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Sen. John Kuehn

Sen. John Kuehn

District 38

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The discussion of property taxes commonly references the taxes paid on the assessed valuation of real estate, including your home, buildings, land, and other improvements physically fixed to your property. One advocacy group and some state senators have recently been advocating for reform of the personal property tax system in Nebraska. Of the $3.9 Billion of property taxes collected, almost 6% of the total is assessed on personal property. Personal property includes all items owned that are not physically associated with a piece of real estate.

Under Nebraska law, intangible personal property–financial wealth in the form of stocks, bonds, cash, bank accounts, and contracts–has been exempt from taxation since 1967. Tangible personal property includes all other “things” owned, such as equipment. Most Nebraska taxpayers are unaware a tax exists on tangible personal property, likely because they do not pay personal property taxes.

A simple way to know if your family is impacted the personal property taxes is whether or not you prepare a depreciation schedule with your annual tax return.  Household goods, motor vehicles, personal items, and non-depreciable property are exempt from taxation. Therefore, unless you have a business, you are not paying taxes on personal property you own.

Not all items owned by a business are subject to the personal property tax.  Inventory for resale or materials used in production are exempt. In agriculture, livestock and grain inventory are not taxed. In 2015, the Nebraska Legislature passed a bill exempting the first $10,000 of taxable personal property from taxation for every business owner. All personal property owned by data centers, wind energy generators, and charities is also exempt from personal property tax.

Because the tax is assessed only on depreciable property, items are only taxed for the duration of their depreciated lifespan, which may or may not match the time of use or ownership. Unlike real estate which is valued at market rate, the value of personal property is determined by “net book value”. Items are depreciated over a period of three, five, seven, ten, fifteen, or twenty years, depending on the item. As each year passes, a depreciation factor is applied that reduces the value of the equipment over time. After the value of the item is fully depreciated, the tax no longer applies even if the property is still owned and used. Thus, the taxes paid over time always decrease for an item of personal property.

Because only property owned by business, and not even all property owned by all businesses, is subject to taxation, the distribution of personal property taxes across communities and different taxpayers is highly variable. To illustrate, neighboring farmers in the same county with similar sized operations may have very different property tax bills. A beginning farmer can qualify for an exemption of $100,000 per year for three years on their machinery. A farmer who regularly trades for new equipment will pay more property taxes than a farmer who owns similar equipment but of older age. A horse used by a ranching operation is not taxed, but an ATV is.

Similar variation is found among other businesses.  A restaurant that installs all new equipment will have a higher tax bill than a competitor who purchases used equipment. The same restaurant owner will pay less taxes over time on the same equipment as it depreciates in net book value, regardless of its functionality or potential for generating income.

As discussion about personal property tax reform continues, taxpayers must be careful to not confuse it with property taxes on their home, farmland, or improvements. Since not every taxpayer is subject to the tax, or even a majority of property tax payers, metrics based on population of a town or county such as “per capita” are of little value to the discussion.

All taxes deserve strict scrutiny and evaluation for the principles of simplicity, transparency, neutrality, and stability. Voters need to understand the nature of the personal property tax, including its application and exemptions, when deciding whether or not it is the top priority for reform among the mix of different taxes.

Advocacy groups and senators are exploring a number of different tax reform proposals for introduction during the next legislative session or possible ballot initiatives. Among the areas being discussed are changes to personal property, real estate, income, and sales taxes. Many of the proposals would involve changes to multiple taxes to balance the state budget and offset local property tax collections. As various groups begin promoting their favorite ideas, voters need to understand the full impact of each plan.

The principles of simplicity, transparency, neutrality, and stability can be applied to the various ideas to help taxpayers evaluate proposed changes to Nebraska’s current tax system. Two concepts currently being discussed involve providing refundable income tax credits for a portion of your property tax bill. One, known as the “50/50 plan”, proposes to refund 50% of the public school portion of your property tax bill, minus bonds, to your income tax liability. The other would refund 35% of your total property tax bill on your income taxes.

