Last month, the Nebraska Economic Forecasting Advisory Board raised the revenue forecast by $161 million for the current fiscal year and $101 million for the next year.
That forecast led Gov. Pete Ricketts to say that the $262 million, over the next two years, will allow property tax relief to “move full steam ahead during the upcoming legislative session.”
But, according to Renee Fry, executive director of the Open Sky Policy Institute, lawmakers shouldn’t count their chickens before they’re hatched. She said when it comes to dedicating that windfall in tax revenue, lawmakers should consider the consequences of pledging the money to property tax relief before it is actually collected.
“The forecast was raised pretty significantly from the prior forecast,” Fry said.
That led to calls to use the projected increase in revenue for property tax relief, she said. Nebraska Farm Bureau’s president, Steve Nelson, said the increase in revenue “only bolsters the opportunity for the Legislature to provide property tax relief for Nebraskans.”
“While some will want to use additional dollars for other purposes, it’s vital these dollars be dedicated to lowering property taxes for hard-working Nebraskans,” Nelson said.
But Fry and her organization are urging lawmakers to “use a little caution” when allocating those additional revenue dollars for property tax relief.
“First of all,” she said, “it is projected revenue growth.”
Using historical data of the October revenue forecasts, Fry said there is a pretty good chance that the forecast will not be accurate.
“If you look at the last 12 years, it has been off more than $100 million in 10 of those 12 years,” she said. “Just because those revenues are projected, it doesn’t mean they will actually materialize.”
What will happen, Fry said, is that the additional funds will automatically go into the state’s cash reserve unless the Legislature passes a bill that directs it out of the cash reserve.
“Part of the issue is that the next session (of the Legislature) is a short session,” she said. “April is the big month for revenue receipts when most people pay their taxes. There is a huge surge in revenue in April, but the Legislature will be out of session by the end of the month. If they plan on that $161 million being there, they will have to borrow it from our current cash reserve and pass a bill to take it out of there, whether it actually materializes or not.”
The problem, Fry said, is that the lawmakers will have adjourned before they have a better idea at what those revenues will actually be.
In the second year of the biennium, fiscal year 2021, the board is projecting an additional $101 million in revenue.
“That $100 million will actually be available for the floor and can be used for bills, which indicates a little bit of a free-for-all,” Fry said.
She said part of the problem is that someone could introduce a bill that uses that $100 million for some spending purpose or combination of spending purposes, such as property tax relief or K-12 education.
Fry said lawmakers can obligate that $100 million and they could obligate $100 million every year in the future and “we would have a balanced budget, whether that materializes or not, because it only has to be balanced in the current biennium.”
“So, even though it is projected, it could potentially create a situation where we are using one-time revenues that haven’t been realized for an ongoing spending purpose, which could get us into trouble and has gotten us into trouble in the past,” she said.
Fry said there are a couple of problems with the forecast that were not mentioned at the forecasting board meeting in October.
“The very first thing is that the Department of Revenue said at the very beginning of that meeting that there is no recession that is built into the forecast,” she said. “Even though national forecasters are projecting a downturn and a recession as early as 2020, it has not been factored into our forecast.”
The second thing, Fry said, is that there is some thought that some of the additional revenue is due to one-time corporate repatriation dollars that are pursuant to the federal Tax Cut and Jobs Act that provided incentives for corporations to bring revenues back to the United States rather than operating offshore.
“The other thing that the Department of Revenue said is that when corporate income taxes fall, they fall fast,” she said. “Most of the significant growth in revenue that leads to that projected surplus is mostly due to corporate income taxes.”
Fry said the Open Sky Policy Institute is urging some caution for using the projected revenue to budget for ongoing property tax relief.
“The consequences are if that revenue doesn’t materialize or if it is one-time and we make permanent spending obligations, we are going to have to cut some area of the budget,” she said. “If the Legislature is making a commitment to property taxpayers that they are going to cut property taxes, they might have to renege on that if the revenue is not there.”
Another consequence, Fry said, is that Nebraska is far behind in savings in its cash reserve.
“If that $261 million materializes and we put it into the cash reserve, we still will only have 13.9% of general fund receipts in our cash reserve, and it is recommended that we have 16% in there heading into a downturn,” she said.
The path the state has taken in the past has been to put surplus revenue into the cash reserve, Fry said, and that has served the state well the last two times when there has been a downturn in the economy.
Also, she said, there are other areas of the state budget that are underfunded, such as corrections and youth behavioral programs.
While it is the easy thing to do to use the surplus for property tax relief, Fry said, there will not be any way to sustain it.
“The only way you will have any guarantee for sustainable property tax relief is to raise other taxes and use that for property tax relief, but that is harder to achieve,” she said.
Fry and Connie Knoche, Open Sky education policy director, were in Grand Island Tuesday.