State officials said Thursday that Nebraska appears on track to add an additional $122 million or so to its cash reserve fund because of an unexpected increase in individual income tax revenues.

The influx was included in a new and higher projection of state tax revenues issued by the state’s revenue forecasting board.

Read the full article online.

Nebraska loses an estimated $98 million[1] 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.

[1] National Conference of State Legislatures, Collecting E-Commerce Taxes: An Interactive Map

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.

Spending has declined relative to the economy

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.[1] 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.[2]

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[3] 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.[4]

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.[5]

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[6] 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[7]) 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.[8]

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.

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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.

By Renee Fry

There’s a saying, “If you don’t like the weather in Nebraska, wait five minutes.” This seems particularly true in the Cornhusker State these days.

The fiscal climate also can change quickly, and the Legislature’s Appropriations Committee made prudent recommendations this week that would leave the state better prepared to weather budgetary swings.

The committee suggested that — rather than cutting taxes or enacting more spending measures — an additional $53 million in projected revenue for the 2013-15 biennium go into the state’s rainy-day fund. That revenue, combined with a $125 million windfall into the fund thanks to what experts say is a “one-time surge” in capital gains tax receipts, will help push the rainy-day fund balance to $625 million.

Read the full article online.

Let’s hope that lawmakers take his advice.

The merits of having a sizable rainy day fund were demonstrated during the recent “great recession.”

Nebraska ended the fiscal year in summer 2008 with a record cash reserve of $564 million.

The state was able to dip into that reserve during the next few years when revenue slowed, rather than cutting programs or raising tax rates.

Read the full article online.

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.

LINCOLN, Neb. (AP) — Investors who were spooked by Washington’s fiscal-cliff showdown have created an unusual, $125 million cash windfall for Nebraska state government, budget officials said Thursday.

The board that estimates state-government revenue predicted that Nebraska will receive the additional money from personal-income taxpayers, who sold their investments last year and paid capital gains taxes amid fears that federal rates might increase.

By law, all of that projected revenue will flow into Nebraska’s cash reserve — leaving the state with about $571 million in its rainy-day fund this year. The fund serves as a savings account to help the state pay its bills when the economy slows.

Read the full article online.

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, 10^th 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.

As Nebraska legislators consider reforming the state’s tax system, the leaders of a non-partisan fiscal research group say tax policy needs to be modernized.

Renee Fry, executive director of the Open Sky Policy Institute, says common sense is sometimes forgotten in how the state taxes various goods and services.

“We tax a night at the movies but we don’t tax a day at the spa,” Fry says. “We tax rental cars but we don’t tax using a limousine with a driver. There are all of these inconsistencies in our tax code because our tax code is based in the 1960s.”

Read the full article.