The use of state General Fund revenue to provide an income tax credit to offset property tax collections fails the simplicity standard. Schools collect $2.3 Billion in property taxes, including bonds. Under the “50/50” proposal, around $1 Billion of the General Fund would be refunded. Under the 35% proposal, $1.3 Billion of the $4.3 Billion currently collected by the General Fund would be refunded. Covering the refunds would require either a 25% reduction to existing General Fund programs or a 50% increase to the current total collections of either sales or individual income taxes. For a family to understand the net impact of the change to their own budgets requires calculating the increased taxes they will pay in either sales or income tax and compare it to their property tax liability. It is impossible for a family to know that impact with accuracy until after the policy has been passed and they have paid a year’s worth of taxes.

Using tax dollars collected and appropriated by the state to offset property taxes levied and spent by independent local boards fails the standard of transparency. Under both proposals, over $1 Billion of state General Fund spending would be dictated by local officials with no accountability to state lawmakers or residents in other communities. Local spending decisions made by board members in metro Omaha and Lincoln would be covered by taxpayers in District 38, while neither you nor your senator will have any influence or control over those spending choices. A clear line of sight between taxpayers and those who spend their money does not exist.

Neutrality is difficult to evaluate until full modeling of the tax shift proposed by the income tax refund proposals is completed by the Legislative Fiscal Office. It is assumed there will be a $1 Billion tax increase to fund the proposals. If applied to current sales and income tax policy, the increases will magnify any favoritism and carve outs that exist in the current system. If some existing exemptions are eliminated, the impact to any taxpayer will not be known until the specific exemptions are identified, further exacerbating the complexity of the proposals.

The long term stability of the income tax refund proposals is also an open question. The property tax crisis has been created by dramatic increases in local subdivision spending over recent years. Nothing in the proposals alters that pattern. In fact, past experience has demonstrated that increased state spending to cover local spending results in increased local spending. Both proposals set the impact on the state budget as a percentage of local property taxes levied, which state legislators have no control over. The long term stability of the state budget would be determined by the individual actions of all the local boards across the state, with no accountability at the state level. The level of the tax credit would need to be adjusted downward in a few years in order to balance the state budget if local budgets continue to grow at a rate greater than state revenues. Thus, the policy would not be stable in the long term.

Anyone who tells you a major tax change can be accurately explained in 30 seconds or less is being dishonest. In tax policy, “there is no such thing as a free lunch”. With so many tax proposals being discussed, voters will need to critically evaluate each and ask questions to understand the immediate and long term impact of the changes on their family and community.


As the legislative session approaches, the annual discussion about changes to Nebraska’s tax policy is again heating up. The traditional debate between reductions to income taxes, led primarily by corporate interests, and real estate property tax reform, led by agriculture interests, again takes center stage. This is not a new debate, as the same discussion dates back over 60 years. In 1966, two ballot initiatives were passed by Nebraska voters, one eliminating the state property tax and another authorizing state income tax. The result was the creation of Nebraska’s local property tax system, state sales tax, and the foundations of our state income tax system.

Promoting the tax discussion are a number of special interest and advocacy organizations lobbying for changes to current tax policy that support their objectives. The State Chamber of Commerce is currently on a multi-week, statewide tour of communities promoting their goal for income tax reform. Agriculture groups have been holding meetings in communities across the state proposing a number of tax shifts to reduce property taxes. Additionally, Nebraska’s two most active “think tanks”, funded by private donor dollars, have both held legislative symposiums with speakers that support their ideological views on tax policy. Marketing and media messaging from these various interest groups has dominated news and the public discussion.

Tax policy is a complex topic. A change to one tax has ripple effects that cascade through other taxes and programs. Every proposed change involves “winners” and “losers”.  That is, in absence of a reduction in taxes with a direct and equal reduction in the spending paid for by those taxes, reducing one tax means an increase in another. With every interest group lobbying for their particular constituency, it can be difficult for taxpayers to truly grasp what the impact of proposed changes will be. For that matter, it is difficult for me, as a state senator, to consistently cut through the clutter and have reliable data to get a clear picture of the total impact of proposed changes to tax policy.

