Nebraska’s Surging Tax Revenues Should Accelerate Reforms

Nebraska’s Surging Tax Revenues Should Accelerate Reforms

What to do with Nebraska’s surging tax revenues is a problem every policymaker would like to face.

Nebraska legislative leaders have already pointed to the best solution. Senator Lou Ann Linehan, who chairs the Revenue Committee, argued that the surplus revenue “has to go back to the taxpayer.” The best way to do that, Sen. Linehan pointed out, is to accelerate income tax cuts that were enacted in LB 873, which was signed into law in April 2022.

Nebraska’s Tax Revenues Continue to Surge

Nebraska’s revenue forecast has once again been revised its revenue projections upwards. Nebraska’s Economic Forecasting Advisory Board increased the state revenue forecast from July 1, 2023 – June 30 2025 by $1.8 billion, putting the 2-year revenue forecast at just over $13 billion. Nebraska’s incredible revenue surge, coupled with spending discipline, creates a structural surplus that can be used to buy down tax rates.

Personal income has grown strongly in Nebraska, contributing to the state’s growing tax receipts. Nebraska’s personal income was up 8.5% in the second quarter, the 5th strongest of any state. Strong global demand for agricultural commodities and manufactured foodstuffs have bolstered Nebraska’s income growth. This income growth fuels tax revenue growth, which in turn allows lawmakers to accelerate tax rate cuts.

LB 873 phases in cuts to the top individual and corporate income tax rates over the next five years as follows:

  • Current: Individual income tax: 6.84% Corporate income tax: 7.50%
  • January 1, 2023: Individual income tax: 6.64%; Corporate income tax: 7.25%
  • January 1, 2024: Individual income tax: 6.44%; Corporate income tax: 6.50%
  • January 1, 2025: Individual income tax: 6.24%; Corporate income tax: 6.24%
  • January 1, 2026: Individual income tax: 6.00%; Corporate income tax: 6.00%
  • January 1, 2027: Individual income tax: 5.84%; Corporate income tax: 5.84%

These rate cuts, combined with the exclusion of social security benefits from taxable income, will result in a nearly $520 million annual revenue reduction once fully phased in. Of the total annual income tax revenue reduction, nearly half will be phased in by the end of Fiscal Year 2024-25.

In contrast, the Forecasting Advisory Board adjusted Nebraska’s revenue forecast upwards by approximately $900 million per year for the next biennium budget. This leaves sufficient fiscal space to accelerate the income tax cuts that are currently scheduled to occur after Fiscal Year 2024-25, and instead have them phase in for the next biennium budget. The result is that Nebraska’s income tax rate will be reduced more quickly, which is an important step for providing tax relief and competing with surrounding states.

Lawmakers can also deliver greater property tax relief by expanding and accelerating a property tax reform from LB 873. The law amended Nebraska’s Property Tax Incentive Act to create a new refundable income tax credit for community college taxes paid, which is separate and in addition to the income tax credit for K-12 school taxes paid.

The annual value of the tax credit for community college taxes paid is as follows:

  • Tax year 2022: $50 million
  • Tax year 2023: $100 million
  • Tax year 2024: $125 million
  • Tax year 2025: $150 million
  • Tax year 2026: $195 million

Total community college property tax collections were $250 million in 2021, according to Department of Revenue data. Thus, once fully phased in, the new tax credit for community college taxes paid will be equivalent to 78 percent of total collections from the most recent year of property tax data.

Put Nebraska’s Surging Tax Revenues to Good Use

The new credit can be enhanced and simplified for better property tax reform. The state can use the same money for the credit along with a $60 million supplement from state surpluses to directly eliminate community college property taxes altogether, and then fund the colleges from state funds going forward.

Eliminating the community college property tax would simplify the property tax system and cut the state’s total property tax burden by 5.3%, all else being equal. That would be a solid property tax achievement in any year. Furthermore, property taxes could be reduced by even more through comprehensive tax reform coupled with changes to K-12 school funding.

Nebraska’s property tax and income tax are the least competitive elements of its tax code. Strong revenue growth gives policy makers the opportunity to deliver tax relief by cutting income taxes more rapidly, and by eliminating a property tax altogether.

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