Economic Forecasting Board projects higher state tax receipts
The Nebraska Economic Forecasting Advisory Board met today and increased the forecast for the expected tax revenue the state will receive during the 2020-2021 fiscal year.
While this was one of the regularly scheduled meetings, this meeting had a completely different mood and focus due to the uncertainty surrounding the pandemic and recent legislative changes.
For starters, there was an extensive discussion from the Department of Revenue on tax withholding amounts. Simply put, withholding is the amount an employer takes from employees’ wages and pays directly to the government as a sort of credit against the income taxes the employee will owe. Because the federal relief legislation added a bonus to the unemployment payments many people received, the state had more than the normal amount withheld from paychecks, causing revenues to be much higher than normal.
Then there was a lengthy discussion on all the major items impacting Nebraska’s General Fund revenue for the upcoming fiscal year. Below is a table used during the meeting. Here you can see all the impacts on the state’s revenue, why this forecasting meeting lasted much longer than normal, and also included an extensive conversation surrounding all these impacts.
Tax filing deadlines were extended as a result of COVID-19 and for those counties impacted by the 2019 flood, so many Nebraskans were able to file later than the normal April 15 deadline. Other factors considered are the CARES Act tax conformity, which created tax reductions for employers and workers hurt by the pandemic over three years impact, and legislative changes, including the new property tax relief credit.
After this explanation, there was a deep dive into how the new Property Tax Incentive Act works, which is a state income tax credit program. The biggest takeaway is that the new property tax program will not be as transparent to document in the budget because it functions through a tax refund.
For example, the property tax credit relief fund created in 2007 is a direct transfer out of the General Fund to a cash fund where the money is then distributed. Since it is appropriated by legislators, that is easy to see and track in the budget. Education funding through the TEEOSA formula is also easy to see because it shows up as an increase or decrease in spending in the Education section of the budget. The new Property Tax Incentive is not technically considered spending, because it is an income tax refund for property taxes paid. Thus, it will show up as a tax refund on the revenue side, but not as an expenditure on the budget side.
To make it easy, it is treated the same way business incentives are treated. A business pays taxes, but then turns in their credits for a refund of their taxes paid. When the state is calculating its revenue, it takes the gross revenue from all taxes and then subtracts the refunds for the net tax revenue figure. The net taxes are what the state can spend on programs.
Now, the most interesting part of the whole forecasting meeting was how they arrived at the current fiscal year’s numbers. Normally, each member of the forecasting board submits their prediction for each major tax revenue stream and then the board votes on which figure they think is the best compromise. They use the predictions from IHS, Moody’s, the Nebraska Department of Revenue, and the Nebraska Legislative Fiscal Office as guidance for their prediction. However, this year with all the uncertainty and major items impacting the state’s revenue, they decided to just take the simple average of all these estimates.
Overall, it was a very interesting meeting and it highlights that many current legislative priorities are dependent on how much revenue the state collects in the years ahead.