Evaluating Nebraska’s Tax Collections with Tom Henning

Tom Henning, a Kearney-based food industry executive, serves on the Nebraska Economic Forecasting Advisory Board, which projects how much tax revenue the state will bring in each year. He joins Jim to discuss the latest revenue numbers, how the board uses economic data to make its estimates, and what current economic trends suggest may be up ahead for Nebraska. A transcript of this discussion is available below.

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Mentioned on this episode:

Nebraska tax revenues for October 2021 show continued growth

Forecast calls for $475 million boost to Nebraska tax receipts

Episode Transcript

Jim Vokal: Nebraska’s finances look strong heading into 2022, with a record cash reserve, healthy revenues coming in on a monthly basis, and a historic amount of federal funding heading the state’s way. But is the state due for a course correction once those funds taper off, and what impact will the highest inflation since the 1990s have on how far the money goes for government and the private sector?

My guest today is a good friend, Tom Henning, the President and CEO of Cash-Wa Distributing in Kearney. He’s also a board member of the Federal Reserve of Kansas City’s Omaha Branch and serves on the Nebraska Economic Forecasting Advisory Board, which is responsible for assessing Nebraska’s revenue situation. Tom, thanks for joining me on Nebraskanomics.

Tom Henning: Thank you for having me, Jim.

Jim Vokal: All right, the Forecasting Advisory Board is familiar to followers of Nebraska’s fiscal situation, but it’s safe to say, I think, that most people don’t follow the subject too closely. Can you maybe start off our conversation and share with listeners what the Forecasting Advisory Board does and what impact it has on the way our government works here in Nebraska?

Tom Henning: The Revenue Forecasting Board is a nine-member body facilitated by the Department of Revenue and the Legislative Fiscal Office in Lincoln. Out of those nine members, five of them reside in the outstate, four in the Lincoln and Omaha area. And we’ve got a number of bankers on the board, we’ve got an economist who was a professor of economics at UNO on the board, and the rest are business people. And there’s a couple that have interest in agriculture, so it’s kind of a well-rounded board, kind of represents the whole state of Nebraska. I would say this about the members of the board, they’re all passionate about their function and their role with the Revenue Forecasting Board. Four are appointed by the governor and I think we have six-year terms, and five are appointed by the Legislature, and so they’ll roll off.

I’ve been reappointed once, and the function of the board is to really project and forecast the income for each biennium. And we forecast out for basically three bienniums. The two bienniums that are outside the current biennium, you know, it’s probably like shooting fish in a barrel—although when it comes right down to it, it’s pretty accurate in what we forecast.

We forecast the revenue sources for Nebraska, which are individual income tax, corporate income tax, sales tax, and then the miscellaneous taxes. And the miscellaneous taxes are things like cigarette tax, fuel tax, alcohol tax, and some miscellaneous things.

When we get together the process in establishing those numbers is rather astute. And the whole process was really well thought out years ago. And I might say this also. When Nebraska, in 1866, applied for statehood, we were rejected by then-President Johnson, only because we weren’t going to give women the right to vote. We reapplied in 1867 and we were accepted, and we had to present a constitution in there. And then, there was basically what amounts to a balanced budget amendment, and the only debt financing Nebraska could do is they could borrow up to $100,000, and that’s only if South Dakota invaded Nebraska. And you look at history back then, that must have been the time of the Indian Wars and everything.

So basically, we’ve had a balanced budget amendment in there, and we haven’t been able to do any debt financing, which is fine. If every state would be in that condition, even the federal government, I mean, look at the condition we would be in.

What happens prior to a forecasting meeting is we will get enough information, and I’ll consume three to four hours in digesting that before each meeting. We’ll get two revenue forecasts that come from two national forecasting agencies, they’ll forecast for the United States, and then they’ll forecast for the state of Nebraska. And then the Department of Revenue and the Legislative Fiscal Office have economists on their staff, and they’ll put forecasts together.

