Nebraska issued $112 million in tax refunds in December

Nebraska gross tax revenues for the month of December were overall very strong. Every category was above forecast for the month except for gross personal income tax, which was 3.4%, or $7.6 million, below forecast.

When we look at the fiscal year net revenues, Nebraska remains ahead of projections. The state is currently 7.9% or $209.8 million above forecasted projections for the fiscal year (July 1, 2020 – June 30, 2021).

• Net Sales and Use taxes are 10.7% above forecast
• Net Individual Income taxes are 7.3% above forecast
• Net Corporate Income taxes are 2.6% above forecast
• Net Miscellaneous taxes are 3.7% above forecast

However, December’s tax refunds are worth noticing. For the month, they were 35%, or $29 million, above the forecast, placing the state just slightly below its overall revenue forecast for the month. For the fiscal year as a whole, refunds are exceeding forecast figures by 1.4%, or $7.2 million.

Simply put, a tax refund is a reimbursement to a taxpayer. This normally happens in the spring when taxpayers paid too much in state taxes, or purposefully had more of their pay withheld from their paycheck. However, other than those that file quarterly, most taxpayers have not filed their returns yet. That leads one to assume that the refunds in this scenario are more than likely from the state’s economic development programs.

At the state’s revenue forecasting meetings in Lincoln, the committee often discusses how to forecast refunds. This is an extremely difficult task because companies can earn credits through the state’s multiple economic development programs, primarily for the sales and corporate income tax. They can keep these credits and turn them in at random times that best suits their specific business situation. While this is good for the company, it can make it challenging for the state to forecast or predict precisely when this will impact the state’s revenue.

The reason why refunds are important is because they reduce the available revenue the state has to spend or use for tax cuts. For example, if the state has more refunds than anticipated, that could push the total revenue picture into a shortfall.

In public finance terms this is called “spending through the tax code” or tax expenditures. Tax expenditures are special provisions in the tax code that allow taxpayers (individuals or corporations) to exclude a specific amount of gross income or deduct a certain amount from their final tax bill. Functionally, tax expenditures are the same as direct government spending.

For example, from a budget perspective, it makes no difference whether Nebraskans can lower their taxes by deducting a portion of their income for a specific purpose or whether the state simply provides a check for a percent of their taxes paid each year. Both approaches effectively increase government spending and are offset by other taxes or reductions in government spending.

Given the current situation with COVID-19 and the associated economic impacts from the directed health measures, Nebraska is in a very good situation from a revenue standpoint. However, it is always important to look at all the information, which includes refunds.