Nebraska lawmakers propose ideas to address state's budget shortfall

Gov. Jim Pillen highlighted many of the things going well in Nebraska during his State of the State address last week.

The state recently eclipsed two million residents, growing at a faster rate than in previous years. Unemployment remained among the lowest in the nation, and Pillen said the state government is becoming smaller and more efficient.

But despite all of that, Nebraska is facing a more than $432 million budget shortfall. That’s a major change from when Pillen first took office in 2023, which the governor alluded to last week.

“Back in January of 2023 we had, as I called it, bushel baskets, and bushel baskets and bushel baskets of money, because of the extraordinary flow of all the money that was printed through the pandemic," he said.

The governor said a decrease in the share of Medicaid expenses paid for by the federal government, known by the acronym FMAP, is primarily to blame for the shortfall. Nebraska’s FMAP dropped by more than 1.5% for fiscal year 2026 in part because the state’s per capita income rose faster than other states in recent years. That means the state has to pay for an additional $351 million in Medicaid expenses over the next two-year budget period.

Pillen said he hopes to work with the new administration to get the FMAP formula changed.

“After the inauguration, we're going to go to DC and say, ‘Look, this is a funding mechanism for Medicaid that should be pro rata with every state. It makes absolutely no sense that you are penalizing states that are doing well’," he said.

State senators also have a variety of solutions to address the shortfall.

Sen. Tom Brandt, who represents a southern Nebraska district that leads the state in percentage of unpaved roads, said low corn prices contributed to the shortfall.

“When you take the 46,000 corn farmers in the state of Nebraska, and their income has all got basically cut in half, it has a direct impact on the amount of income taxes paid into the state of Nebraska," he said. "I doubt anybody forecasted that.”

To overcome the shortfall, Brandt said he hopes to remove sales tax exemptions on pop, candy, fantasy sports and luxury services.

“When you look at pool cleaning services, I don't even know why they're exempt. When you charter an airplane, when you charter a limousine, when you hire a sightseeing company, these are all things that currently are exempt," he said.

Similar sales tax expansions have been introduced in the Legislature before, including during both the regular and special sessions in 2024. Brandt said the need to balance the budget will help the bill get across the finish line this session.

“We're starting $432 million down," he said. "That's what makes a difference.”

But Sen. Danielle Conrad, who has emerged as one of the Legislature’s leading voices against sales tax expansions, said both sides of the aisle could take issue with the proposal.

“It's going to find skepticism from Republican and conservative colleagues who said, ‘Hey, I meant it when I said it, no new taxes.’ And it's going to find concern and skepticism from myself and other progressive senators who say, ‘Hey, wait a minute. This is going in the wrong direction. Sales taxes are regressive’," she said.

Conrad said the shortfall was caused in part by income tax cuts passed in 2023 and what she called ‘pet projects.'

“Those massive income tax cuts that were made in recent years, you can see that they're blowing a hole in the state budget, and you can also see that they're primarily benefiting the wealthiest Nebraskans," she said.

New Revenue Committee chair Sen. Brad von Gillern said the shortfall was due to several factors including uncertainty around the U.S. presidential election.

In a text to Nebraska Public Media News, he wrote "Receipts were flat in the months prior to the election, which also included times of Great strife across the world and talk of a third world war.”

Von Gillern also wrote that state revenue was higher than projected in December and he anticipates the next forecast to show a lower budget shortfall.

The Nebraska Economic Forecasting Advisory Board meets in February and April to determine new revenue projections, which could change the shortfall amount or eliminate it entirely.

Bill introduction continues in the Legislature through Wednesday, when committee hearings on legislation begin.

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