Four key indicators of a state’s fiscal health include employment levels, inflation rates, tax revenue receipts and the balance of its cash reserve. In all four areas, Nebraska finds itself in a relatively strong position and this has contributed to some sources ranking our state high in terms of fiscal health. Moody’s Analytics for instance ranks Nebraska 7th in terms of the ability to hold up to state fiscal stress. An example of fiscal stress is the ability of a state to weather economic uncertainty.
One area where Nebraska is particularly strong is our cash reserve, which is presently at unprecedented levels. State cash reserves are often compared to savings accounts and are intended to help states weather economic downturns. Nebraska’s cash reserve leaves the state well positioned to manage future economic uncertainty.
Some have talked about drawing down the cash reserve to pass new legislation this session. There are some important factors to consider regarding the use of cash reserve dollars and why maintaining a robust cash reserve is beneficial for the state.
Reserves buffer against volatility
A key reason cash reserves are a main factor in fiscal health is that they protect states against shifts in revenue. Economic changes, emergencies, natural disasters and tax cuts at the state and federal levels, among other things, can contribute to volatility in state revenues. In fact, a 2022 Pew Charitable Trusts paper identifies tax cuts as a prominent cause.
2022 tax cuts bring considerable uncertainty
Nebraska lawmakers passed the largest tax cut in state history through LB 873 in 2022. Once fully implemented, the measure will cause annual revenue losses of about $1 billion, which is about 18% of our current state budget. The Pew paper notes that having a robust cash reserve is a key way to protect states from having to slash funding for education, health care and other vital services because of the revenue losses created by tax cuts.
Furthermore, during the debate on LB 873, key members of the Appropriations Committee said a key reason Nebraska could move forward with the tax cuts was because the cash reserve was strong and could help absorb the revenue impact the tax cuts may cause.
Important to keep reserve’s purpose in mind
The state’s cash reserve is often referred to as the “rainy day fund,” which means it’s there to help the state get through tough economic times without having to make dramatic cuts to schools, health care and other services vital to a strong economy. Appropriate uses of reserve funds also include one-time expenditures to help meet pressing state needs.
The fund is not designed to help support ongoing costs, such as tax cuts. While our robust reserve did help set the stage for LB 873’s tax cuts, it’s possible that the bill’s revenue losses could result in a depletion of our cash reserve and leave future lawmakers faced with having to cut services or increase taxes and fees to balance the state budget when revenues lag in the future.
Other fiscal uncertainties also make a robust reserve important
High inflation rates, changes in consumption patterns and stock market volatility have some economic experts, including the Urban-Brookings Tax Policy Center (TPC), projecting weaker economic growth in the coming months and this also could impact state revenues. Furthermore, concerns have been raised about the potential impact of federal tax changes on state tax codes when aspects of the 2017 Tax Cuts and Jobs Act expire in 2025. These factors also could significantly impact state revenues and further highlight the need to maintain a robust cash reserve.
Prudence can help maintain our fiscal strength
While Nebraska is fortunate to be in a relatively strong fiscal position right now, many factors exist that could significantly impact our state’s finances in the future. Policymakers this session can help protect our state’s fiscal position by being prudent in policy choices and this includes working to maintain a robust cash reserve to help us buffer against future fluctuations in state revenue.