxes > Major Policy Trends - The Growth of Economic Development Tax Incentives
MAJOR
POLICY TRENDS -
THE
GROWTH OF ECONOMIC DEVELOPMENT TAX INCENTIVES
Introduction
The economic well being of Nebraska is an issue of vital importance to state and local policymakers. Recent years have seen tremendous competition between states for jobs, the primary policies being financial, training and other programs benefiting prospective employers. Typically, the tax system is one of the means of providing these incentives. This section will examine the tax incentives available through legislation in Nebraska, discuss their cost, their growth, and provide an overview of programs available nationally. It does not examine economic development efforts that are not in the form of tax incentives. Nor will it resolve the debate as to how much tax incentives affect job growth, or the relative cost versus benefit of such programs.
Linked below is an analysis of the cost and growth of the largest and oldest of tax incentive programs in Nebraska, the Employment and Investment Growth Act, usually called by the bill number that enacted it, LB 775. While under LB 312 (2005) there are to be no new applications for benefits under this act after Dec. 31, 2005, beneficiaries will be receiving benefits for many years into the future. Also linked is a textual description of all tax incentive programs available in Nebraska, and a chronology of significant Legislative changes to these programs. Finally, there is a link to a comparison to programs in other states.
Tax Incentive Program Descriptions
Tax incentive programs available in Nebraska are as follows:
-
Employment and Investment Growth Act (NEB. REV. STAT. Sec. 77-4101
et. seq.)
The Employment and Investment Growth Act, usually known as LB 775 (1987) provides three levels of benefits for businesses which invest and/or increase employment by specified amounts. Businesses that qualify must be involved in research, data processing, finance or insurance, manufacturing, or a headquarters operation. The Act is available to businesses transporting, wholesaling, storing, or selling products, but not retailers who do not make their own products.
Businesses proposing a qualifying project must file an application detailing the project before approval of the benefits is provided. Once the Tax Commissioner is convinced that the project qualifies, an agreement is signed setting out the responsibilities of the state and the business. The increased employment and investment are calculated on a project only basis, not company wide. In other words, companies may qualify for LB 775 (1987) benefits by modernizing and centralizing a manufacturing operation at a project location while decreasing the number of jobs overall. However, the statute prohibits receiving benefits by transferring jobs to a different location within the state. If the project qualifies for benefits, but later falls below the required levels of jobs or investment, the company receives no benefits for that year and one-seventh of the benefits already received are recaptured for each year the company fails to qualify.
The three levels of qualification are as follows:
a. Businesses with projects promising $3 million of investment and 30 new employees receive the following tax incentives:
(1) A refund of sales taxes paid on tangible personal property used in connection with the project,
(2) An income tax credit of five percent of wages paid to new employees added by the presence of the project for seven years, and
(3) An income tax credit of ten percent of the investment made at the project.
b. Businesses with qualifying projects calling for at least $10 million in new investment and at least 100 new jobs receive the benefits described above, plus a 15-year personal property tax exemption for mainframe computers, certain aircraft, and business equipment used in connection with the project.
c. Businesses with qualifying projects calling for at least $20 million in investment and fewer than 30 new employees qualify for only the refund of sales taxes paid on tangible personal property used in the project.
Credits may be carried over for up to eight years. The company also has the option of using the credits to obtain a refund of the state or any local sales or use tax paid anywhere in the state.
Under LB 312 (2005) there are to be no new applications for benefits under the Employment and Investment Growth Act after Dec. 31, 2005. Applications that are received by that time are to be processed normally and are eligible for benefits under that act. Applications after that date will be filed under the Nebraska Advantage Act. There are many similarities between the two acts. -
The Nebraska Advantage Act
There are many similarities between the Employment and Investment Growth Act and the new Nebraska Advantage Act. Applications are still reviewed by the Department of Revenue for compliance with the requirements of the act, and if approved, the obligations of each party are set out in a contract. The procedural aspects are identical. Failure to maintain the required levels of of employment or investment will result in recapture of one-seventh of the benefits granted for each year of non-compliance.The most significant changes from the Employment and Investment Growth Act were (1) a requirement of a wage equal to at least 60% of the state's average wage for all employers for purposes of qualifying for and earning benefits, (2) granting larger wage credits for better-paying new jobs, (3) indexing investment thresholds in the future to changes in the producer price index, (4) creating a jobs-only tier, (5) allowing jobs credits to be taken against the withholding of new employees, (6) expanding the definition of taxpayer to eliminate the necessity that at least 90% of the owners be subject to income tax, (7) allowing teleworkers to count as jobs at the project if the telework is interrelated to the project, (8) limiting benefits of the newly-created Tiers 1 and 3 so that they cannot extend more than ten years after the application date, including any carryover, (9) expanding the definition of "qualified business" to grant benefits to businesses involved in technology-related services where more than 75% of the sales are to an out-of-state customer or to the federal government, (10) increasing the investment requirement for the investment-only tier from $20 million to $30 million and requiring the taxpayers under this tier to retain at least the same number of jobs at the project or lose benefits, (11) delaying large refunds of local sales taxes to meet budgeting requirements of cities, and (12) requiring disclosure of project-specific credits used information every other year.
