The Nebraska Impact of Federal Fiscal Reforms

Federal fiscal reform will have layers of impact upon states like Nebraska. From taxes to tariffs to entitlements, the highly touted “Big Beautiful Bill” will preserve some elements of America’s fiscal formula while reforming others. Nebraska lawmakers ought to keep an eye on the relevant options on the table and be prepared to respond appropriately. 

First, some realism is in order. Nebraska lawmakers cannot solve a problem when the problem has not yet been defined, and Nebraska’s legislature will almost certainly adjourn before the federal fiscal package passes this summer. Therefore, while it’s possible to anticipate some federal changes, others will need to be addressed in the Spring 2026 legislative session. To that end, Nebraska ought to consider scheduling interim committee work to take in the federal changes and prepare Nebraska’s 2026 response.  

Taxes 

The National Taxpayers Union (NTU) has produced a fantastic state-by-state analysis of the impact of the expiration of the 2017 Tax Cuts and Jobs Act (TCJA).  

The TCJA was enacted in the first year of President Trump’s first term and cut the tax burden across all income brackets. The primary tools for tax reduction were rate cuts across income levels combined with an expanded standard deduction. These reforms, along with a variety of other business provisions, will expire at the end of 2025 if they are not renewed, which would result in: 

• Halving the federal standard deduction 

• Reducing the federal child tax credit 

• Reintroducing higher federal tax brackets 

• Lowering the federal estate tax threshold 

• Eliminating key business tax benefits like federal Section 199A and full expensing 

That’s where NTU’s analysis comes in. The NTU finds that Nebraska will be one of the top-10 most affected states if we reach TCJA expiration on January 1, 2026. Nebraskans will face an average federal tax increase of $2,443 per filer.   

On the other hand, Nebraska lawmakers ought to also monitor any successful TCJA renewal, because a renewal will likely look different from the status quo. For example, the tax treatment of tips and overtime could change, which will impact state revenues if Nebraska conforms to such changes. Nebraska is already phasing out the taxation of social security benefits, which is another federal change under consideration.  

Nebraska ought to adopt 100% bonus depreciation for new capital expenditures in machinery and equipment, and be prepared to adopt federal provisions for bonus depreciation for manufacturing facilities. Furthermore, Nebraska ought to cease taxing Global Intangible Low-Taxed Income (GILTI), which is overseas income that should never be part of the state tax base.  

Tariffs 

There is not clarity on whether new tariffs will be a part of the federal reconciliation package, nor on what the final tariff levels will be. However, it is a safe bet that tariff rates will be significantly higher under President Trump. 

Tariff hikes tend to invite reciprocation or another form of backlash. While President Trump argues that he is trying to right-size the treatment of U.S. exports, and there is substantial evidence that foreign markets discriminate against U.S. products and companies, Nebraska lawmakers nonetheless ought to prepare for higher foreign tariff rates on Nebraska exports. 

State lawmakers cannot solve international disputes, but they can help cushion the blow to Nebraska industries. For example, the industries most exposed to trade disputes are exporters such as agriculture and manufacturing. These industries have a significant footprint in Nebraska. A pro-growth state agenda that would have a disproportionate positive impact on these industries would include: 

• Repealing tangible personal property tax 

• Permanent full expensing for capital expenditures in machinery and equipment 

• Elimination of smaller property taxes, such as Educational Service Unit (ESU) property taxes, and continued caps and reductions of existing property taxes. 

• Ending the state taxation of GILTI 

Entitlements 

Finally, the “Big, Beautiful Bill” reconciliation package might include a rollback of the Obamacare Medicaid expansion to able-bodied adults without disabilities. As we previously wrote, Nebraska must prepare for the prospect of such Medicaid reform, because it would leave Nebraska taxpayers on the hook for hundreds of millions in new state costs.  

If such federal changes are passed, Nebraska and other states will have little choice but to roll back their Medicaid expansion programs, or otherwise take on hundreds of millions in new annual costs. The prudent step is to prepare to roll back the program expansion. 

As Nebraska lawmakers finalize their path to a balanced budget, they know that the work will continue over the interim. And that work includes not only improving upon state fiscal reforms, but also preparing for the reshaping federal fiscal environment. The legislature will finish their work soon, after which the work on responding to federal reforms will begin.