As I approach tax policy proposals, there are a number of principles I use to evaluate them. Voters may find also them helpful for cutting through the political spin and assessing the merits of a tax change.  First, I look for simplicity. Many proposals involve complex transfers, calculations, and forecasts. Complexity creates opportunity for abuse of the tax code and makes it impossible for taxpayers to understand their tax liability. Second, I look for transparency. Policies that hide taxes or obscure how they are paid create a disconnect between taxpayers and how their dollars are spent. Third, I support tax policy that is neutral. Neutrality means that tax policy does not favor or punish one group or industry at the expense of another. Finally, I look at the stability of the tax policy. Wide swings in revenue create unpredictability in government services and programs.

You may notice one characteristic often mentioned in tax policy discussions is absent: fairness. The term “fair” is highly subjective and used so frequently for political spin it has no useful meaning in evaluating tax policy. A “fair” tax has become code for a tax somebody else has to pay. If the principles outlined are applied, the tax will not present an unethical burden on any single constituency.

Over the next several weeks, I will discuss the specific details of a number of tax proposals. Applying these four principles–simplicity, transparency, neutrality, and stability–we can cut through the rhetoric and politics and understand the true impact of various strategies for modernizing Nebraska’s tax system. Reasonable people can have different approaches and opinions to taxation. Nevertheless, it is important that all taxpayers have a clear understanding of how they are being taxed and why.

The need for strong quantitative, science reasoning and reading skills for high school graduates is greater today than ever before. Students who graduated in 2017 will have access to multiple forms of consumer credit, more options for healthcare, and a limitless quantity of information coming from multiple media platforms. Compared to when their parents entered college and the workforce, today’s graduates will need to understand increasingly complex financial instruments including retirement plans, insurance, and even credit cards. Improved medical technology comes with greater decision making for patients. With so much information and so many options available, the ability to carefully read and critically evaluate information is more important than ever before for making decisions for our families and communities.

Basic competency in math, reading, English, and science is not required only for high school graduates who intend to pursue a four-year college degree. Students entering vocational and skilled trades need a strong math and communication skills. All citizens, in order to be informed consumers, voters, and taxpayers, need to have competency in these skills.

Given this need, it is somewhat alarming to look at the recent results of ACT scores for 2017 high school graduates in Nebraska. It is a misconception to believe that the ACT is only valuable for students pursuing a four-year college degree. The modern ACT is far more than a memorization and recall standardized test. Today’s ACT is a sophisticated evaluation tool that assesses skill and competency in a wide variety of educational areas. Furthermore, the ACT has developed a series of metrics that effectively predict how prepared a student is for successful completion of an introductory college course using their ACT subtest scores.

College is not the best or only path for every high school graduate. However, every high school graduate in Nebraska should be prepared to have the option to pursue a two or four year degree if they so choose. While no single test or number can capture the full potential of a student, it is counterproductive to dismiss significant and well-researched data on student preparation and competency simply because it comes from a standardized test.

Of the 2017 graduating class, 84% of Nebraska students took the ACT. Of that population 99% indicated they would pursue some degree of education beyond high school, with 93% intending to pursue a bachelor’s degree or higher and 6% aspiring to an associate’s degree. Nebraskans should take pride in the high percentage of high school graduates who wish to pursue additional education and training beyond high school.

A challenge for many students in pursuing higher education is cost. Unfortunately, the 2017 Nebraska graduate performance on the ACT reveals that an overwhelming majority of them will be paying college tuition for coursework to gain competency in subjects they should have mastered in high school.

Using comprehensive data, the ACT has established baseline scores in four different areas of the ACT that predict a student will have a 75% chance of scoring a grade of C or better in an introductory college course. According to ACT data, only 28% of Nebraska’s graduates met that competency level in math, reading, science, and English. An almost equal number, 27%, failed to meet any of the readiness Benchmarks. Thus, over 1 in 4 Nebraska ACT test-taking graduates in 2017 are not prepared for college in any of the core areas.

