Download the PowerPoint presentation we used on our tour around the state this week.
U.S. Sens. Mike Johanns and Deb Fischer were among a strong bi-partisan Senate contingent that voted on Monday to pass the Marketplace Fairness Act – which gives states the ability to collect online sales taxes.
Nebraska loses an estimated $98 million every year to untaxed online and catalog sales. While Nebraskans are legally required to remit use tax through their income tax return, compliance is extremely low. This lost revenue makes Nebraska more reliant on other taxes – particularly property taxes.
The Marketplace Fairness Act would require online retailers to collect sales taxes. Right now, a state can only require sellers to collect these taxes if they have a physical presence in the state, putting local retailers at a competitive disadvantage with out-of-state online and catalog sellers who can’t be required to collect sales taxes.
In other words, the Marketplace Fairness Act does not enact a new tax but rather provides an enforcement mechanism for our current tax code.
Nebraska U.S. Sens. Mike Johanns and Deb Fischer both voted for the bill. In doing so, they acted to resolve a fairness issue for Nebraska’s retailers and moved to lessen our state’s property tax reliance. We hope the House of Representatives will follow the Senate’s lead and also adopt The Marketplace Fairness Act.
 National Conference of State Legislatures, Collecting E-Commerce Taxes: An Interactive Map
A decade-long decline in state spending will come to an end if the Legislature’s Appropriations Committee budget is adopted.
The committee’s recommendations call for a 5.2 percent average annual increase in General Fund appropriations this biennium, but it’s important to note that appropriations only grew at a 1.1 percent average over the previous four years.
As such, the budget would be a small first step toward restoration of support in key budget areas such as education, transportation and infrastructure, and health and human services.
The cost of providing services increases every year due to factors such as inflation, population growth and increased costs of health insurance, so state General Fund spending in actual dollars increases most years.
But when viewed as a share of the economy, state General Fund spending has decreased significantly in the past several years. In the 14 year span between FY 98-99 and FY 12-13, Nebraska Personal Income grew at an average rate of 4.4 percent. General Fund appropriations have averaged 3.6 percent growth in that same period. This lag has led to a nearly 11 percent drop in state spending as a share of the economy. (Figure 1)
Impact on K-12 education
The Appropriations Committee’s proposed 5 percent average annual growth for the Tax Equity and Educational Opportunities Support Act (TEEOSA) – which the state uses to fund K-12 education — will halt a long decline in support and slightly reverse the trend.
TEEOSA funding will be far from being fully restored, however, as it will remain about 9.6 percent below the FY 98-99 to FY 12-13 average, and about $78 million below the biennial funding level called for under current law. TEEOSA funding is now at its lowest level as a share of the economy since the formula was implemented in 1990.
General Fund K-12 appropriations decreased as a share of the economy by 21.4 percent from FY 98-99 to FY 12-13. As state funding has decreased, school districts have become more reliant on property taxes. Final data for FY 12-13 are not yet available, but property taxes increased from 44.8 percent of school budgets in FY 00-01 to 48.4 percent in FY 11-12.
Effect on higher education
The Appropriations Committee recommendations include a 4 percent average annual increase for higher education funding. This would not be enough to reverse the decline in General Fund higher education support as a share of the economy.
Between FY 98-99 and FY 12-13, General Fund higher education appropriations declined 20.7 percent as a share of the economy.
Transportation and infrastructure outlook
The Appropriations Committee budget shows that a sales tax diversion from the General Fund will help increase state transportation and infrastructure funding by about 9.8 percent per year.
This will be a significant boost as expenditures on Nebraska’s roads and other infrastructure declined 15.8 percent as a share of the economy between FY 98-99 and FY 11-12.
Implications for Health and Human Services
General Fund appropriations for the Department of Health and Human Services (HHS) would grow 6.2 percent per year in the Appropriations Committee budget, somewhat faster than the 5.7 percent average from FY 98-99 to FY 12-13.
Within HHS, Medicaid and the Children’s Health Insurance Program (CHIP) spending would grow 10 percent per year, while the rest of HHS would grow 2.5 percent per year.
