The governor’s budget proposal, which will be the focus of a Friday Appropriations Committee hearing, uses a transfer of money into the cash reserve to trigger an increase in the LB 1107 income tax credit while also circumventing fiscal guardrails that were essential to garnering support for the bill.

Under LB 1107, one key guardrail is that the income tax credit only grows when the state’s revenues increase by over 3.5%. Last year’s change of the income tax filing deadline triggered an increase in the credit that was based on artificial growth rather than real revenue growth.

This budget proposal again triggers an increase in the credit that is not due to revenue growth, but rather by a transfer of money into the rainy day fund this fiscal year that brings its balance to $500 million. This increases the credit by an additional $173.4 million over the biennium. This acceleration of the credit would set a new baseline of $298 million annually beginning in FY 22. Even though state revenue receipts are projected to decrease in FY 22 over FY 21, the credit will stay at that $298 million level, which, in essence, prioritizes the LB 1107 credit over funding for other state priorities like health care and education.

The budget proposal also would counteract the LB 1107 guardrail designed to maintain a healthy cash reserve. The governor’s proposal increases the cash reserve in the current fiscal year to accelerate the LB 1107 credit, but then draws the reserve down. At the end of the out-biennium, the budget proposal would take the rainy day fund to a projected level of less than 6% of general fund receipts, which is well below the recommended level of 16%.

Additionally, the proposed acceleration of the LB 1107 credit could also be problematic given the Appropriations Committee’s expedited budget timeline. The LB 1107 credit is a tax expenditure, not an appropriation, and so if the credit is accelerated, this revenue comes off the top of what lawmakers have to fund the budget and other legislation. If the budget passes before the April revenue forecast as some have discussed, and then the forecast is reduced, the Legislature could very likely find itself forced to hold a special legislative session to enact funding cuts for services that Nebraskans are depending on more than ever amidst the pandemic.

The hearing on the budget proposal begins at 9:30 a.m. on Friday. NET Nebraska will stream the hearing live.