There are five tiers of benefits allowed under LB 312:
Tier 1 - $1 million of new investment and ten new jobs. This tier is only available to manufacturers, research and development or testing businesses, and high tech services that export at least 75% of their product. Qualifying businesses under this tier will be eligible for a refund of one-half of any sales tax paid for purchases at the project, a sliding-scale jobs credit (detailed below), and a 3% investment credit.
Tier 2 - $3 million of new investment and 30 new jobs. This tier is available to manufacturers, data processing companies, financial services companies, transportation and distribution companies, telecommunications companies, research and development or testing businesses, and high tech services that export at least 75% of their product. This tier is currently provided in the Employment and Investment Growth Act. Beneficiaries receive a 100% sales tax refund for purchases at the project, the wage credit and a 10% investment credit.
Tier 3 - $0 investment and 30 jobs. This tier is available to the same types of businesses as Tier 2, and will allow the beneficiaries to receive only the wage credit.
Tier 4 - $10 million in investment and 100 new jobs. This tier is available to the same types of businesses as Tier 2 and is also currently provided in the Employment and Investment Growth Act. In addition to the sales tax refund, jobs credit, and the ten percent investment credit, qualifying businesses under this tier will receive a personal property tax exemption for turbine-powered aircraft, mainframe computers, agricultural processing machinery, and distribution personal property like shelving, conveyer belts and forklifts.
Tier 5 - $30 million in investment with no new jobs requirement. This tier is available to the same types of businesses as Tier 2 and exists in the Employment and Investment Growth Act, except that the investment threshold has been increased from $20 million to $30 million and beneficiaries are required to maintain at least the same number of jobs at the project as were in existence the year before the project.
The new tiers of beneficiaries created by LB 312, Tier 1 and Tier 3, will sunset after five years.
Qualifiers in all tiers except Tier 5 will receive a wage credit equal to 3% of the increased compensation at the project if the jobs pay between 60% and 75% of the state average wage, 4% if they pay between 75% and 100%; 5% if they pay between 100% and 125%; and 6% if they pay more than 125% of the state average wage. Employees must be paid at least 60% of the state average wage to count as new employees under the act and to be considered in determining the percentage amount of credit received. Credits are earned for employment and investment made any time during the entitlement period.
LB 312 requires an annual report from the Tax Commissioner every July 15. The report will list agreements under the act, the identity of the taxpayers, and the location of the projects. The report will also show investment, employment and benefits earned by industry group. This is the information that is currently reported under the Employment and Investment Growth Act.
LB 312 imposes a new requirement for project-specific information. The new information to be reported is (1) the identity of the taxpayer, (2) the location of the project, and (3) the total amount of investment and jobs credits used and refunds granted over the prior two years as a single aggregated number. This information will be reported every other year. The report will also have to describe the methodology used in calculating the net impact of the program and any investment or industry multipliers used, and any limitations in the methodology.
- The
Quality Jobs Act
Pursuant to the original legislation, the state could no longer accept applications for benefits under the Quality Jobs Act after Feb. 1, 2000. (NEB. REV. STAT. Sec. 77-4935.) It will be described in this section as it existed prior to its termination.
