Nebraska is one of many states experiencing a rosy revenue situation. Similarly, we are not alone in facing a slew of tax cut proposals in response to flush state coffers.
Nebraska lawmakers this session have already advanced tax-cut proposals to the second-round of debate that would reduce state revenues by about $294 million by 2026. Another tax cut bill, LB 939, is likely to be debated by lawmakers on Wednesday. The measure, which would ratchet our state’s top corporate and personal income tax rates down to 5.84%, would annually reduce revenues by $400 million by 2026.
Lucy Dadayan, a senior research associate at the Urban-Brookings Tax Policy Center, recently wrote that states should be careful about passing tax cuts based on the financial uptick as the factors causing strong revenues are likely not permanent.
“Two years into the pandemic, states are flush with cash, a vastly different picture than the 20% revenue decline suffered by states in the early days of the pandemic,” Dadayan said in the blog. “But today’s often double-digit revenue growth is not sustainable.”
Several factors, including inflation, pandemic-altered spending patterns, large influxes in federal aid and tax planning maneuvers have contributed to surges in state revenues, according to Dadayan.
These revenue surges could very well be temporary and thus policymakers should be cautious about using them as the basis for tax cuts, Dadayan said.
“With revenues soaring, many states are enacting big tax cuts,” Dadayan said. “However, this year’s large surpluses can quickly turn to shortfalls in the wake of permanent tax cuts.”
Here in Nebraska, the $189 million surplus projected for the next budget cycle in the Appropriations Committee preliminary budget[1] wouldn’t be enough to cover the cost of the bills on the second-round of debate, let alone the massive revenue reduction that would come from LB 939.
Passing these tax cuts could leave lawmakers facing the exact scenario Dadayan described. Holding off on tax cuts, on the other hand, could leave our state in a stronger position as we move out of the pandemic and, hopefully, into more normal economic times.
LB 939 is on Wednesday’s Legislative agenda and Nebraska Public Media will stream the debate on the bill live.