Estate and Generation-skipping Transfer Taxes

LB 367 (2007) terminated the estate tax and generation-skipping transfer taxes for decedents dying or transfers occurring on or after Jan. 1, 2007. As a result, this source of tax revenue will decline precipitously and disappear over the next few years. This description is how the taxes were in 2006.

The state transfer tax is imposed on the transfer of the estate of any resident decedent, upon the transfer of any interest in property in Nebraska of a non-resident decedent, and upon the generation skipping transfer of property in Nebraska which occurred prior to 2007. Prior to 2003, the amount of the tax was the difference between the maximum state death tax credit allowance for state and local estate and inheritance taxes under the federal transfer tax, reduced by the lesser of any estate or inheritance taxes paid on the Nebraska portion of the property, plus Nebraska inheritance taxes paid.

The federal estate tax is assessed on estates in excess of $2 million on a progressive schedule reaching 45%. The exemption amount is to increase to $3.5 million in 2009, and the estate tax is to be repealed in 2010. It then returns in 2011 with a $1 million exemption amount under the federal Economic Growth and Tax Relief Reconciliation Act of 2001.

The federal generation skipping transfer tax is assessed on such transfers greater than the exemption amount which, beginning in 2002, is identical to the estate tax exemption amount ($2 million). The federal law now allows a deduction for state and local estate, inheritance, and transfer taxes paid.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the state death tax credit was reduced by 25% in 2002, 50% in 2003, 75% in 2004, and in 2005, the state death tax credit was repealed and replaced with a deduction for state and local death taxes.

In response to this pending elimination of state transfer taxes, LB 905 was enacted in 2002 and decoupled the Nebraska estate and generation skipping transfer taxes from the state death tax credit allowed under federal law. Under LB 905, the gross estate or generation-skipping transfer is as defined in federal law minus an exemption amount of $1 million. The Nebraska estate tax liability is then determined from a tax rate table set out in the law.

The generation-skipping transfer tax rate is 16%.

Both state transfer taxes are administered by the Nebraska Department of Revenue and the proceeds flow to the general fund.

Cigarette and Tobacco Products Tax

A. History - The cigarette tax has been in existence since 1947. The rate per pack has increased from three cents at that time to 64 cents today. Beginning in 1971, a portion of the cigarette tax began to be used for capital construction. At that time, 2.5 cents went to build the UNL Field House and 2.5 cents for the State Office Building. Beginning in 1980, only four cents was to be committed to capital construction and one cent to the Nebraska Outdoor Recreation Cash Fund. Beginning in 1983, an additional cent was taken from capital construction and committed to cancer research. Beginning in 1989, the 13 cents general fund portion was reduced by $3 million (originally $4.5 million) per year for deposit in the Municipal Infrastructure Redevelopment Fund (MIRF), which is distributed to municipalities on a per capita basis. In 1993, the tax was increased from 27 cents to 34 cents, five cents going to the general fund and two additional cents to cancer research. (NEB. REV. STAT. Section 77-2602.) Beginning Oct. 1, 2002, the rate increased to 64 cents per pack. The following table shows recent receipts from the cigarette tax and the tobacco products tax.

Nebraska Cigarette and Tobacco Products Tax

Year	Cigarette Tax Receipts	Tobacco Products Tax Receipts
1991	37,412,210	1,428,329
1992	36,534,491	1,598,020
1993	39,656,428	1,884,890
1994	45,475,905	1,975,836
1995	45,799,985	2,155,620
1996	45,622,019	2,357,168
1997	45,636,583	2,543,285
1998	48,716,304	2,744,835
1999	43,077,696	2,898,689
2000	42,518,529	3,084,924
2001	41,632,726	3,237,679
2002	45,890,972	3,596,251
2003	67,712,816	4,742,409
2004	67,432,564	3,596,251
2005	66,958,401	5,256,100

Source: Nebraska Department of Revenue

The Tobacco Products Tax Act was enacted in 1987 and went into effect in 1988. (NEB. REV. STAT. Sections 77-4001 through 4025.)

B. Base and Rate - The cigarette tax is currently 64 cents per pack of 20 cigarettes or the per-cigarette equivalent of 80 cents per 25 cigarette pack. The tax is paid by the wholesaler and passed through to the consumer.

Tobacco products other than cigarettes (cigars, pipe tobacco, loose cigarette tobacco, chewing tobacco, and snuff) are taxed at a rate of 20% of the wholesale purchase price. The tax is collected and remitted by the person who makes the first sale of a tobacco product in Nebraska. A collection fee is allowed in an amount equal to that which is allowed for collecting the sales tax. (NEB. REV. STAT. Section 77-4008.)