The Quality Jobs Act provided for a "wage benefit credit" for businesses (1) investing at least $50 million and employing at least 500 new employees, or (2) investing at least $100 million and employing at least 250 new employees. Businesses seeking these benefits were to apply to the Quality Jobs Board, consisting of the Governor, State Treasurer, and the Chairperson of the Investment Council, who could approve the application if they found that the project met the goals of the Act after considering the project employment and its quality, the type of industry, the type of investment, and whether the project would have occurred without the incentive. A qualifying business was defined as one involved in research, data processing, telecommunications, insurance, financial services, manufacturing, warehousing, transportation, distribution, or a headquarters. It was not available for retailing or food service businesses.
If a project received approval, it was eligible for the wage benefit credit for ten years. The wage benefit credit could be taken in one of two forms: (1) The company could retain the state income tax withholding of the employees of the project, not to exceed five percent of the total wages at the project, and instead of returning the withholding to the state the company could have applied the withholding to employee benefit programs, educational training programs, and company safety/training programs. The employee was to apply the withholding as an income tax credit up to the amount of liability attributable to income from the project employer, or (2) The company could have taken a credit against the corporate income tax in an amount that varied depending on the average wages at the project. If the average wage was more than $40,000, the credit was equal to 5% of the wages at the project; if the average wage was $30,000 to $40,000, the credit was 4%; if $20,000 to $30,000, it was 3%; and if the average wage at the project was less than $20,000, no credit was allowed.
If the company failed to maintain the required levels of investment or employment, it was not to be eligible for some or all future benefits, and some or all past benefits would be recaptured depending on the portion of the 10-year period that the company did qualify.
- Invest
Nebraska Act (NEB. REV. STAT. Sec. 77-5501 et. seq.)
Pursuant to the legislation that enacted it, there can be no new applications for benefits under the Invest Nebraska Act after June 1, 2005. There were 11 qualifiers for benefits under the act as of the end of 2004. Like the Quality Jobs Act, the description below is how the act was prior to its expiration.
The Invest Nebraska Act was enacted in 2001 to provide for a new program to replace the Quality Jobs Act. Many provisions were the same as that act, but there were critical differences. First, projects in counties with a population less than 100,000 may qualify for the benefits with lower thresholds of investment and employment. For these so-called rural tier qualifiers, the company must meet thresholds of at least $10 million in new investment and 25 new employees. Second, the wage benefit credit was calculated using only the alternative method of calculation from the Quality Jobs Act. Under this method, the wage benefit credit is an increasing percentage of the compensation increase based on the average wage of the jobs. The credit is 5% if the jobs pay $40,000 or more, 4% if they pay $30,000 to $40,000, and 3% if they pay $20,000 to $30,000. The benefits may still be claimed as a credit against withholding.Also, the new jobs must pay at least the state average annual wage of about $27,000 to qualify as new jobs in the rural tier of benefits. To qualify under the old Quality Jobs Act, thresholds of $50 million of new investment and 500 new jobs or $100 million of new investment and 250 new jobs, the new jobs must pay 110% of the state average annual wage. There was also a higher qualification level of $200 million of new investment and 500 new jobs at 120% of the state average annual wage. Qualifiers at this level receive a 15% investment credit or the wage benefit credit, whichever they choose.
In the definitions under the act, qualifying businesses, applications, standards for approval, and recapture provisions were the same as was the case with the Quality Jobs Act. The only additional qualification under the Invest Nebraska Act was a requirement that the company have a written policy prohibiting genetic testing.
Finally, the act contains a requirement for an independent audit.
- Employment
Expansion and Investment Incentive Act (NEB. REV. STAT.
Sec. 77-27, 185 et. seq.) (Renamed the Nebraska Advantage Rural Development Act.)The Employment Expansion and Investment Incentive Act was initially enacted in 1986 and expanded in 1987. For many years it was known by the 1987 bill number, LB 270. However, LB 608 (2003) rewrote the entire act and LB 312 (2005) amended it and renamed it the Nebraska Advantage Rural Development Act. Following is a description of the act as it exists currently.
As amended, businesses file an application for receiving benefits under the act as is the case with the Employment and Investment Growth Act. The application is accompanied with a $500 fee and the contents of the application are confidential. $400 of the application fee is returned if the application is rejected because the available funds have been used up. The application states the maximum amount of expected credits that may be earned.
After reviewing the application, the Tax Commissioner is to approve the application and set the maximum amount of credits that may be earned. The Tax Commissioner may not approve projects totaling more than $2.5 million for FY2004-05 and FY2005-06 and $3 million for later years. If approved, the applicant and the Tax Commissioner enter into an agreement that specifies the maximum available credits that may be earned by the project.
