Nebraska Tax Incentives - Fraud?

In my opinion Auditor of Public Accounts Mike Foley does a thorough job. He and his team of auditors are responsible for auditing all state government departments, including the legislature and the governor's office. They audit village councils in small towns. He's currently going after the governor. Today there were news reports that he had uncovered $1.2 billion in lost revenue. The articles suggested that there was fraud. I do not agree, at least not based on what Foley is quoted as saying. 

There are several tax incentives programs in Nebraska. The largest are the Nebraska Advantage Act (NAA) and ImagiNE (a relatively new program). There are a also smaller programs like Microenterprise (for businesses with five or fewer full-time equivalent employees) and Nebraska Historic Tax Credits (for rehabilitating and renovating buildings on the National Register of Historic Places), but the bulk of tax incentives go to companies participating in NAA and ImagiNE. Before I retired from the Department of Revenue in 2025 I worked with tax incentives. From 2016-2022 I was the initial reviewer on NAA tax refund claims as well as doing preliminary audit work for new applicants. From 2023-2025 I also reviewed the work of the initial examiners and approved claims for payment. I had little to with ImagiNE, since claims were just starting to come in a few months before I retired. 

The goal of NAA is to reward companies who do two things: (1) Increase employment and (2) Increase investment. There are multiple tiers within the program — each tier has a different benchmark for how much additional employment (measured by total compensation) and investment is required. For example, Tier 1 projects require $1 million in additional investment and 10 additional Full Time Equivalents (FTE's); Tier 2 requires $3 million in additional investment and 30 additional FTE's. The requirements increase with each tier. There are sub-tiers for large data centers and a tier for investment only. 

The year that a company applies is called "the base year". The applicant must show increases in compensation and investment compared to the base year. In order to determine what is an the increase a "qualification audit" is done to determine what the increase in compensation and investment actually is. A preliminary review of the applicant's calculations is done by an examiner. The applicant provides a list of employees and investment in the base year as well as the years that they believe they have met the requirements of the tier in which they are applying. The examiner is basically checking the math. If it adds up, an auditor takes over and examines the applicant's books to determine whether they have met the requirements for an incentive project. Once the auditor approves the project, the applicant can now begin earning credits.

For most tiers, the entitlement period (the number of years in which the project owner can earn and use tax credits) is seven years. The amount of the tax credits available for use is calculated using a standard formula. The incentives company can then use the tax credits earned to receive a tax refund. The refund is most commonly used for a refund of sales and use taxes, but also can be used to refund payroll taxes or corporate income taxes. For sales and use taxes, the refund can only be for tax paid at the location listed in their incentives application (for example sales tax paid for a corporate retreat at a hotel, or tax paid at an out-of-state location are not eligible). Once the seven-year entitlement period ends the incentives company no longer earns credits, but there is a "carryover period" of varying length when they can continue to use credits. 

The incentives company is required to meet the benchmarks for their tier every year within the entitlement period. If they do not meet the requirements in any of the seven years they will be charged back 1/7 of the refunds previously received; future refund claims will be reduced by 1/7 for each year the benchmarks are not achieved. 

For example: Company XYZ has an incentive project with an entitlement period of 2012-2018. They have a carryover period from 2019-2023. This means that they are earning credits from 2012-2018. They can use the credits if the tax was accrued any time from 2012-2023, even if they submit their claim after December 31, 2023. (There is a three-year statute of limitations for filing sales tax refunds, unless a request for extension is filed — these extensions are routinely granted)

This is where the State Auditor's information strays from reality and the reporting gets it wrong. If our example company, XYZ Corp ceases operations — all employees are terminated, and there are still unused credits, the XYZ Corp can continue to submit refund claims for sales tax accrued for any of the entitlement or carryover years. (There are also aging  of credits issues, which I don't need to get into to explain the system) This may seem counter to the goals of the program, which is to attract and keep businesses in Nebraska, but nothing in the incentives statute requires that an incentives company remain in Nebraska after the term of their agreement has expired. They are penalized, as I stated two paragraphs previously, if they close shop before the term of their agreement is up, but afterwards there is nothing to prevent them from leaving the state, selling to another company, or simply ceasing to operate.

Mr. Foley is framing his findings as if there is either fraud on the part of some incentives companies, or malfeasance on the part of the Department of Revenue (DOR). I was employed in DOR from 2016-2025, for the first 7 1/2 years in the Incentives Group, and the rest in a related work group. I can attest that the leadership of the Incentives Group is extremely diligent at following the statutes, and that there are numerous checks and balances to ensure that every dollar is correctly allocated. If anything, I thought auditors and managers were overly picky in their reviews. 

It has been suggested that DOR is understaffed and overworked and that explains the alleged "lost revenue". I can say with confidence that elimination of remote work by Governor Pillen has contributed in large part to the staffing issues. When his edict was finally executed, the Incentives Group lost half of its experienced auditors. Despite this loss of key people, the work was still getting done in a timely manner. At least it was when I retired last June. 

Foley has declined to name companies who are "uninvesting", citing the fact that tax returns are confidential. But you don't need tax returns. All companies receiving tax incentives are public record, listed on the DOR website, including how much they receive each year. 

Does Foley have a point? Yes he does. There are numerous aspects of the state's incentives programs, not just NAA, that allow companies to game the system. Should we still be sending out millions to companies which are no longer operating in Nebraska? I don't think anyone would argue that we should. But Foley's argument is with the legislature, not the agency that executes the statutes.