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Key senator says rosy state finances call for accelerating tax breaks

LINCOLN — A key state lawmaker said Thursday that she’s aiming to accelerate tax breaks passed this year, in light of a glut of excess state cash reserve funds.

That would mean that phased-in reductions in state personal income and corporate taxes could happen sooner, along with the gradual elimination of state taxes on Social Security passed during the 2022 legislative session.

State Sen. Lou Ann Linehan
State Sen. Lou Ann Linehan of Elkhorn
(Courtesy of Unicameral Information Office)

“We are collecting more money than we need, and it has to go back to the taxpayer,” said State Sen. Lou Ann Linehan of Elkhorn, who chairs the Legislature’s Revenue Committee, which guides state tax policies.

“It’s a good year to be a senator,” she said.

Meanwhile, a Lincoln-based think tank that monitors state tax policies said the excess funds should be used for “strategic and systematic” investments in housing, child care, mental health care, rural broadband and transportation, and that using temporary revenue surpluses for permanent tax cuts is fiscally unwise.

Prudent investments

“Prudent state investments in these areas — as opposed to additional tax cuts for the wealthy and corporations — could help more hardworking Nebraskans enjoy ‘The Good Life,’ ” said Rebecca Firestone of the OpenSky Policy Institute.

The comments came after an annual report on state tax receipts and anticipated spending was presented to a panel of state lawmakers by Keisha Patent, who heads the Legislature’s Fiscal Office.

That report indicated that the state tax receipts for the fiscal year that ended in June were 18.7% higher than projected, which followed a 13.5% increase in 2020-21. The growth was described by Patent as “extraordinary.”

Cash reserve well above requirements

The growth, the report projected, would push the state’s cash reserve to $1.9 billion more than required by fiscal year 2024-25. That is 21% above the required amount in the state’s “rainy day fund.”

By the end of the subsequent two-year budget cycle, which ends in 2026-27, the cash reserve excess is projected to grow to $3.28 billion.

This spring, the State Legislature passed a package of tax cuts which included dropping the state’s top income tax rate from 6.84% to 5.84% over five years and phasing out state income taxes on Social Security payments by tax year 2025.

Linehan said it would be “easiest” to use the excess funds to accelerate the already passed tax cuts, which also include a gradual reduction in state corporate income taxes and a tax credit on property tax payments to support community colleges.

Harder to cut property taxes

What’s politically harder, the senator said, is reducing property taxes, which are levied locally by school districts, cities and counties.

In recent years, state lawmakers have opted to increase state tax credits provided to Nebraskans against what they paid in property taxes.

But Linehan said she would rather see changes in state aid to K-12 schools to lower property taxes. That, she added, would probably require the Legislature to build in a “safety hatch” for funding local schools in the event state tax revenues tanked. The lack of a guarantee of state aid during hard times has been among the sticking points for education groups about proposed changes to the TEOSA formula.

Down cycle ahead?

Linehan’s proposals are likely to inspire alternatives. During the 2022 session, Omaha Sen. John Cavanaugh proposed returning the state’s excess cash directly to Nebraskans, in the form of rebate checks.

Patent, in comments to state senators Thursday, cautioned that Nebraska’s fiscal fortunes run in cycles, and the state is just now coming off four to five years in a row of excess tax revenue. So, she said, the cycle would favor four to five years ahead of lower-than average revenue.

Patent said she also built in inflationary increases in state spending for operations and salaries in her projections.

Linehan said she credits departing Gov. Pete Ricketts for holding the line on state spending proposals and Sen. John Stinner, the term-limited head of the Appropriations Committee, for conservative budgeting.

OpenSky, citing a new national report, said earlier this week that if Nebraska enacted a refundable state child tax credit of $2,800, it would cut the state’s child poverty rate in half and benefit between 219,000 and 389,000 Nebraska children.

That would be a “powerful” aid to working families, the institute said.

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