An important milestone in Nebraska’s state budget process takes place today, as the Nebraska Economic Forecasting Advisory Board (NEFAB) meets to set the most up-to-date revenue projections for the next couple of years, which will help decide how much the Legislature has available to spend in this legislative session. 

A history of peaks and valleys

Nebraska’s recent revenue trends have defied expectations, with record growth in each of the past two years. Current projections show revenues continuing to grow from pandemic-era highs. Revenues can, however, be volatile and a historical lookback shows that periods of revenues above the forecast are followed by periods of below forecast revenues that vary in length.

Not only have the past two years set records with respect to growth, they’ve also been the most volatile in actual tax receipts compared to the forecast set the prior year since FY 1984-85. The state also is coming off four years of actual receipts exceeding the prior year’s forecast, which, history shows, is about the maximum time Nebraska’s seen such sustained positive conditions. Since 1985, there have been some clear patterns, with a few years of receipts exceeding forecast followed by a few years of receipts lagging forecast. 

The maximum number of years the state has seen receipts exceed forecasts is five, which happened three different times. Years below forecast lasted anywhere from two to four years, and for the current fiscal year to date, receipts are 1.5% below forecast. Two of the past three down cycles occurred during a recession.

Causes of volatility

Nebraska’s receipts right now are being affected by two simultaneous factors: the continued influence of federal pandemic stimulus dollars flowing through our economy and the tax cut package from last year, which is starting to ramp up this year. 

The federal stimulus – believed to be a large part of why we’ve experienced records in the past two years – is starting to wind down. This could mean reduced revenues relative to the highs of the past two years, especially when coupled with the revenue losses from last year’s tax package and the possibility of additional tax cuts this year. 

Budget proposal insights

Meanwhile, a third of the way through the legislative session, both the governor’s and the Appropriations Committee’s proposed spending packages have been released and were the subject of a recent OpenSky Policy Institute webinar, hosted by the Nonprofit Association of the Midlands on Feb. 20 (see video below).

Both plans rely heavily on one-time federal stimulus funds to support ongoing spending obligations and tax cuts that would hurt the state’s ability to collect revenue in the future. 

Some of the main takeaways from the governor’s budget proposal include low spending growth over the next couple of years despite high inflation, significant tax cuts – on top of those passed last year – and a large boost in spending on K-12 education. These priorities largely shut out other spending, however, as the proposal leaves a relatively small amount of funds available for the Legislature to spend at its own discretion.

The Appropriations Committee, on the other hand, has higher spending growth over the biennium and leaves more money for other legislative priorities, including provider rate increases. Some agency requests, including the university system, haven’t had hearings yet, however, so some line items will necessarily shift.

Summing up

While Nebraska’s fiscal situation has been good in the past couple of years, history shows we may be headed for a rockier period, even without the combined impacts of federal stimulus ending and the revenue lost to tax cuts. These factors are critical for both NEFAB and the Legislature, especially when making decisions that will affect how much the state can raise and spend in the future.