C. Burden Compared to Other States - Nebraska's 64-cent cigarette tax rate was higher than Missouri's (17 cents), Iowa's (36 cents), South Dakota's (53 cents) and Wyoming's (60 cents) on Jan. 1, 2007. It was lower than Colorado's (84 cents) and Kansas' (79 cents). Nebraska's rate was the 31st highest in the nation on that date.

D. Administration and Disposition - The cigarette tax is administered by the Nebraska Department of Revenue. The proceeds are reduced by a 1.85% collection fee retained by the wholesaler for the cost of collecting the tax and affixing the stamp. The collection fee costs the state about $1 million of cigarette tax proceeds annually.

The distribution of the cigarette tax is as follows (NEB. REV. STAT. Section 77-2602.):

1. The equivalent of 49 cents less $3 million is allocated annually to the general fund.
   
2. The equivalent of one cent is allocated to the Nebraska Outdoor Recreation Development Fund that is administered by the Game and Parks Commission. The fund is utilized to support development, operation and maintenance of areas of the state park system.
   
3. The equivalent of three cents is allocated to the Department of Health and Human Services Finance and Support Cash Fund to support cancer research.
   
4. The equivalent of 2 cents is annually allocated to the Information Technology Infrastructure Fund.
   
5. The equivalent of 5 cents of the tax is annually allocated to the Building Renewal Allocation Fund. Use of the Building Renewal Allocation Fund is generally limited to allocation of funds appropriated by the Legislature to the Task Force for Building Renewal ("309" Task Force) for deferred maintenance and repair of state buildings.
   
6. A specific dollar amount of $3 million is annually allocated to the Municipal Infrastructure Redevelopment Fund (MIRF). Amounts credited to MIRF are distributed semi-annually to all incorporated municipalities in the state in proportion to population. Amounts distributed are authorized to be expended to support infrastructure redevelopment projects as defined within the Municipal Infrastructure Redevelopment Act.
   
7. Beginning July 1, 2001, through July 1, 2016, $1 million to the City of the Primary Class Development Fund and $1.5 million annually to the City of the Metropolitan Class Development Fund. These earmarks represent state contribution to Lincoln's Antelope Valley Development Project and Omaha's Riverfront Project.
   
8. Any amounts remaining flow to the Nebraska Capital Construction Fund (NCCF). As it stands currently, no cigarette tax proceeds remain to flow to NCCF after the above earmarks have been satisfied.

The Department of Revenue administers the tobacco products tax. All proceeds go to the General Fund.

E. Major Issues - Major issues involving the tobacco tax are usually based on its distribution. More specifically, most debate is not on the tax itself, but is on the desirability of the projects and programs it supports. Cigarettes, like alcoholic beverages, are subject to both the excise tax and the sales tax. The cigarette tax is one of the few tax bases which declines from year to year.

Alcoholic Beverages Tax

A. History - There has been an alcoholic beverage tax since the repeal of prohibition. The table below details the alcoholic beverages tax rates since that time.

Alcoholic Beverages Tax Chronology

Effective Date	Beer	Alcohol and Spirits	Light Wines (14% or less alcohol)	Fortified Wines (more than 14% alcohol)
05/24/35	$ .03	$ .50	$ .05	$ .15
05/01/37	.035	.80	.15	.40
05/30/47	.04	1.00	.20	.55
08/25/51	.04	1.20	.20	.55
01/01/63	.06	1.60	.20	.55
05/22/63	.06	1.20	.20	.55
04/01/65	.08	1.60	.20	.55
07/01/72	.10	2.00	.75	.75
06/01/77	.11	2.25	.85	.85
09/07/79	.12	2.50	.55	1.10
08/30/81	.14	2.75	.65	1.25
10/01/85	.20	2.90	.75	1.35
10/01/87	.23	3.00	.75	1.35
7/01/03	.31	3.75	.95	.95

Source: Nebraska Department of Revenue

Alcoholic beverage tax receipts were generally flat until the 2003 rate increase as can be seen in the data table entitled "General Fund Miscellaneous Tax Receipts" that is also linked to this area.

B. Base and Rate - The tax is levied on a gallon of beverage at the distributor level. The rate varies depending on the kind of alcoholic beverage. Currently the tax rates are as follows:

Alcoholic Beverage Tax Rates

Beverage	Tax Per Gallon
Beer	$0.31
Wine	0.95
Farm Wine	0.06
Alcohol and other spirits	3.75

NEB. REV. STAT. Section 53-160.

C. Administration and Disposition - The alcoholic beverage tax is administered by the Liquor Control Commission. All proceeds go to the general fund.