It is important to note that much of HHS, particularly Medicaid and CHIP, is federally funded, so the General Fund is only part of the picture. Federal and state policies interact to determine overall spending on these programs, and oftentimes a General Fund decrease is offset by a Federal Funds increase, and vice versa. For example, Nebraska received nearly $330 million in federal stimulus funds for Medicaid, which reduced the amount of state money needed to fund the program during the recent recession.
We do not have historical appropriations data from Federal Funds and Cash Funds but expenditures data show that in FY 11-12 total HHS spending from all funds as a share of the economy hit its lowest point since at least FY 98-99, declining about 3.5 percent overall during that 13-year time period.
Effect on local governments
It is unclear exactly how the Appropriations Committee budget recommendations would affect local governments such as counties and municipalities.
Local governments likely would see some additional roads funds due to the sales tax diversion mentioned above, as well as increased insurance premium tax revenue as a byproduct of federal health reform.
From FY 00-01 to FY 12-13, support for counties and municipalities decreased 33.6 percent and this has contributed to local governments becoming more reliant on property taxes. (Table 1) Property taxes on average account for a 19.7 percent share of Nebraska county and municipality budgets as opposed to 16.7 percent in FY 00-01.
The largest shift to property taxes is at the county level where property taxes now account for an average of 36.7 percent of county budgets, up from 30.2 percent in FY 00-01. The majority of county budgets are used to fund roads, public safety and health care.
Tax code issues drain revenue
A crucial aspect of the budget picture is that the state is limited by the amount of revenue it has to spend and Nebraska’s outdated tax code has hindered the state’s ability to generate funds needed to support state priorities.
The state’s tax code, which hasn’t undergone comprehensive reform since the 1960s, was designed in a goods-based economy. This means the sales tax doesn’t apply to most services, which are a large and growing part of today’s economy.
The state also lacks the ability to collect all it is owed in internet sales tax. In total, Nebraska loses between $550 million and $650 million a year in untaxed services and internet sales.
The state’s ability to support its General Fund budget priorities has been further drawn down by a recent income tax cut as well as the aforementioned roads funding diversion.
Reasons for optimism
The state’s revenue picture brightened at the recent news that Nebraska Economic Forecasting Advisory Board predicted a $53 million increase in its 2013-15 biennium revenue projections as well as a one-time $125 million windfall for the state’s Cash Reserve Fund – or “Rainy Day Fund.”
Also, the state likely will conduct a comprehensive review of its tax code this interim. This could lead to a more modern tax code that better keeps up with today’s economy.
These developments could help stabilize Nebraska’s revenue and put the state on better footing to adequately fund key budget areas like education and health care, potentially reducing reliance on property taxes. This would be a move toward better opportunities for all Nebraskans and would help fortify the foundation upon which our state and its strong economy is built.
A note about our methodology: When measuring state budget trends as a share of the economy, Gross Domestic Product (GDP) is the most comprehensive measure and would normally be used if possible. However, we do not have official projections for Nebraska GDP growth into future years. For this report, Personal Income was used instead of GDP because official projections are available. Personal Income constitutes about 80 to 85 percent of GDP, and in Nebraska has grown slightly slower than overall GDP. We also prefer to use actual expenditures data when possible, but to directly compare the Appropriations Committee budget to previous years, it was necessary to use historical appropriations data. We only have historical appropriations data for the General Fund at this time. Therefore, in the case of Transportation and Infrastructure spending and Health and Human Services spending, which both rely heavily on Cash Funds and/or Federal Funds, it was necessary to refer to historical expenditures data to put the committee’s proposed appropriations in context, though appropriations and expenditures are not directly comparable. Ultimate expenditures tend to be slightly lower than appropriated amounts.
 When evaluating historical trends in state revenue or spending, an often-used measure is share of the state economy, i.e. Personal Income or Gross Domestic Product (GDP), to put the budget trends in perspective compared to changing state needs.
