Strong revenues give Nebraska fuel for more tax reform

Strong revenues give Nebraska fuel for more tax reform

A gusher of tax revenues poured into Nebraska state coffers in April, creating an unexpected revenue bump for the month when most Nebraskans file their annual tax returns. Revenues were strong across the board, with a surge in personal and corporate income taxes more than covering a slight underperformance in sales tax revenues. Nebraska’s surprisingly strong revenues indicate that the state’s economic performance likely came in better than expected compared to when revenue forecasts were made.

Gov. Pete Ricketts heralded the news as more evidence of Nebraska’s economic success, pointing to business investment and great-paying jobs as driving factors behind strong revenues. Furthermore, Ricketts argued “These surplus revenues paved the way for historic tax relief in the 2022 legislative session. Our ongoing financial strength sets the stage for even more tax relief down the road.”

Indeed, the easiest way for a state to cut taxes is to generate strong tax revenues that allow lawmakers to trim tax rates against that strong growth. Such an approach of lower tax rates rewards Nebraskans for their hard work in expanding the state’s economy, and thus growing the state tax base.

Nebraska’s net revenues (after refunds are deducted) were more than $375 million above expected in April. Sales tax revenues came in just $1.5 million below expectations, while individual income taxes were a stunning $311 million above expectations, and corporate income taxes were another $51 million above projections.

The April revenue surge improves Nebraska’s year-through-April totals. Net total receipts through April are $516 million above fiscal year expectations. Individual and corporate income tax revenues are the primary cause of the revenue surge.

Robust revenue growth means that Nebraska’s recent tax reductions, codified in LB873, can phase in smoothly without causing revenue disruptions. Some of the tax cuts take effect in future years when revenues will be even higher than they are now. Nebraska can consider additional rate reductions if revenues continue to outperform. In fact, lawmakers can make rate reductions an operative feature of the state tax code by creating permanent tax triggers.  Such a policy triggers automatic tax rate reductions in fiscal years when certain revenue conditions are met. Alternatively, ongoing efforts for tax reform can allow Nebraska to quickly reduce its uncompetitive income tax rates.

Tax rate cuts are the appropriate response to robust revenues. Furthermore, lawmakers can improve the tax code by reforming the property tax base and making school districts less dependent on property tax revenues. Nebraska’s property tax credit programs can be leveraged to achieve a large-scale buy-down of school property taxes. In addition, Nebraska can broaden its sales tax base to make its sales tax code fairer and more neutral, and use the resulting revenues to further reduce its income tax rate.

It’s not too early to begin planning out the next steps of tax reform. Strong state revenues create more fiscal breathing room, which will allow Nebraska to reduce tax rates again. Structural tax reforms are best coupled with net tax cuts to ensure taxpayers see lower tax bills on the economic activities Nebraska seeks to encourage—earning a paycheck or investing in property or a small business.

Tax reform is an ongoing process, and every year brings the opportunity for more accomplishments. Indeed, states like North Carolina and Iowa have reformed their tax codes by making iterative progress over many years, with some years marked by big chunks of tax reform and other years marked with smaller bites. Nebraska policymakers can continue towards a more competitive tax code by coming back to the tax reform table as soon as revenue growth allows.

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