A key takeaway from Thursday’s Nebraska Economic Forecasting Advisory Board meeting was that a technicality will cause LB 1107 — which was passed by the Legislature in August — to cost the state considerably more than anticipated.

The income tax filing deadline extension that was enacted earlier this year as the pandemic struck caused $280 million in income tax revenue that would have been collected in FY19-20 to be collected in FY 20-21, thereby artificially deflating last year’s revenue collections and artificially inflating this year’s revenue collections.

This $560 million revenue swing, however, triggered a provision in LB 1107 that will likely lead to an increase in a refundable income tax credit created by the bill that would not have happened otherwise.

Because of the revenue swing, the refundable income tax credit is now projected to reduce revenues by about $212 million[1] in FY 21-22 where it would have only reduced revenue by $125 million had the revenue swing not occurred. The actual cost of LB 1107 will be determined at the end of the fiscal year once actual receipts are known.

The revised forecast made by the board Thursday did reduce the budget gap lawmakers will have to fill in the upcoming biennium from about $787 million to about $291 million. However, lawmakers would have had about a $133 million projected surplus[2] as opposed to a projected shortfall had the income tax credit in LB 1107 not passed. That said, there is still a lot of uncertainty and the projections could change considerably between now and the April forecast.

Tax expenditure report hearing set for 10 a.m., Friday

The Legislature’s Revenue and Appropriations committees will hold a joint hearing today to discuss the Department of Revenue’s 2020 Tax Expenditure Report.

Tax expenditures are like spending in that they represent money the state uses for some purpose. The difference is that instead of tax revenue being collected and then spent, the money is not collected in the first place.

But while the Legislature must authorize spending every biennium, tax expenditures like the refundable income tax credit and business tax incentives passed in LB 1107 are generally only authorized once and then they take priority over funding for services like education and health care. And because tax expenditures also are not subject to the same ongoing review as appropriations, some tax expenditures outlive their usefulness and become significant drains on state revenue.

The hearing about the Tax Expenditure Report starts at 10 a.m. State Capitol, Room 1113. NET Nebraska will stream the hearing live.

[1] The refundable income tax credit increases when the most recent fiscal year’s net receipts exceed the prior year’s net receipts by more than 3.5%. NEFAB projects FY21 net receipts to be $5.286 billion, while FY20 net receipts were $4.94 billion. Under 1107, half the difference between $5.286 billion and 103.5% of $4.94 billion, or roughly $87 million, would be added to the $125 million baseline credit each year of the coming biennium.

[2] If the forecast is accurate, the income tax credit will cost $212 million in FY22 and at least $212 million in FY23. If the state received this $424 million of income tax revenue over the coming biennium, the $291 million projected shortfall would be about a $133 million projected surplus.