This data is troubling for students and families concerned about the cost and affordability of higher education. Students who are not adequately prepared for their entry-level coursework will require remedial courses, for which they must pay tuition, to gain the necessary level of proficiency to be successful. If they do not catch up, success in further years of their education is less likely. Students who attempt but are not successful in college may incur student loan debt they must repay without the earnings advantage of a college degree.

“No fail” policies and grade inflation may boost high school graduation rates and improve students’ self-esteem, but they do not ensure all students will be adequately prepared to be successful citizens and have the opportunity to pursue the careers they choose. Nebraskans must expect more from their sizeable investment in public education.

In a fierce competition characterized as an “incentives arms race”, states aggressively compete against each other to recruit new companies. Companies considering expansion will pit states in a bidding war against each other, with larger and more attractive incentive packages offered to outbid other states. Among states in the Great Plains, both Iowa and Kansas are known for their aggressive recruiting offers, and South Dakota has been recognized internationally for its state support of biotechnology companies. The competition from border states ups the ante for Nebraska when attempting to attract new businesses.

I am opposed to government selectively favoring one business over another by creating inequitable tax policy. The state should not provide financial advantages to specific businesses that are not available to all. However, I also understand that Nebraska would be at a significant disadvantage compared to its neighboring states when recruiting new companies if state economic development incentives are abandoned altogether.

In my last two columns, I have discussed the complexity and challenges of Nebraska’s tax incentive programs, the largest of which is the Nebraska Advantage Act. There are practical statutory changes that can be made to help taxpayers understand what benefits they are providing to companies and their impact. Revisions to Nebraska’s suite of tax incentive programs should include simplification of the number of different programs, clarification of the intended goals of each program, collection of data that specifically addresses the intended outcomes, and creation of enrollment limits for fiscal protection.

First, Nebraska’s complex system of “advantage acts” needs to be simplified. Trying to succinctly describe Nebraska’s tax incentive programs is impossible given the diverse series of tiers, subprograms, and variations of the Advantage Act. For businesses considering growth in Nebraska this complicated system can be a deterrent. For taxpayers it is nearly impossible to see where those foregone tax dollars are going and their impact on the local economy. Collapsing the tiers into a few basic programs that meet well defined goals will be more transparent for prospective businesses and taxpayers alike.

Second, the purpose and intended outcomes of economic development incentive programs need to be clearly delineated in statute. Differences of opinion in the actual objective of Nebraska’s current programs still remain over a decade later. Specifically detailing if the tax incentives are intended to create new jobs, attract new businesses to Nebraska, encourage capital investment, promote business expansion in rural or economically distressed areas is necessary. Each of these has been cited as an outcome, but are not specified in statute. All stakeholders must be on the same page regarding the purpose of the incentive programs for them to be successful.

Third, it is imperative that the reporting requirements for companies participating in the tax incentive programs include data that is useful in evaluating them against their stated goals. As was identified in the Legislative Performance Audit of the Nebraska Advantage Act, many of the questions of importance to lawmakers, taxpayers, and business interests were unable to be answered because of lack of available data. This is a common challenge for incentive programs across the nation. Nebraska has been nationally recognized for its efforts in quantitative evaluation of the costs and impacts of its tax incentive programs. The Pew Charitable Trusts have referred to Nebraska as a “leader” in evaluation of tax incentives. We can build upon that strong foundation, especially if clearly articulated objectives are provided by the Nebraska Legislature.

Finally, establishing upper limits on the annual growth of the total tax incentives program can provide important fiscal protections for the state of Nebraska. With better data collected about the costs and benefits of the incentives, state lawmakers can set manageable, predictable upper limits regarding the size of these programs while taking into account all of the other complexities of Nebraska’s revenue and budget picture. The fiscal protections would not be used to restrict economic development, but rather to provide regular and comprehensive oversight of the net value of Nebraska’s economic development efforts.

Economic development tax incentive programs elicit strong passions among supporters and opponents alike. Regardless of current opinions about the Nebraska Advantage Act and its spinoffs, the potential value of these economic development tools cannot be dismissed. Through straightforward and practical statutory changes, Nebraska’s tax incentives can work for taxpayers and new businesses alike.