The credit amounts are $3,000 for each new employee and $2,750 for each $50,000 in new investment. If the business creates less than 75% of the promised employment or investment, jobs or investment credits are recaptured. If the business fails to maintain the required levels of investment, employment, and wages for at least three years after the credit is allowed, 100% of any credits earned are recaptured.
LB 990 (2006) added a new way of qualifying for benefits under the act. The act now allows a tax credit equal to 10 percent of any investment in livestock modernization equipment provided the investment is at least $50,000. These investments may occur anywhere in the state and receive the refundable tax credit. LB 990 did not increase the overall $3 million annual cap on approved benefits.
Credits are available only to projects in counties with a population of 25,000 or less. The credit is refundable, so it is available regardless of whether or not the taxpayer has any liability. To qualify for benefits, the business must employ five new employees and make at least $250,000 of new investment. If the county has a population of less than 15,000, the taxpayer may qualify with two new employees and $125,000 of new investment. The act also requires the company to pay the new employees at least $8.57 per hour in 2005. However, teleworkers who are paid at a piece rate may still qualify as new employees and the number of new employees would be calculated by dividing the total compensation by the minimum qualifying rate. The wage requirement is adjusted for inflation based on the year to year growth in the average weekly wage in the counties of less than 25,000.The act defines "qualified business" so that it is identical with the Employment and Investment Growth Act. Essentially, manufacturing, distributing, data processing, agricultural processing, financial services and telecommunications qualify while retailing does not. Casinos are specifically excluded.
There is also a project-specific disclosure requirement with regard to the Nebraska Advantage Rural Development Act. The Department of Revenue is to report the name and location of the company, and the benefits received over the previous two years. -
Ethanol Production Credit (NEB. REV. STAT. Sec. 66-1344)
This industry-specific incentive grants producers of ethanol a production credit of 18 cents per gallon on all ethanol produced in the state that came on line in 1999 but had not previously received an incentive or that came on line between 2002 and 2004. Total credits are not to exceed 15.625 million gallons annually or 125 million gallons total over the eight-year entitlement period for any one production facility. The credit is taken in the form of a transferable motor fuel tax credit certificate. In other words, it is taken from motor vehicle fuel taxes deposited in the Highway Trust Fund. However, the loss of fuel tax revenue is reimbursed from the Ethanol Production Incentive Cash Fund.
The Ethanol Production Incentive Cash Fund is funded by a checkoff of seventh-eighths cent per bushel of corn or wheat or hundredweight of sorghum sold through Oct. 1, 2010, a 1.25 cent reduction in the tax credit granted for using gasoline for off-road purposes through 2009, $20.5 million in general funds per year between 2005 and 2012, and $1.5 million annual transfer from the Petroleum Release Remedial Act Fund for seven years. If the balance in the Fund ever exceeds $20 million, the checkoff may be suspended until the balance drops below $10 million.
- Tax
Increment Financing (NEB. REV. STAT. Sec. 18-2101 et.seq.)
The Community Development Act provides for redevelopment of blighted and substandard areas through the issuance of bonds, which are secured by pledging a portion of the property tax proceeds from the property. Blighted and substandard areas are areas of deteriorating buildings, which are characterized by high unemployment, old, unimproved buildings, low-income residents or declining population. A redevelopment project involves demolition or rehabilitation of existing buildings through public or private expenditures. Cities or villages are to create Community Redevelopment Authorities with appointed members, or community development agencies within their governments, to develop and carry out redevelopment plans.
Authorities or agencies may issue bonds to carry out the plans. Bonds may be secured by pledging land or buildings owned by the authority or agency or the revenue from any leases thereto, and also by pledging that part of the property tax revenue attributable to increased value due to redevelopment for up to 15 years. If this "tax increment" option is used, the political subdivisions levying taxes on the property receive their share of the property tax on the pre-development value in the proportion each bears to the whole levy. Property taxes levied on any excess are pledged to repayment of the bonds.
Before approving a tax-increment financed redevelopment project, the city is to submit the blighted and substandard designation to the planning commission, find that the project would not be feasible without the TIF and that a required cost-benefit analysis that has been performed and shows the project to be in the best, long-term interest of the community. Information about the project is to be filed with the Property Tax Administrator annually.
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