So when we get to a forecasting meeting, we’ve actually got four forecasts in front of us, and it’s kind of surprising how close they are to one another. But you know, they will differ along the line, and so our process is they will then take an average of those four forecasts, and that’s really our starting point when we get to the forecasting process. The board members, and incidentally on our board, the board actually runs the meeting. We have a chairman and a vice chairman, and so we will go around and share information about the economy before we start the forecasting process. The Legislative Fiscal Office and the Department of Revenue will give us updates on where we’re at with respect to the present forecast, and so we know exactly where we’re at, and if there’s any anomalies out there—and of course the biggest anomaly has been, you know, basically the COVID support funds that have come to most of every citizen in the United States.

So then what we’ll do is we’ll take each forecast, once our discussion is over, and everyone will have a chance to chime in on their opinion on the economy, and then we’ll vote on each one of those categories for each biennium. And it’s not always unanimous. In fact, we’ve probably this last year when we would vote on the revenues, this is the first time basically we’re pretty close to projecting what revenues are going to be. We might always be a little bit under, but we missed the forecast on all three meetings this last year. One meeting, we were off $185 million, another meeting we were off just short of $300 million, and because no one could predict or project the monies that were going to come into Nebraska from the PPP programs and all the other programs that were out there, which was good, I think our original forecast for this biennium started out to be right around $5 billion. And as you can see, it was [$5.3 billion], I think, was the number that it came in at.

And so anyway, that’s the whole process. We meet three times a year, and in one of those meetings, we certify the forecast for the current biennium and that’s the whole process. And like I say, it’s rather astute, and that’s our job. Then the Legislature is actually locked in to being able to spend no more than what the forecast is, which is which is a good deal.

Jim Vokal: Yeah, I think that’s important that your activities on the board obviously determine the amount that’s available for expenses, and also quite frankly, what might be available down the road for additional cash reserves or tax relief, as well.

Tom Henning: There’s a couple of other areas of input that we have from the Department of Revenue, the Legislative Fiscal Office. If there’s been a piece of legislation that has been recently passed that’s going to have revenue come in, they’ll project that. That will sometimes up the forecast there, or if they’ve got a plan or project that’s coming in they’re going to need money for, we’ll take that [into] consideration when we do the forecasting. So it’s really a pretty astute process.

Jim Vokal: Sure is, and [in] October your board projected a $475 million increase in General Fund receipts, and if that pans out, income, sales, miscellaneous taxes will bring in, as you said previously, about $5.3 billion this fiscal year and $5.5 billion next year. Can you maybe expand upon what are some of the factors that you took in account that contributed to this new estimate?

Tom Henning: Well, one of the things we get on a monthly basis is a copy of the current receipts for the previous month, and they have been going up every month. I just got October’s here not too long ago, and it’s kind of interesting, because we break that forecast down by month, and we were right on target for October of what we’ve forecasted. So that’s kind of impressive. We look at the outlook for the economy in Nebraska by sector, we’ll look at agriculture, we’ll look at retail, we’ll look at manufacturing in the various sectors there.

I probably make 10 or 15 phone calls a month into the sectors that we’re taking a look at to find out what their experience is and how they’re doing, accordingly. We look at the unemployment, and of course our unemployment rate is super low, so you know, that can have an impact. Proposed legislation—or legislation that’s been passed—looking at the impact on that, maybe from a prior year, prior to, and obviously, what happens with the federal government, what they’re discussing and talking about, you know, can have an impact.

And if there’s a major program that is in discussion, I mean as far as something that the state is going to invest in, we’re always taking a look at that too. So really, [we] turn over every stone that we can before we start the forecasting process.

Jim Vokal: I’m sure in your October meeting inflation was a hot topic. You’re in the food industry, Tom, and a lot of people are watching prices within your industry. How could this spike in inflation impact not only Nebraska’s ag economy but the state’s financial picture going forward, from your perspective, and the advisory board?