Evaluating Nebraska’s complicated and diverse tax incentives programs is a challenge. Although an accounting of tax credits and refunds earned by participating companies is straightforward, determining the impact of those incentives on the total revenue of the state and economic growth is not. Central to the difficulty in assessment is a lack of meaningful data that can be used to measure progress toward specific development goals.

In 2015, the Legislature adopted a requirement that each tax incentive program undergo a legislative performance audit every three years. Unlike a financial audit, performance audits assess the outcomes of program using concrete metrics measured toward specific policy goals. In 2016, the first performance audit report was issued. The overarching theme of the audit was the difficulty in measuring many of the stated intentions of the Nebraska Advantage Act.

A central finding of  the audit was the fact the expected standards of performance were not clearly outlined when the incentive programs were adopted. As a result, the data participating companies are required to report does not necessarily prove useful in evaluating whether or not the incentive programs are having their intended effect.

To illustrate, the Nebraska Advantage Act was promoted during debate as a program for job creation. However, the job creation required for qualification are FTEs, or full-time equivalents, not new full-time employees. Thus, a basic metric like identifying the number of new jobs created by companies through the incentive programs is impossible to determine. Companies are only required to create and report the number of equivalent positions. For example, a company could convert two part-time positions at 20 hours per week into full-time positions and count that as one full-time equivalent–even though no new position was created for a new employee. Additionally, determining how many jobs were created because of the state incentives versus jobs the company would have created through normal growth is impossible to determine using the standards for reporting required by the Advantage Act.

In light of these obstacles, a frequently cited statistic by both opponents and supporters of tax incentives, the cost per new job, is essentially meaningless. Depending on how the data is interpreted, the cost per FTE found by the performance audit could range anywhere from $24,500 to $320,000. Such a wide range makes it almost impossible to judge the merit of the current programs.

Job creation metrics are only one of the many challenges when evaluating the outcomes of Nebraska’s tax incentive programs. Many of the policy goals, such as recruitment of businesses new to Nebraska, growth of jobs in distressed areas, and the creation of high-wage jobs were not specifically detailed in the original legislation. Without intentions and objectives clearly delineated in statute, the subsequent programs do not require reporting of data or qualification of projects specific to those goals.

Significant criticism has been aimed at the cost of the incentive programs compared to legislative intentions when the programs were adopted. The original fiscal note prepared in 2005 during passage of the Advantage Act only projects the foregone revenue for the first two years following adoption. Transcripts of floor debate indicate the expected costs long term would run between $50 and $60 Million annually. While 2013 was a unique outlier, the economic model projections produced by the Department of Revenue through 2020 track close to that range. Given the challenges Nebraska has experienced with economic forecasting for revenues in recent years, the net revenue costs are not far out of line. Unfortunately, whether or not those costs are achieving the job growth, investment, and economic stimulus intended is currently impossible to determine with confidence.  

As discussion continues about changes to the tax incentive programs, it will be critical to clearly state the intended outcomes and require reporting that enables accurate and reliable assessment of progress toward those goals. At minimum, statute should change to collect better data for existing programs going forward. Accurate information is vital to ensuring full accountability of Nebraska’s tax incentive programs.


Each year the Department of Revenue issues a report detailing the specifics of Nebraska’s tax incentive programs that target economic development and business growth. The annual release of these statistics renews discussion about the value and cost of Nebraska’s incentive programs by opponents and supporters alike. In addition to the revenue calculations and economic modelling provided annually by the Revenue Department, the Legislative Performance Audit Committee, which I chair, conducts detailed evaluations of the programs in light of the policy objectives established when they were passed into law.

Tax incentive programs elicit strong responses among proponents and opponents alike. Advocates argue for their necessity, and even expansion, to recruit new business and promote job growth in Nebraska. Opponents see the incentives as lost revenue that could be spent for other government programs. Discussion of both the pros and cons of Nebraska’s tax incentive programs is muddled by their complexity. Over the next several weeks, I will use this opportunity to provide constituents in District 38 with background on the various tax incentives, the evaluations of the programs, and the policy discussion around revisions or changes to Nebraska’s business incentives.