D. Major Issues - Frequently there are efforts to increase this tax as a way of reducing consumption. Proposals in the past have called for earmarking part of the tax for a social program, usually for the treatment of alcoholism.

E. Related Issues - Alcohol, like cigarettes, but unlike gasoline, is subject to the general sales tax as well as the alcohol excise tax.

Insurance Premium Tax

A. History - The insurance premium tax was first implemented in 1951. The tax was changed in the 1980s by imposing different rates for certain types of policies. The tax is paid quarterly, and can be prepaid based on prior years. Exemptions from the tax are premiums paid on annuities and other similar pension or retirement plans ($15.5 million annually) and premiums written by fraternal beneficiary associations ($1.3 million annually).

B. Base - Both domestic and foreign companies, except fraternal beneficiary associations, owe the tax on the gross amount of direct writing premiums received on Nebraska policies during the preceding calendar year. The premiums must also be broken up into group accident and health policies and property and casualty insurance, excluding sickness and accident, as well as all other policies.

C. Rate - Rates for this tax are 0.5% for group accident and health insurance, 0.8% for property and casualty insurance, excluding sickness and accident policies, and 1% on all other policies issued in the state. (NEB. REV. STAT. Section 77-908.) The revenue from the tax has been about $40 million, but has been declining in most recent years due to the fact that contributions by insurance companies to the Comprehensive Health Insurance Pool may be taken as a credit against insurance premium tax. These contributions reduce insurance premium tax revenue by $19.2 million annually. The Pool (usually called CHIP) is for providing health insurance for Nebraskans with serious, chronic health problems that render them uninsurable.

D. Administration and Disposition - This tax is administered by the Department of Insurance. Forty percent of the proceeds go directly to the General Fund, 50% to the Insurance Tax Fund, of which 10% of this half is distributed to counties, 30% to incorporated municipalities, and 60% to school districts. The distribution to school districts is placed in the school equalization formula, while the distribution to counties is based on population. The city portion of the distribution is placed in the Municipal Equalization Fund for distribution in an equalized manner.

Any qualifying municipality will receive aid equal to the statewide average per capita property tax times the population of the municipality, minus the statewide average property tax levy times the valuation of the municipality. If the result is negative, the municipality will receive no aid. Essentially, this formula allows every city to raise the average amount of per capita revenue by levying the average property tax rate, with the state supplying any shortfall from the equalization fund.

Beginning in 1998, the 10% that is not deposited to the state general fund or distributed to cities counties and school districts is deposited to the Mutual Finance Assistance Fund. The proceeds in the Fund are to be distributed to any rural or suburban fire protection district or a mutual finance organization that contains within its boundaries at least 80% of the rural population of any one county.

A mutual finance organization is formed by an agreement between fire protection districts and/or cities and villages in which they agree to levy the same rate of tax for the support of fire protection. The amount of aid is $10 times the assumed population of the district or mutual finance organization, but is prorated if the amount in the fund is insufficient. The assumed population is an approximation of the population in the district or mutual finance organization calculated by adding the population of the municipalities involved to the rural population assuming that it is spread evenly throughout the county. Any excess in the fund is to be deposited in the general fund.

Corporate Occupation Tax

Since 1913, Nebraska has imposed an occupation tax on corporations that are incorporated in Nebraska or are doing business here. For domestic corporations, meaning those incorporated in the state, the tax is levied based on the amount of "paid up capital stock" of the corporation. Paid up capital stock is defined in NEB. REV. STAT. Section 21-329 as the par value of all shares of the corporation that are outstanding. LB 524 (2003) provided that beginning Jan. 1, 2004, the corporate occupation tax is to be collected biennially, in the even-numbered years only. The tax rates were exactly doubled under this bill.

As provided by LB 524, the amount of the tax increases from $26 if the paid up capital stock is less than $10,000 to $23,990 if the paid up capital stock is greater than $100 million (NEB. REV. STAT. Section 21-303).

For foreign corporations, meaning those incorporated in another state or country, the tax rate is double that of domestic corporations with a maximum of $30,000 and is based on the actual value of all real and personal property employed by the corporation in the state (NEB. REV. STAT. Section 21-306).

The U.S. Supreme Court held in South Central Bell v. Alabama, 526 U.S. 160 (1999), that the base of the Alabama tax, par value for domestic corporations and property employed in the state for foreign corporations burdened interstate commerce in violation of the Commerce Clause. The Supreme Court determined that because corporations could determine their own par value during the incorporation process, the tax discriminated against foreign corporations. Nebraska's tax has a structure similar to that of Alabama, although the rates are much lower and it has not been challenged as unconstitutional.

Receipts from the corporate occupation tax may be found in the table entitled "General Fund Miscellaneous Tax Receipts".