 All references to funding as a share of the economy in future years are based on the Appropriations Committee final budget recommendations and projected Personal Income growth rates as presented to the Nebraska Economic Forecasting Advisory Board on April 25, 2013.
 Because most funding for this area comes from Cash Funds, the data in this section refer to General and Cash Funds combined.
 We do not have the Cash Funds appropriations data necessary to make a direct comparison of historical trends to the budget proposal. The numbers here refer to expenditures for FY 98-99 to FY 11-12, and appropriations from FY 12-13 to FY 14-15.
 Recovery.Nebraska.Gov, Nebraska State Government – Total ARRA Expenditures – As of June 30, 2012.
 Local budget data from the Nebraska Auditor of Public Account’s office website are only available from FY 00-01 to FY 12-13.
 Note: the total line on Table 1 is a weighted average. Source: Nebraska Auditor of Public Accounts local budget data.
 Estimates of revenue lost to untaxed services that are considered feasibly taxable range between $450 million and $500 million; see for example Bill Lock, Memo Re: LR161, LR166, & LR 97 (Committee on Revenue: December 2009). The state’s share of approximately $118 million in lost state and local revenue to untaxed online sales is about $98 million; see National Conference of State Legislatures, Collecting E-Commerce Taxes: An Interactive Map.
A sign of Nebraska’s strengthening economy came from the Nebraska Economic Forecasting Advisory Board on Thursday as it predicted a $53 million increase over February’s 2013-15 biennium revenue projections.
The board also anticipated a $125 million increase in the state’s Cash Reserve Fund – or “Rainy Day Fund” due to a one-time increase in personal income tax receipts, a phenomenon that this Rockefeller Institute report shows many states will experience this year.
This means the Nebraska’s Cash Reserve – or “Rainy Day Fund” — is expected to hold $571 million once the FY 12-13 revenues are finalized, amounting to about 14 percent of the state’s budget.
The Cash Reserve Fund acts as a savings account that helps the state pay its bills when the economy slows. Once the forecast of expected revenues is complete, any tax receipts that come in more than that forecast are automatically deposited into the Cash Reserve Fund.
Similarly, if revenues are less than the forecast, money is automatically transferred out of the Cash Reserve to make up the difference. The Legislature also can transfer money from the Cash Reserve with a majority vote.
The Government Finance Officers Association (GFOA) recommends that governments keep a reserve balance equal to at least two months – or 16.7 percent — of their General Fund budgets in cash reserves.
The Cash Reserve reached 15 percent of the budget in 2007, which allowed the legislature to draw down reserves in order to keep service cuts smaller than they otherwise would have been.
While there are good reasons to be optimistic about Nebraska’s economy, history tells us the state should strive to keep its cash reserve at or above the recommended 16.7 percent level to weather future rainy days.
We’re excited to get out on the road next month to share our research with various organizations in Chadron, Alliance, Ogallala, North Platte, McCook, Kearney, Fremont and Columbus.
Below we’ve listed our presentations that will be open to the public. We’d love to see you if you’re able to attend any of these meetings:
- Monday, May 6 – 8 a.m. Chadron Area Chamber of Commerce gathering. Country Kitchen, 10th Street and Hwy. 385
- Monday, May 6 – 11 a.m. Alliance Rotary. Newberry’s, 402 Box Butte Ave.
- Tuesday, May 7 – Noon. McCook Rotary. Purple Moon Cookery (1505 North Highway 83)
- Wednesday, May 8 – 7 a.m. Kearney AM Rotary. The Alley Rose, 2013 Central Ave.
Plans are in work for us to visit more cities over the summer and into the fall. We’ll communicate more about these visits as details are confirmed.
We look forward to the tour and we hope we can meet up with some of you while we are on the road.
Below is a memo we sent to Nebraska State Senators on Tuesday morning regarding Medicaid growth. We completed the memo as a request from Sen. Jeremy Nordquist, who asked that we evaluate the historical growth rate used in this DAS budget division chart.
OpenSky Policy Institute has not taken a position on the issue of Medicaid Expansion, however, we regularly receive and honor requests such as the one submitted by Sen. Nordquist in an effort to provide data for informed debates on policy issues.
