LINCOLN — Nebraska lawmakers voted Wednesday to reinstate income taxes on federal retirees, saying they made a mistake by eliminating those taxes last year.
They also ditched a proposal to give homestead exemptions for partially disabled veterans as they worked to reduce the budget impact of several tax packages.
The federal retiree action came as lawmakers considered Legislative Bill 1317, introduced by State Sen. Lou Ann Linehan of the Omaha area. The measure, which won second-round approval, brings together 10 tax-related bills.
The package includes a bill fleshing out how the state’s new Good Life Districts should operate and another putting an excise tax on the energy used to charge an electric vehicle. A third would penalize nonprofit economic development corporations for holding land without moving forward to develop it.
LB 1317’s repeal of the tax exemption for federal retirement income affects a law that took effect Jan. 1. The repeal would increase state revenues by an estimated $12 million annually.
Lawmakers rejected an amendment from Sen. Carol Blood of Bellevue that tried to undo the repeal and keep the exemption, with 32 voting against her proposal and 6 voting for it. Blood said senators were sending the message that “we’re going to give you something, then take it back.”
But Linehan said her intent last year had been to exempt retirement income only for federal employees who had started before 1984 and were not able to participate in Social Security. She said her goal was fairness for those retirees as the state eliminated income taxes on Social Security benefits.
The actual law that passed, however, was based on LB 38, which Blood had introduced. That measure provided the exemption for all federal retirees, and Linehan said she did not realize the difference until later in the year.
Linehan introduced LB 863 this year to reinstate the tax for the more recent group of federal retirees. The Revenue Committee added it to LB 1317 on an 8-0 vote, despite numerous opponents who testified at the public hearing.
Senators also debated a scaled-back version of LB 126, introduced by Sen. Jen Day of Omaha. Originally, her bill would have extended the homestead exemption program, under which the state covers the cost of property taxes for some homeowners, to benefit partially disabled veterans.
The bill emerged from the Revenue Committee and cleared first-round debate on a 39-0 vote with some additional changes to the homestead exemption program. But Linehan offered an amendment Wednesday to eliminate the proposed exemptions for partially disabled veterans and most of the other parts of the bill.
Linehan said the cost of expanding the program was too much to fit within the state’s budget. Legislative fiscal analysts have told lawmakers that they could increase spending or cut taxes by no more than $20 million per year in order to keep the state in the black during the three fiscal years ending June 30, 2027. Day’s homestead exemption bill would have cost an estimated $148 million during that period.
Linehan’s amendment proposed less dramatic changes. One would let people keep their homestead exemptions if their income did not change but their home valuation increased. Another would allow them to keep an exemption while living in a nursing home or other facility if they are expected to return home.
Day expressed disappointment about the bill’s outcome. She said she has been working since 2021 to get homestead exemptions for disabled veterans and had hoped that this would finally be the year she succeeded.
“I know a lot of people are extremely frustrated that we are in this position again,” she said. “I will absolutely be bringing this back next year.”