Expert examines Ricketts’ social security tax cut proposal

Creighton Tax Scholar: “Proposal will go nowhere unless backed by bipartisan support.”
Nebraska Sen. Pete Ricketts' new tax act is raising eyebrows across the country.
Published: Sep. 15, 2023 at 10:44 PM CDT
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OMAHA, Neb. (WOWT) - This week, Nebraska Senator Pete Ricketts introduced legislation he says will “boost the retirement income of millions of seniors in Nebraska and across the country. He’s calling it the Social Security Check Tax Cut Act.

This is Ricketts’ third piece of legislation under what he calls his “proven Nebraska solutions, ready for America” package.

After initial readings, the bill was sent to the Senate Finance Committee.

Ricketts sees Senate Bill 2800 as a national extension of the law he signed in Nebraska to phase out state taxes on Social Security benefits.

Travel from Washington and prior commitments left Ricketts unavailable for interview requests to discuss the legislation, but he said in a press release:

“All Social Security benefits should be completely tax-free. My bill helps us get there in a fiscally responsible way. During my time as Governor, we provided major relief to seniors by phasing out state taxes on Social Security benefits, and it’s time the federal government did the same. By passing this bill, we can take the first step in boosting the retirement income of millions of seniors in Nebraska and across the country.”

To get a better understanding of tax on Social Security income, we turned to tax policy scholar Victoria Haneman at Creighton’s School of Law.

“Social Security was not taxed when the program was started, but it’s important to keep in mind that when Social Security as a program was established, corporate taxes were way higher, taxes at death were way higher, and the top income tax rate was almost double what it is today,” Creighton’s Frank J. Kellegher Professor of Trusts & Estates professor said. “The benefits were not taxed until the program started running on fumes around 1983.”

The program is still on fumes, and Haneman says how you cut these taxes matters.

“In Minnesota, when a state tax cut was proposed to eliminate taxation on Social Security benefits, the study showed that about 50% of the benefit from the tax cut flows to households making more than $143, 000 per year,” she said. “It is possible to design a tax cut that is targeted and actually targets those who are in need so that we don’t have a tax cut flowing to higher income taxpayers.”

Haneman thinks raising current thresholds would be a better place to start.

“Those income thresholds are between $25,000 and I think right now $44,000.... and those figures have not been indexed for inflation, so they are really out of date,” she said. “You could deliver a targeted tax cut by indexing those amounts for inflation.”

At the end of the day, she says Social Security has political problems.

And in a way, politics adds to the problem of finding the best way to fund a critical program for millions of retiring and permanently disabled Americans.

“It’s very popular with politicians to put tax cuts on blast without discussing who is going to bear the cost of the tax cut and exactly how much the tax cut is going to cost,” Haneman said. “And we’re living right now in a time with a staggering deficit.”

As for Ricketts’ SB 2800, she sees the effort as a familiar one that will require something possibly out of reach.

“This type of legislation is actually a little bit tiresome because it’s not new, and I mean it’s one of those things that continuously gets floated,” she said. “Whether or not it’s politically feasible, ...amending Social Security requires 60 votes in the Senate and neither party has held 60 seats since the 1970s, and so Ricketts’ proposal will go nowhere unless it’s backed by bipartisan support, which was less of a challenge for him when he was governor in a politically conservative state. But our junior Senator may not understand now the importance of reaching across the aisle on these types of initiatives.”