Tom Henning: I think from the perspective of Nebraska, it’s going to probably increase the revenue stream, and I think there will be an increase in the revenue stream probably up through—in my personal opinion—up past May or June next year when the tax returns are filed. The economy in Nebraska has really, really, been good. The farm economy has really been outstanding. Commodity prices are the highest they’ve been in a number of years. The yields, there was very little storm damage out in the area that I’m familiar with this year. So the production was at an absolute high. We’ve got examples in Custer County, Dawson County, Buffalo County, obviously, of corn yields being up close to 300 bushels per acre. We had ideal growing conditions this last year, so the economy is from an agricultural standpoint, very good. Also have to say this though, and the Department of Revenue can’t give us an exact number, but the amount of income or revenue that comes in from the agriculture sector is not significant, and part of the reason is, if a farmer makes money or a rancher makes money, they’ll go out and buy some equipment, right? But on the other side of the coin, they’re paying their fair share of taxes when you look at the property tax load they’re carrying. So one can’t be critical and say “well you guys don’t pay any income tax,” well they’re paying a bundle in property tax.

So having said that, historically if you look at agriculture, if they have a darn good year income-wise, the next year, the year following, and maybe two years following, their input costs go up. And I’ve heard farmers talking about the fact that they paid $200 a ton for fertilizer this year, and I’ve heard it’s going up anywhere from $800 to $1,200 a ton. It’s a natural gas derivative, so I think…farm income is going to be good for the next maybe three, four years. The demand for food worldwide is way up. Our export volume is way up, but I think they may have a little bit of a cost pinch when it comes to the inputs. The other thing is the supply chain is really disrupted. The shipment of parts—I’ve got a couple of friends that have had a combiner or a tractor down for a couple weeks out of harvest, because they couldn’t get it get a part for it. And then the transportation aspect is certainly not looking good.

But I think for the next probably three years, I think they’re going to have a great economy that’ll be positive for Nebraska. I think the other thing that’s really positive, and I heard an agronomist who’s fairly well known make the speech, he said you know, we are the breadbasket of the United States. And I truly believe it. You know, we stand on the Ogallala Aquifer, and we’ve got water. In 2012, we were the number one corn-producing state in the union. So, I mean, we’re really blessed along that line. But the answer to the question, I think ag is good this year. I think they’re going to be able to bank some money, and I think for the next couple of years looking at the prospects out there, I think it’ll be real good. But I think they could get pinched because of inflation, and they could get pinched because of probably the supply chain issues out there, understanding that they have really gone two years without replacing a lot of equipment, and their equipment is a couple years older. And we look at that in the transportation industry too, so, I think the two wild cards are going to be inflation, and I think the other one is going to be the supply chain, that’s going to be significant. But I’m optimistic about what’s going to happen there. There’s a heck of an impact on our business right now.

Kind of throw in a couple things here—our average inflation rate—we do a cost index report weekly, and our inflation rate with our product mix. 20% of our items account for 80% of our sales. Our inflation rate for probably the last 10 weeks has been right at 11%, and a lot of it has to do with transportation. We get imports out of Southeast Asia every month. The inbound freight rate on a container of pineapple, mandarin oranges, that comes out of Asia has gone from $1,350 a container up to $16,000 a container. Our freight rates, and this is just in this country, on trucking off the west coast, out of the northwest, has gone from about $2,400 a truck up to $4,500 a truck. So, there’s a lot of inflation that is built in there. Our inbound fill rate from our vendors here in this country was typically 99% pre-pandemic. It has dropped down to 80% for the last 13 weeks. So, I think I think everyone, every business person, and I think ag are going to feel the same thing that we’re feeling—inflation and supply chain issues.

Jim Vokal: Appreciate that, Tom. As we discussed, your board sets the financial benchmark for a lot of the legislative work here in the state. And I think it almost seems mysterious how the forecasting board determines whether or not the economic conditions in the state are going to result in more or less revenue coming in, and by how much. Are there any lessons that you have drawn from being part of the process, either for how to assess the likely revenue picture, or other aspects of the forecasting process?

