The fate of Nebraska’s business tax incentives program will be a hot topic when the state Legislature convenes next week, and it isn’t clear supporters will be able to extend the program beyond its end-of-2020 expiration.
Nebraska Advantage, the primary tax program for businesses relocating or expanding in the Cornhusker State, was battered over the last year by fiscal conservatives, advocates for lower property taxes, and economic policy watchdogs. Critics including Republican state Sens. Curt Friesen and Steve Erdman call it an exercise in “corporate welfare” that has yielded few benefits.
“I want to know what we’ve gotten for it,” Friesen told Bloomberg Tax. “Our performance audit committee that looks at the incentive packages suggested they don’t pay for themselves. There is no return on investment.”
The senators and other critics are likely to focus some of their ammunition on a long-shot niobium mining project in southeastern Nebraska that scored 10 years of tax abatements valued at $200 million. The tax package for NioCorp Developments Ltd., one of the richest in state history, is a window into an expensive and opaque economic development process, the critics say.
But killing the program would weaken Nebraska’s position in a competitive environment where other states offer hundreds of business incentives, proponents say. They are promoting changes instead. Legislation to modify and renew Nebraska Advantage through 2029 collapsed at the end of the 2019 session, but the measure, L.B. 720, will be a top agenda item when lawmakers meet Jan. 8 for a 60-day session.
“We don’t look at this as corporate welfare. Every other state in the nation has a program and we know we have to have a program,” said the bill’s primary sponsor, Sen. Mark Kolterman (R). “At the same time, our property taxes are way out of line for agriculture. We know we need to make some significant changes. We understand these two issues have to go hand in hand.”
Nebraska Advantage, established in 2005, offers a comprehensive basket of tax credits and exemptions for businesses creating new jobs or making investments. The program offers six tiers of benefits based on the scope of a project, with the most ambitious able to claim sales tax relief for capital purchases, a 10% job credit on new employee wages, a 15% investment credit, and a personal property tax exemption for up to 10 years.
No Caps, No Discretionary Review
Unlike many other state programs, Nebraska’s isn’t capped and doesn’t provide benefits at the discretion of a review committee—features that draw strong criticism. Instead, businesses must qualify with the Department of Revenue and claim their benefits. The program also has a feature that critics view positively: It operates under a “pay-for-performance model,” which permits businesses to collect benefits only after their investment and job-creation targets are reached.
L.B. 720 extends Nebraska Advantage for 10 years and makes several improvements, Kolterman said. Among other things, the bill: prioritizes benefits for companies generating high-wage jobs; grants more incentives to companies locating in blighted communities; streamlines the application process; and requires businesses to report annually on their goals.
Over the last six months, Kolterman has tried to position L.B. 720 for swift passage in January, securing support from fellow lawmakers and Gov. Pete Ricketts (R), a strong supporter of Nebraska Advantage. The Nebraska Chamber of Commerce & Industry held a press conference in November touting L.B. 720 and launching a website titled Good for Nebraska. The group says Nebraska incentive programs dating back to 1987 had created 110,000 jobs and brought $35 billion in qualified investment to the state.
The measure may be a tough sell in the Legislature, however, if the past is a guide.
A coalition of interests united against it during the 2019 session, including the Nebraska Farm Bureau and economic policy watchdogs. L.B. 720 hit a brick wall during the final minutes of the 2019 session after lawmakers from rural districts withdrew their support, angered by the defeat of a separate bill promising $100 million in property tax relief through new taxes on soda, candy, bottled water, and consumer services.
Even if supporters of L.B. 720 are able to finesse a compromise to reduce property taxes, Friesen and Erdman said the state needs to address fundamental flaws. They say Nebraska Advantage fails to attract businesses from outside the state and it saddles Nebraska with costly long-term tax expenditures.
“Right now we have no caps and we aren’t really in control. There are a lot of outstanding earned credits that have not been redeemed yet,” Friesen said.
Report Highlights Flaws
A report by the state’s Legislative Performance Audit Committee in April identified program problems:
- Benefits awarded between 2008 and 2017 totaled $1.2 billion. Of that total, $705.2 million in tax benefits had been claimed by 135 projects, and $497 million were yet to be used.
- Only 10% of businesses receiving benefits were new to Nebraska.
- Nebraska Advantage costs the state, in forgone tax revenue, much more than the $24 million to $60 million annually originally projected. The report shows tax expenditures of $126 million for 2013, $76.7 million for 2014, $102.6 million for 2015, $142.3 million for 2016 and $97.5 million for 2017.
The Open Sky Policy Institute, a nonpartisan fiscal policy think tank, pointed to some of the same problems in a policy brief in May. Regarding cost, Open Sky pointed to Revenue Department projections showing the state would forgo more than $1.5 billion in revenue over the next decade when the full cost of L.B. 720 is added to the balance of credits already promised. Open Sky concluded L.B. 720, “would likely continue Nebraska’s tradition of costly and questionably effective tax incentive programs.”
Open Sky called for L.B. 720 to be restructured, imposing caps on benefits to ensure predictability. The group also called on the state to exercise more discretion to ensure benefits go to high-impact projects.
Nebraska Advantage gets mixed reviews from the Pew Charitable Trusts, which analyzes state economic development programs. Pew considers the program a leader nationally with regard to its audit and evaluation processes. But Pew faulted its structure and execution, saying there is a need for annual limits on benefits and a discretionary review process.
“They are promising incentives over a number of years and there is no limit on the size of those commitments. So the state is taking on liabilities of hundreds of millions of dollars on a going forward basis,” said Josh Goodman, an analyst with Pew’s state fiscal health program.