Tax policy experts weigh in on Nebraska’s state budgetary future

Nebraska lawmakers overcame a significant shortfall through the passage of this year’s budget, but more fiscal trouble may be on the horizon.

On the final day of this year’s legislative session in June, Speaker John Arch made a prediction on the focus of the legislature’s return in 2026.

“I will predict that our biggest challenge next year will be our budget,” he said. “Once again, we sent a balanced budget to the governor, but we always face mid-biennium budget adjustments, and next year will be no different. And in fact, could be more challenging”

So how did Nebraska get into this situation in the first place? Rebecca Firestone, the executive director of Open Sky Policy Institute, put it this way.

“I would say the budget is in a precarious position because of some choices the Legislature has made over the past few years,” she said. “Some of those big-ticket items that are making things difficult for us on a budgetary front are income tax cuts that were passed in 2023 and some very, very substantial state funding commitments to reducing local property taxes. The state economy is in a good place, so we started this legislative session with a projected budget shortfall of $432 million that needed to be closed in order to balance the budget. And it's worth noting that typically speaking, when the economy is in a good place, we don't see budget shortfalls. So that is concerning, just in terms of policy choices. And I would say that we're not out of the woods yet.”

Full interview with Rebecca Firestone

Michael Lucci, a senior policy advisor at the Platte Institute, added that Nebraska’s situation is par for the course across the country.

“All states in the 2021 to 2023 period, all states experienced tremendous growth in really baseline revenues from a lot of sources, but in particular from sales taxes,” he said. “And that growth has slowed down. And so states really across the map are adjusting to slower growth in revenues than they experienced for two or three years there.”

Full interview with Michael Lucci

While the state scrambles to find ways to cut costs and raise revenues, Lucci said the state income tax cuts passed in 2023 should not be touched.

“If you enact a phased in income tax cut, and then you stop it, maybe raise it, you lower it, that produces uncertainty,” he said. “And so the efficiency of the tax code is important for a variety of reasons, but just as a general principle, whether taxes or other issues, certainty and predictability matters a lot to the business community. So we think that the income tax is the one tax driver that is most important for the state's competitiveness.”

But Firestone said the income tax cuts produce more uncertainty, not less.

“What happens with income tax cuts is they actually inject more volatility into revenue projections,” she said. “So it becomes harder for the people who set state budgets to be able to predict, well, how much revenue are we going to be able to have to come in? Because now we're on this path of cutting taxes, and we expect that's going to spur economic growth, and we hope that economic growth materializes, and yet, until it materializes, it's hard for us to actually know how much revenue we have to rely on.”

Both Lucci and Firestone agree that broadening the sales tax base by ending exemptions for certain goods and services is a good way to raise revenue. A proposal from Sen. Tom Brandt would have done just that and used the funds for property tax relief. However, it failed to pass, which Lucci said shows the policy’s political difficulties.

“It's very hard to do a sales tax expansion,” he said. “So this is kind of a unique issue, where if you talk to a tax economist, liberal, conservative, progressive, they all kind of agree, like, yes, a sales tax should be taxing all these things equally - final consumption, not business inputs, but final consumption. But politically, it's really kind of a challenge to get that across. So, I think that expanding to final retail consumption is something that we're always going to be looking at in a fairly positive light. But what we want to know is, what is that revenue used for? And that’s not always in the same tax bill.”

Firestone said she approves of broadening the sales tax base to lower the sales tax rate, but opposes the proposals introduced in the Legislature that would use the funds for property tax relief.

“You are using sales tax revenues to provide broad based property tax cuts that are not well targeted,” she said. “What happens is that low- and middle-income households will be asked to pay more in sales taxes. They may not see a concomitant reduction in property taxes, and you will end up having large landowners who can afford to pay their property taxes that are receiving a property tax break. So overall, it is a tax shift that makes Nebraska's tax code more regressive.”

Barring a special session, the Legislature will reconvene in January.