Tom Henning: I guess there are, although I’m really surprised how close we’ve been able to hit the forecast through the years. I think the thing that we learned, whenever you’ve got some heavy government subsidies coming in…that can certainly throw a monkey wrench in coming up with some accurate numbers as to what the forecast is. You know, when they announced…that they were coming across with the PPP money, and some of the funds they had. The result of that was the banks have had a ton of money, and not all that money was spent. Probably not all that money was needed. And the plan and process they used to distribute it probably was hit and miss. I mean, everyone could get a piece of that action. So there was a lot of money that flowed into the state. I’m gonna guess that if we ever hit a crisis again, and there’s a free flow of money like that, it’s going to be pretty difficult to forecast there. There’s enough history and there’s been enough communication with the Department of Revenue as to the monies that are coming in, really as opposed to what is forecast, and it’s the anomalies in the Legislature based upon new plans, new projects, spending that you know will have an impact that you may not recognize or realize right off.

…and I think one thing about the board members, I think they’re pretty well-read. And the forecasters can really hit the nail on the head. They can look at it globally. I say globally, at least nationally. And they take a lot of things in consideration. So, yeah, the lessons we’ve learned is really the anomalies to the forecasting process really come from state government and from the federal government in plans, programs, legislation, and that kind of thing. I think that’s the big thing.

Jim Vokal: All right, one final discussion point. We’re coming into the 2022 Nebraska legislative session, and so much of your work on the advisory board is the basis of what senators aspire for and don’t aspire to do in Lincoln in any given year. What advice do you have for senators looking at your current revenue projections, and how would you encourage them to use the forecast generally while they’re in office, especially with many new senators that are going to be hitting their stride in 2023.

Tom Henning: I guess if I had a conversation with a senator, I would say this: Nebraska is a great place to live, it’s a great place to work, raise a family, it’ll be a great place to retire. Making Nebraska even a better place for that should be the ultimate goal of that legislative body, and that segues into other plans and programs you and I are very much familiar with. And I think they need to support legislation that takes care of the basic needs and that which will grow our workforce, grow our population, and our economy, which will increase our tax base, reduce our reliance on property taxes, and do the other things that can leverage all of our other strengths in this great state. And I think one of our goals obviously and you’re on the same boat—or I’m on the same boat you are—is to do those things. And, you know, the in-migration of people into Nebraska is stronger than what we think.

We had a population growth, and we’ve got to continue down that road. And we’ve got create jobs, we’ve got to have affordable housing, we’ve got to have the opportunities. Because this is really a great place to live and we really excel. And I think because of the number of things that have happened in Nebraska, you know, pick out the Med Center for example. Pull out the healthcare community what they’ve done with healthcare and everything. There are many other projects out there and they need to be supportive of that, and I think if we have an inkling somewhere along the line that there’s a plan or a project out there that would help accomplish this goal in this mission, we certainly need to create an advocacy for it and lobby those legislators accordingly. I think that’s a whole key.

Jim Vokal: Any cautionary advice for them when they’re looking at the numbers as it relates to cash reserves or tax reform that needs to have pay-fors going forward?

Tom Henning: The cash reserves are basically a result of—if we miss a forecast and the revenues exceed what the forecast was—those automatically go into the rainy day fund, into the cash reserve, and that’s how that probably all starts. We’ve witnessed times in the past where there has been motions and actions to move things out of the cash reserve. I think the cash reserve fund myself, knowing things we could do in Nebraska, is healthy to have. How much? You know, I wouldn’t speculate a number there. But if there’s something really dynamic that could impact what we’re trying to do in Nebraska, I think it’s important to have some money there that we can draw upon, and that would be my opinion. It’s like you or I. You got a little money in the bank, you got a little in the cash side, you may have a little bit of investments there that are designated for future events, one of which obviously is retirement. I think the state needs to take a similar position.

We’ve seen maybe actions that were going to be taken down the road to remove money out of cash reserves and for maybe not the most meaningful thing to the state. But I mean we’ve got a lot of challenges, we’ve got a lot of opportunities, and it needs to be an opportunity fund if nothing else for us.

Jim Vokal: Tom, thanks for your service on the forecasting board, and thank you today for joining me on Nebraskanomics.

Tom Henning: Thank you, Jim, I appreciate what you guys are doing down there.