Although commonly referred to as an aggregate group, Nebraska has multiple economic development programs that provide tax incentives. The largest of these is the Nebraska Advantage Act, which became law in 2006. It replaced prior programs, including the Invest Nebraska Act, which stopped accepting new applicants. In addition to the main Nebraska Advantage Act, several smaller incentive programs focus on more specific economic targets. These include the Nebraska Advantage Rural Development Act, the Nebraska Advantage Microenterprise Tax Credit Act, and the Nebraska Advantage Research and Development Act.

Businesses are required to apply and qualify for the incentive programs. Each program has criteria for qualification of benefits, which vary between program and tier.  The Advantage Act alone has six separate tiers, with subdivisions of some tiers. The amount of capital investment, number of full time equivalent (FTE) jobs created, and wage levels all determine eligibility for an incentive program. Depending on the program, business have between 5-7 years to attain qualification for the program, can accumulate benefits over a 6-10 year period, and can carryover and collect earned benefits for a period of time after their entitlement period. A business can participate in an incentive program for a maximum life of 10-15 years, depending on tier and program.

The tax incentives provided are also quite variable, depending on the program. Qualified businesses can receive a direct refund of sales and use taxes that are paid for the purchase of personal property and aircraft. A portion of the total investment in the business, between 3 and 15%, can be earned as an investment credit.  These credits can be accumulated over years, and used to refund additional sales taxes, offset income taxes that are due, or reimburse for property taxes paid. Compensation credits can be earned, which are determined as a percentage of the total new full time equivalent jobs created each year, multiplied by the average wage of those new jobs. Thus, more new, higher paying jobs would earn the business more compensation credits. Those credits can be used of offset income tax withholding or income taxes due for those businesses. Credits earned do not have to be collected in a single year, can but can be applied over the span of the business’s participation in the program. Certain qualifying personal property can also receive an exemption from the business’s personal property tax liability.  

As you can see, these programs defy a simple explanation and evaluation. As of 2016, 114 projects had qualified under the Nebraska Advantage Act alone since 2006. Those businesses earned $842 million in tax credits and collected $362 million of those qualified reductions. $473 million remain as outstanding credits capable of being collected in future years.  

During that same 2006-2016 time span, the qualified projects of the Advantage Act made $7.4 Billion in new capital investment and created 13,993 new full time equivalent jobs in Nebraska. At the same time, $159 Million was provided in sales tax refunds, and $5.2 Billion of personal property value was given an exemption.  

Evaluating the merits and drawbacks of these programs requires a deeper dive into the details of each specific program. In the coming weeks I will provide insight into the attempts to objectively evaluate these programs and determine whether or not they are meeting their intended objectives.

The “Mindset List” has been published every fall since 1998. Compiled by faculty of Beloit College in Wisconsin, the list details notable cultural, historical, and technological events from the year that college freshmen were born. Students entering college this fall were born in 1999, representing the last class to be born in the 20th century. They have never known a world without emojis or Humorous and written to convey the perspective of young adults entering college, the “Mindset List” provides a poignant reminder of how quickly American society, culture, and technology changes.

Although developed as a retrospective to provide a context of the past, looking back at previous Mindset Lists published over the last 19 years provides an important reminder of the need for long-term perspective. All too often policy discussions, especially those led by special interests, focus on immediate payoffs and benefits. This can come at the cost of sound, long-term policy decisions. The fate of property tax relief proposals in the last legislative session provide a perfect example of shortsighted decision making. Agricultural special interests rejected long-term structural changes to ag land valuation because it did not have an immediate effect. Sound tax policy was opposed and the long-term property tax relief for the future was lost.

Students entering college and vocational programs this fall will likely be working in jobs two decades from now using technologies we have not yet envisioned. When they began kindergarten 12 years ago, the iPhone was incomprehensible to most. Today they enter college with more technology in the palm of their hand then was available to the original Apollo astronauts when they landed on the moon. It is shortsighted and illogical for us to assume that the technologies and skills required for jobs in 2017 will be the same skills required for a successful career in 2037.