Please feel free to contact us with a request if we can help provide data related to tax and budget policy and we will do our best to assist.
We have included the full text of our memo to Sen. Nordquist below.
Date: April 15, 2013
To: Senator Jeremy Nordquist
From: OpenSky Policy Institut
Re: DAS Budget Division chart on Medicaid/CHIP growt
This memo is an attempt to respond to your request on April 12 regarding the accuracy of the DAS Budget Division’s chart predicting Medicaid growing at an annual 7.8% growth rate over the next 25 years. While Medicaid/CHIP growth is very difficult to predict, we believe that this chart overstates the size and average growth of Medicaid/CHIP.
The DAS Budget Division shows Medicaid growing from its current 16.7% of the General Fund to over 35% 25 years from now. An alternate measure of growth using all funds, however, would have Medicaid shrinking to around 12%. The real future growth rate is likely somewhere in between.
7.8% Medicaid/CHIP growth rate is likely exaggerated:
For several reasons, the 7.8% annual Medicaid/CHIP growth assumed in the DAS chart appears to be exaggerated. The 7.8% growth figure is based on the FY91 – FY13 period. FY91 was just before a significant increase in Medicaid/CHIP spending that was largely due to programmatic expansions, not normal cost growth.
General Fund Medicaid/CHIP expenditures grew 56% from FY91 to FY93, and the 40% increase in FY93 is the largest single-year increase ever, a clear outlier. This growth was likely fueled predominantly by policy changes in the early 1990s that expanded Medicaid coverage.
A number of other programmatic changes were made over the following years, many of which also increased Medicaid spending beyond “normal” growth, but none of these changes caused spending growth as dramatic as the increase in FY91-FY93. Notably, the Children’s Health Insurance Program (CHIP) was created in 1997.
The graph below shows Medicaid/CHIP spending as a share of the total budget under several different growth scenarios. It is based on alternative assumptions that attempt to address the exaggerated growth noted above.
Each of these alternatives is based on actual historical Medicaid/CHIP expenditures and, where available, official cost estimates for the required and optional Medicaid expansions. The growth rates used in the alternatives below are calculated using only actual expenditures, to avoid mixing appropriations and expenditures. For FY13 to FY15, the Legislative Fiscal Office is projecting that appropriations for the existing Medicaid/CHIP program will grow by 10.3% on average. Those projections are included under all three alternatives below, after adjusting to account for the fact that Medicaid/CHIP appropriations tend to be higher than what is actually expended.
Alternative #1. Medicaid/CHIP grew 5.8% on average from FY93 – FY12, a period which excludes the programmatic expansions in the early 1990s but includes other expansions, such as the creation of the CHIP program in 1997. Also, FY93 and FY12 represent similar points in time relative to national economic cycles, as the country was in the early years of post-recession recovery in both cases.
Medicaid/CHIP would grow from 17% of General Fund spending in FY12 to about 24% in FY38.
Alternative #2. The average annual Medicaid/CHIP growth rate over the last decade, FY03-FY12, was 4.5%. This time period had fewer programmatic changes in a more recent decade.
Under these assumptions, Medicaid/CHIP would grow slightly slower than the rest of the budget.
Alternative #3.The growth rate over the last ten years in Medicaid/CHIP spending from all sources, arguably a more comprehensive measure of average Medicaid/CHIP spending growth, is only 2.7% per year, which would cause Medicaid/CHIP to shrink relative to the rest of the budget.
Future Medicaid/CHIP growth is impossible to predict as it is dependent on a number of variables, including future policy decisions and utilization. However, 7.8% growth appears to exaggerate likely growth.
 Nebraska DHHS, Nebraska Medicaid General Information, pp. 5-8, http://nlcs1.nlc.state.ne.us/epubs/H8900/S001-2007.pdf
Tax subsidies and other tax expenditures take money from the state’s coffers just as appropriations do and a bill advanced by the Legislature on Thursday brings that fact more to the forefront of the state’s budget process.
