The forecasting board’s revised estimate for the current fiscal year ended up $145 million higher than the average projection made by the national forecasting experts and incorporates a one-time income tax bump caused by pushing the filing deadline into the current fiscal year. As a result, it should be met with caution, said Sen. John Stinner and former Sen. John Kuehn at a webinar hosted by OpenSky Thursday after the forecasting board meeting.

Some members of the board disagreed as to whether the national economics organizations, namely, IHS Economics and Moody’s Analytics, sufficiently accounted for the impact of the Paycheck Protection Program (PPP) stimulus in the state and whether — and to what extent — it might offset the other economic damage caused by the pandemic. This disagreement prompted a few “to go above and beyond” those organizations’ numbers, “and in some cases pretty extreme[ly],” said Kuehn, who sits on the board. Corporate income tax receipts were thus forecast to come in more than 20% higher than any of the estimates presented.

Individual income tax receipts also were a significant contributor to the optimistic forecast, as delaying the tax filing deadline caused a one-time $255 million bump in July receipts. This bump is “propping up” the baseline forecast, Stinner said, and the consequences will be “kicked down the road,” said Kuehn.

That’s one reason why Stinner isn’t as concerned with the current year as he is the outyears, which will be calculated using that artificially inflated baseline and that he expects will result in a shortfall of more than $500 million. This level of shortfall would require the Legislature to “cut expenses or generate some form of revenue,” he said. “It certainly brings pause to the conversation of passing any large bills that have future impact on expenses and/or revenue.”

It also calls into question whether the state has a sufficient “cushion” going into such a situation, Stinner said. The cash reserve is below recommended levels and there’s considerable uncertainty as to what will happen when “the real economy” has to take over once the various federal stimulus programs, which have injected significant amounts of money into the economy, end.

Overall, the forecast decreased revenue compared to the February forecast by $50 million, which leaves the Legislature with $90 million “for the floor.” Stinner, however, is concerned that the Legislature may “spend money that will probably be adjusted — or could be adjusted” because of all the uncertainty surrounding the pandemic and economic downturn.

Kuehn agreed, saying policymakers should look at what the forecasting board did yesterday “with an asterisk” because there was not unanimous consensus across the forecasting board with regard to the optimistic outlook. Those decisions are not supported by the IHS and Moody’s expert analysts, Kuehn said.

“The real potential exists that this overly optimistic viewpoint to the tune of another $80, $90, $100 million [will] not materialize” and that the board will have to downgrade the forecast when they meet in October and have “to reduce another $10, $20, $30, $40 million out of this current fiscal year,” Kuehn said. “I would be very cautious and set careful priorities about how to spend that money on the floor.”

“Understanding what happened today rather than just looking at the bottom line is important,” he added, because “this is certainly a case where how the sausage was made is really important for the policy decisions that are going to be made by this legislative body over the course of the next couple of weeks.”

You can watch a recording of the webinar here.

Hearing to discuss decoupling from CARES Act changes set for Monday

In another legislative fiscal policy development, a Revenue Committee hearing has been scheduled for Monday, July 27 at noon for AM 3093 to LB 1074.

The measure would have the state decouple from portions of the CARES Act tax changes. The hearing will be held in Room 1525 of the State Capitol. Read more about the CARES Act tax changes and their implications for Nebraska in this recent policy brief. Also learn more about the CARES Act’s excess business loss tax provision, which creates a high-income tax break that would reduce state revenues by $187 million over three years, in this recent policy brief.