Nebraska’s economy may be experiencing an unsustainable period of growth due in large part to an influx of federal funds, OpenSky Senior Analyst Craig Beck said during a recent OpenSky/Nonprofit Association of the Midlands budget briefing. This puts the state at risk of having to make major budget cuts in the future if legislators cut too much revenue this session, Beck said.

The state’s revenue picture is in stark difference to the one senators faced just a few years ago, when any bill that needed an appropriation was almost guaranteed to fail for lack of funding. Media reports show the state has $453.6 million for new legislation this session. The question, however, is whether the picture is going to stay rosy, meaning we’re in an economic boom, or grow dark because the state is in a “fiscal bubble” in which our revenues are being inflated due to factors other than strong economic growth, Beck said.

For a number of reasons, including the $24 billion in federal relief money that’s flowed into the state since the pandemic began, the latter scenario may be more likely, Beck said.

A large chunk of this – nearly $16 billion – was through the CARES Act, which pushed stimulus directly to both residents and businesses and helped prop up state’s sales tax receipts, Beck said. The next largest piece – nearly $6 billion – came through the American Rescue Plan Act (ARPA), the bulk of which has already been distributed. The Legislature will decide how to spend the final $1 billion but will need to wade through $3 billion in requests before doing so. Unless the funding is distributed directly to Nebraskans, it’s unlikely to have the same economic impact as the CARES Act funding, Beck said.

The magnitude of federal dollars that have come into the state in such a short period of time is partly what leads some fiscal experts to believe Nebraska and other states are, in fact, in a fiscal bubble, Beck said. This is supported by a few other indicators, including inflation and a shift in consumer buying away from services and toward taxable goods – both of which will boost sales tax receipts – and a strong stock market.

If we are in a bubble and it bursts, revenues could drop off precipitously, particularly if lawmakers reduce future revenues by passing major tax cuts this year, Beck said.

You can watch the full webinar here and download Beck’s presentation slides here.