The emphasis on vocational skills and career readiness in K-12 and higher education has a valuable short-term goal and arises from good intentions. However, the dramatic changes demonstrated by the Mindset List reminds us that these programs should not substitute or crowd out an emphasis on strong intellectual and analytical skills. Proficiency in reading, strong quantitative skills, and problem-solving abilities enable and equip all students to learn and develop skills for success in their first jobs as well as throughout their careers and working life. Career readiness has become equated with a trade rather than a strong foundation for lifelong learning and career advancement.

As we seek to expand high skill manufacturing jobs and train students specifically for those roles, we must learn from the experience of our neighboring states. Communities in Iowa and Kansas have seen significant economic stress created by layoffs and plant closures. These are the very high-tech, high skill, high paying manufacturing jobs we are rushing to train students for in career academies and vocational programs. Despite having held highly technical positions, retraining for new jobs has proven costly and time consuming, in large part due to the need to remediate basic reading and quantitative skills in adult workers. The lack of a strong, comprehensive education has proven a barrier to successful reentry into new jobs.

Those of us over 40 find it difficult to comprehend that today’s young adults have no frame of reference for popcorn that couldn’t be popped in the microwave or rotary dial phones. My niece, who started kindergarten this year, will graduate high school using technologies and likely pursuing a career that does not even exist today. A comprehensive educational foundation will be vital to her future career success.  

Short-term goals and immediate policy outcomes are important. However, they should not come at the price of future disadvantage. As we begin a new school year and marvel at how “things have changed” for this generation, we should be sure we are equipping all Nebraskans with the intellectual skills to be adaptable for whatever the future holds.  


The past week the Revenue Department released the certified report for state revenue during July, the first month of the 2017 fiscal year. Tax collections were $7.6 million below the level projected in April by the Nebraska Economic Forecasting Advisory Board. This is the third consecutive month in which revenues did not meet projections since the Board lowered revenue expectations in April. This trend raises the possibility of modifications to the budget enacted during the past session that became effective on July 1st. Concluding my discussion over the past few weeks of the budget process, this week I will address how the budget can be modified after its adoption as law.

The state budget covers a two-year funding period, known as a biennial budget. Developed during 90-day legislative sessions held during odd numbered years, the budget covers two fiscal years that begin July 1 of each year. Although state dollars are appropriated to a specific fiscal year, it is general practice that funds not spent in the first fiscal year, known as reappropriations, roll over into the second fiscal year of the biennium. Adopting a balanced budget and meeting the statutory minimum reserve levels are required at the end of the two-year period, not at the beginning of the budget cycle, at the end of each fiscal year, or each month throughout.

The General Fund portion of the state budget is built to meet the revenue the state is predicted to collect by the Nebraska Economic Forecast Advisory Board. The revenue forecast is based upon analysis of economic models that attempt to predict consumer behavior, earnings of Nebraskans, and economic conditions both locally and nationally. If revenues do need meet forecast, spending must be reduced or money must be taken from other sources, like the rainy day fund, to make up the difference. Revenues in excess of forecast are automatically transferred to the Cash Reserve.

Although a budget is developed and adopted on a biennial basis, the “off year” involves the development and adoption of a “deficit budget”.  This does not mean that the budget is allowing spending by the state in a deficit balance, but rather that modifications are being made to a previously adopted budget. Special sessions can also be called to modify an existing budget.

In theory, off year adjustments to the budget would only address unforeseen expenses, differences from the revenue projections, and statutory changes. However, in recent years the deficit budget process has expanded to include new spending and additions to the base appropriations of some agencies. The expansion of this practice is more political than pragmatic. Deficit requests made to a previously adopted budget can obscure the total increase in spending an agency may request by breaking it up into two smaller requests, one at the beginning and one the second year of the biennium.

As was seen with LB 22 at the beginning of the last session, a deficit budget bill can be a vehicle to decrease spending to meet lower revenues. With the exception of state aid to K-12 public schools, agencies receive their appropriation in equal installments from the Department of Administrative Services at the beginning of each quarter of the of the fiscal year. If the distribution has already been made for the quarter, any reductions will be taken from the remaining distributions.  For example, if a deficit bill passed in the next session were to reduce an agency’s appropriation by 4%, it would all be taken from the remaining quarter of the fiscal year, meaning the agency would receive only 21% of its original appropriation on April 1st, rather than 25%.  In contrast, if the same 4% reduction were taken in a special session in October, a smaller reduced distribution would take place over the last two quarters of the year, with each being 23% of the original appropriation.