LB 629 – a bill by Sen. Danielle Conrad – would require Nebraska governors to include with their budget proposals, Department of Revenue reports on the state’s subsidy programs and other tax expenditures, such as those that were targeted for elimination under LB 405 and LB 406.
A move toward transparency
This is good news for Nebraskans because the bill – which advanced with a 39-0 vote — will give lawmakers a more complete budget picture on which to base their decisions. It also is a step toward transparency in regards to the billions the state spends each year on tax expenditures and subsidies.
While tax expenditures cost the state revenue just like appropriations, they are not reviewed in the same manner. In fact, after they are passed into law, they are rarely reviewed again. This means they continue whether they benefit the state or not.
Measure has been successful elsewhere
The side-by-side reporting of tax expenditures and appropriations is a measure that other states – including Vermont — have enacted to help monitor spending through the tax code – a task many states struggle to carry out.
Earlier this year, the legislature’s Performance Audit Committee released a report that found Nebraska has no good way to know if the millions it spends on subsidy programs actually work.
More progress on the subsidy front
More hope for transparency comes in the form of LB 612, a bill by Sen. Paul Schumacher that calls for the Department of Revenue to appear at a joint public hearing before the Revenue and Appropriations Committees and present on various tax expenditure and subsidy reports. LB 612 is on the Legislature’s debate agenda for this afternoon.
OpenSky also testified in favor of LB 612, which like LB 629, received unanimous committee approval.
Nebraskans can take heart in both bills as they are steps toward a system that helps make sure the money the state forgoes is money well spent.
Download an updated copy of our budget and tax primer, “Looking for Clarity: An Overview of Nebraska Budget and Tax Policy.”
The easy-to-read primer – which was updated recently with the most current state fiscal date — takes the confusion out of Nebraska’s laws and tax codes and distills it into a concise, manageable summary of how Nebraska collects and spends funds.
Looking for Clarity offers an unbiased look at Nebraska’s budget. OpenSky has combined information regarding the budget process, state spending, state revenue, and tax expenditures in one place. Helpful visuals and real-world examples illustrate where taxpayer dollars go.
You also can visit this page to learn more about the primer and about some web extras.
Listen to MP3s of audio transcriptions of the 2007 Burling Commission report below.
Audio of the 1987 Syracuse Study will be added in the near future.
Both tax study reports would be referenced by the Tax Modernization Committee created by LB 613, should it be passed by the Legislature.
We will let you know when the Syracuse Study audio is available for download.
- Introduction and section 1: Summary of Commission Findings and Recommendations
- Section 2: Demographic and Geographic Information
- Section 3: The Overall Nebraska Tax System
- Section 4: The Nebraska Property Tax
- Section 5: The Nebraska Sales Tax
- Section 6: The Nebraska Corporate Income Tax
- Section 7: The Nebraska Individual Income Tax
- Section 8: Nebraska State Tax Administration
- Five steps toward a better tax reform debate
A big take home from the report released Thursday by the Center on Budget and Policy Priorities is that states that were able to thrive after cutting their income taxes had something to fall back on to replace lost revenue – namely oil and natural gas.
Surging energy prices brought billions into gas- and oil-rich Oklahoma, New Mexico and Louisiana. Revenue from gas- and oil-production taxes offset funds these states lost from the deep income tax cuts they enacted in the 2000s.
Three other states — Arizona, Ohio and Rhode Island — slashed income taxes in the 2000s and their economies suffered. They didn’t have oil and gas to fall back on.
Experience around the country clearly shows that tax cuts do not produce economic growth. So if you want to cut taxes you better have a backup revenue source to make sure you can pay for education, transportation and the other building blocks of job creation.
At last check, Nebraska – where talk of income tax cuts is underway — is not home to major oil or natural gas reserves. Nor does the state have a thriving tourism industry, which is another resource states lean on to offset lost income tax revenue.
So unless the next Great American Oil Field springs up near McCook or Disney World moves to Chadron, income tax cuts in Nebraska likely would force the state to raise other taxes, cut vital services – or both.