Tidal Wave of Tax Receipts
The tidal wave of state tax receipts keeps rolling in. The state’s net receipts through April were $495 million higher compared to the previous fiscal year for the same period, an increase of 10.6 percent. Coupled with the previous fiscal year’s growth of 13.5 percent, the state has had two consecutive fiscal years of incredibly strong revenue growth. Such revenue growth is abnormal as the average growth rate since 1996 is about 5.0 percent. As a result, the state’s cash reserve, or rainy day fund, is likely to exceed $1 billion at fiscal year-end on June 30.
Why the extraordinary revenue growth the past two years? A few factors including federal government assistance during COVID, strong corporate profits, rising wages, and strong farm income come to mind. For this fiscal year, sales, individual income, and miscellaneous taxes are up between 7-10 percent—reflective of wage growth and increased economic activity. Corporate income taxes are up 30 percent, likely due to strong corporate returns. The increase in corporate income taxes accounts for 26 percent of the $495 million increase in overall receipts.
Nebraska’s surge in revenue and subsequent budget surplus isn’t unique among states. Most other states have experienced similar revenue surges for many of the same reasons. The Pew Charitable Trusts reports that during fiscal year 2021, states grew their collective rainy day funds by $37.7 billion, an increase of roughly 50 percent. Rainy day funds grew in 35 states and 36 states posted increases in the number of days government operations could run using rainy day funds alone (Figure 3). Like Nebraska, higher tax revenues are big contributors to the budget surpluses.
Figure 3. The Number of Days Each State Could Run on Savings, FY2021
With the level of economic uncertainty right now, high inflation, rising interest rates, and declining corporate returns, it’s hard to see how state revenue growth can be sustained at the past two years’ levels. The economy is slowing, potentially teetering on a recession. Plus, the income tax reductions passed with LB 873 have yet to kick in. They will lower receipts too. So, while the tide of receipts has been rising. It may start receding soon.