Since the state budget is a plan for spending, the plan changes as state revenues and government program needs change. This flexibility is needed, but should not be abused for political gain. The dynamic nature of the appropriations process requires careful attention by lawmakers and taxpayers alike.

A common misconception is that the Legislature appropriates money to the level of a specific position, agency process, or reimbursement fee. A high level of detail may be provided during public hearings and in budget documents to explain the intention for how requested funds plan to be used, but the actual appropriations bill is not that specific. “Intent language” is statutory language associated with an appropriation amount that provides specific legislative direction for how funds are to be used. These earmarks are the exception, not the rule. A budget can best be described as a plan for spending during a fiscal year. A government budget document does not tell you how dollars were actually spent, but rather is a prospective document that details how they plan to be spent.  

Each state agency is assigned a number within the state budget system. For example, the Department of Agriculture is Agency 18, while the Department of Corrections is Agency 46. An agency can be a “code” or “non-code” agency, indicating whether it is under direct management of the Governor or is independent. Code agencies have a Director hired by and are accountable to the Governor. The Departments of Economic Development and Revenue are examples. Non-code agencies are autonomous, with governing boards that may be elected or appointed. Management of those agencies is accountable to their board, although the Legislature has the sole authority to appropriate public money. To illustrate, the Tourism Commission is governed by an appointed Board of Directors defined by statute, while the Board of Regents of the University of Nebraska operates under constitutional authority.

The Appropriations Committee allocates specific dollar amounts of General, Cash, and Federal Funds to each agency. Within the agency, the appropriations are specified into one of three categories: operations, aid to individuals, and aid to local government. Operations budgets are the dollars appropriated for the day-to-day functions of the agency. This includes employee costs, office space, and all of the expenses associated with running the agency. Contrary to popular belief, operations expenses are only approximately $1.5 Billion of the $4.6 Billion General Fund budget. Higher education makes up over ⅓ of the total. Operations of all of state government comprise less than 25% of the total General Fund Budget.

Aid to individuals is commonly referred to as entitlement spending. These are public dollars that are paid directly to individuals, such as with public assistance, or paid for specific services associated with an individual, such as developmental disability aid. Some programs, like student grants for higher education, are wholly funded with state tax dollars. Others, like Medicaid, are a cost share with the federal government. Thus, the appropriation includes both General Fund and Federal Funds. Aid to individuals is about ⅓ of the General Fund budget, with Medicaid, by far the largest individual aid program, comprising 60%.

Aid to local government is dollars that pass through the state to local political subdivisions. Over ⅔ of that aid, almost $1 Billion is TEEOSA aid to K-12 public schools, commonly referred to as state equalization aid. Special education and community college aid make up another $300 Million in aid to local governments. One-third of the state General Fund is distributed to local governments.

An agency may have specific subdivisions, known as programs, which divide the agency’s budget. The number of programs or their size within any agency has a historical basis. Some agencies are appropriated as a single program, while others have many program areas of varying size. Management within an agency has the statutory authority to move dollars around within a program area. They may not transfer appropriations between programs in an agency without legislative approval. An appropriation is a legal authority for the agency to spend allocated dollars within the boundaries of state statute.

The budget is a plan, and is not actual spending. Expenditure reports detail how and if the dollars were spent as originally planned. If budgeted funds are not spent, they may be rolled over into the next budget. These carryover funds are known as “reappropriations”. Because Nebraska uses a baseline budget process that does not require justification of funds appropriated in prior budgets, reappropriated dollars are common. Historically there has been little legislative oversight of the use of these funds, as blanket reappropriations are frequently allowed.

Sen. John Kuehn

District 38
Room #12th Floor
P.O. Box 94604
Lincoln, NE 68509
Phone: (402) 471-2732
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