As many of you know, we have been dealing with budget shortfalls during the last two years. I thought it might be worthwhile to explain the state’s budget process, where the revenues come from, and why we are dealing with deficits.

First, let’s remember that the General Fund’s primary revenue comes from four sources: Sales and Use Taxes, Individual Income Taxes, Corporate Income Taxes, and Miscellaneous Taxes. Over the past 25 years, the revenues from these four sources have grown from approximately $2.46 billion in fiscal year 2000-01 to $6.74 billion in fiscal year 2025-26.

The Nebraska Economic Forecasting Advisory Board forecasts net receipts from the four main tax categories (including accounting for refunds), but it does not account for General Fund transfers, appropriations, expenditures, or balances. Changes to federal tax policy can also impact state receipts, which can be hard to anticipate. The Legislature relies on the Forecasting Board’s estimates when making the state’s budget, and deficits occur when the Forecasting Board’s estimates, and therefore the budget, do not align with actual revenues.

In the last 25 years, we’ve generally seen approximately 4-5% annual growth as a state. However, federal COVID relief contributed to unusually strong economic activity and revenue growth for some recent fiscal years. In FY2020-21, General Fund receipts grew from $4.94 billion to $5.96 billion, a 20.6% increase. Combined individual and corporate income tax receipts increased approximately $865 million in FY2020-21, from about $2.84 billion to $3.70 billion. Approximately $280 million of that increase resulted from the COVID-related shift of the 2019 income tax filing deadline from April to July. Corporate income taxes alone were up over $1 billion in FY2023-24.

Nebraska’s pass-through entity tax was also a major factor in the FY2023-24 increase and subsequent decline. The state received approximately $1.5 billion in pass-through entity tax payments in FY2023-24, but only about half of the related credits were claimed that year, resulting in a net General Fund gain of approximately $750 million. Most of the remaining credits were claimed in FY2024-25. Because the law was retroactive for five tax years, the first two years were unusually skewed, but those effects are now beginning to even out.

Total General Fund receipts peaked at approximately $7.16 billion in FY2023-24. They fell to $6.16 billion the following year and rose to $6.74 billion this past year, even with the decrease in the state income tax rate.

At its low, the Cash Reserve was approximately $18 million, or 1.0% of expenditures, at the end of FY1995-96. With smart spending of prior administrations and effects of COVID dollars, the state’s Cash Reserve rose to approximately $928 million at the end of FY2021-22. By the end of FY2022-23, the state’s Cash Reserve grew to approximately $1.64 billion. The state’s Cash Reserve has dropped to approximately $830 million at the end of FY2025-26 and is projected under current law to decline to approximately $526 million, or 9.9% of expenditures, at the end of FY2026-27. These projections are based on current law and assume the Legislature makes no additional budget changes in upcoming sessions, which is very unlikely.

If the Cash Reserve declines to approximately $426 million at the end of FY2028-28, it would still represent 7.6% of expenditures. So, let me be clear: the state is not bankrupt.

So, the question many are asking: Where has the money gone, and why? By the end of FY2022-23, early in my tenure in the Legislature, our Cash Reserve stood at 31.8% of expenditures. The Legislature’s focus in 2022 and 2023 was to make strategic investments with the excess reserves that would positively impact the state’s future.

The most sizable investments included the Perkins County Canal, the new state penitentiary, and property tax relief. The Legislature set aside $53.5 million in 2022 to fund the initial stages of the Perkins County Canal project. This was a bold priority of then-Governor Pete Ricketts, a priority embraced by Governor Jim Pillen as he pushed to preserve the existing fund and add another $574.5 million in 2023, bringing total funding set aside for the project to $628 million.

The Legislature also committed approximately $352 million from the Cash Reserve Fund for planning and construction of the new prison facility.

Governor Pillen advocated for the Education Future Fund, which was designed to reduce K-12 schools’ dependence on property taxes by providing more state funding. The Education Future Fund was seeded with a $1 billion General Fund transfer in FY2023-24. Including subsequent transfers and those scheduled during the current biennium, approximately $1.73 billion has been transferred or committed to the fund.

He also pushed to create the Tier II property tax credit fund to help offset the cost property taxpayers are paying to fund public schools. For FY2026-27, the state is providing nearly $1.7 billion in General Fund support through the two property tax credit programs and the Community College Future Fund, totaling approximately $5.35 billion.

Income tax relief has also been provided through rate reductions, rather than supplemental funding. The state’s maximum individual income tax rate dropped from 6.84% to the current 4.55%. It is scheduled to drop to 3.99% next year.

All these factors are reflected in the state’s General Fund Financial Status and affect the total dollars available to spend. But, of course, the budget is based on what will come in during the next one or two fiscal years, not the receipts from the prior year. Discrepancies between estimates and actual revenues create a “deficit.” State budget increases have been well contained and remain below annual projected revenue increases.

It is a privilege to represent you in the Nebraska Legislature, and I look forward to hearing from you regarding issues that are important to you. I can be reached at 402-471-2729 or by emailing me at mike.jacobson@leg.ne.gov.