Nebraska's Bleak Revenue Picture

January, 2018

Lincoln -- This is going to get interesting: Nebraska state government revenues are falling just as the legislature is coming into session with pressure from voters to do something about local propery tax relief. But Nebraska sales and income tax rates are already comparatively high, so there is not much hope for those sources to be able to lessen reliance on property taxes to support local governments. There is serious talk of a citizens' 2018 ballot initiative to limit property taxes, with or without replacment of lost revenues with other sources.

Nebraska's agricultural economy has been in trouble for a few years, which is the fundamental problem causing lagging state government revenues. Now there is another problem: the enacted Trump tax legislation may cut revenues further to the extent the state uses the federal base and definitions for its own state income tax.

Unless, of course, the state rates are adjusted to bring in the same amount of revenues as before, or the state tax system is further decoupled from the federal system (resulting in extra paperwork for taxpayers). There is also the possibility that Nebraskans may not benefit that much from the Trump tax cut because of the loss of deductions.

Currently there is mostly silence coming from the Nebraska statehouse about revenues, masked by brave talk about cutting spending to match revenue declines. But Nebraska is not a big spending state at either the state or local level, so there is not much room to cut unless the idea is to adopt a Brownbackian approach, the theory of which is that tax cuts propel economic growth such that state revenues increase and no spending cuts are necessary. That nonsense has flopped spectactularly in Kansas. Nebraska also has big bills to pay for long-time neglect of its prison systems.

The only areas in which Nebraska ranks relatively high in spending are roads and higher education. Given the state's geographic expanse, the spending on roads is not unusual. What is a little surprising is that the state has earmarked part of its sales tax base to pay for roads rather than relying on the fuels tax. This has eroded the base that might otherwise have been used for property tax relief. Thank you, Senator Deb Fischer.

State spending on higher education, measured either on a per capita or percentage of personal income basis, has historically been high in Nebraska. The reason for this is that Nebraska has high aspirations in this area but not the population base for it, compared to other states. The state university can argue that the spending is a good investment: Nebraska's medical school and associated complex is the largest employer in Omaha; the Institute of Agriculture in Lincoln is large but given the importance of agriculture to the state, its expenditures are hardly ever on the chopping block. The question for the Institute, given the trouble Nebraska agricultural economy is in, is whether it could be doing something more to turn that sector around.

There are good options for Nebraska to deal with its revenue problems. Other states have acted or are looking at the following:

• Enforce collection of sales taxes on Internet transactions.

• Tax sweetened beverages instead of exempting them, both to bring in revenue and to cut expenditures for health issues related to their consumption.

• Adjust state corporate taxes upward in recognition of their large federal corporate tax cuts, still providing a net tax reduction.

• Re-structure state income taxes so as to protect Nebraskans from the loss of deductions under the Trump tax act and thereby leave more money in Nebraska. This would work by reducing or eliminating state income taxes, which from 2018 onward are not fully deductible in the federal income tax system, and replacing them with payroll taxes, which are deductible for employers. Simultaneously employees' pay would be reduced by the amount of the payroll tax, as they have already been relieved of state income taxes. Several states will be exploring this option, especially states like Nebraska that do not have much fiscal capacity to deploy the state tax base to reduce local property taxes, and resent losing state and local tax deductibility for the purpose of rewarding lower tax states with even lower federal taxes.

Will Goveror Ricketts lead on any of this? Not likely. He has not shown much interest in how Nebraska's farm economy might be improved; he has shown little imagination on how property taxes might be relieved (for example, by earmarking revenues from new sources for property tax relief, which voters might go for); he is not inclined to criticize the shortcomings of the Trump tax act; his current interest in the university is not to prod it to be more of an engine for economic change, especially in agriculture, but to suggest to his political donors that conservative students are being mistreated. This may signal that the governor is preparing to try to overcome the revenue problem with spending cuts and to scapegoat others when the state legislature inevitably is unable to deliver on his promises.

I hope I am wrong about the governor and that he will step back from a misguided strategy that will only hurt the university and the state (although much of the UNL faculty apparently think it is too late for that). Rather, he should be engaging the university positively to work with it in turning around Nebraska's failing agricultural economy.