New tax-cut law passed last year expected to slow Nebraska's long-term revenue growth

Nebraska's state tax revenue likely won't grow as fast in the future because of a law passed earlier this year, a budget official told lawmakers Wednesday.

State officials generally assume revenue will increase at an average rate of 5 percent per year. Michael Calvert, director of the Legislature's Fiscal Office, told a committee that the new tax bracket-indexing law will reduce that rate over time.

The Legislature's Tax Rate Review Committee reviewed the state's finances as lawmakers prepare to write a new budget during the session that begins in January.

The law ensures Nebraska's income tax brackets automatically keep pace with inflation. Previously, taxpayers who received a cost-of-living increase would get bumped into a higher tax bracket. The law is expected to shave roughly $100 million off the state budget over the next decade.

"That's an ongoing tax cut, year after year after year," Calvert said.

Nebraska lawmakers will face a relatively small projected shortfall of $50.1 million next year, according to a report presented to the committee. The state is on course to collect about $9 billion during the upcoming two-year budget cycle, which ends in June 2017.

Gov. Dave Heineman, a Republican who leaves office in January, has said lawmakers should concentrate on additional tax cuts next year. He noted that the state's economy is holding strong and tax revenue is still expected to grow. Gov.-elect Pete Ricketts has said lowering property taxes is his top priority.

Sen. Heath Mello of Omaha said he expects lawmakers will strike a balance between measures designed to lower property taxes and spending on key priorities.

But Mello, chairman of the Appropriations Committee, said the budget estimates don't yet account for major expenses that lawmakers are expected to debate next year.

"Any time you want to make revenue reductions, you've got to find a way to pay for them," Mello said.

The Department of Correctional Services has submitted budget requests totaling nearly $23.2 million, primarily to ease overcrowding. The Department of Health and Human Services has requested $19 million to reimburse the federal government for child welfare expenses that weren't properly documented.

Nebraska also owes Kansas about $5.5 million as part of a legal dispute over water from the Republican River.

In addition, Mello said state officials don't yet know the total cost of settlements from major lawsuits, including those filed by relatives of Nikko Jenkins' victims. Jenkins was released from prison in July 2013 despite his pleas for mental health treatment and went on a 10-day killing rampage in Omaha the following month.

Mello said lawmakers may have to tap the reserve to pay some of those expenses.

The reserve is projected to hit a record-high $769 million if current revenue estimates turn out as expected. Mello said lawmakers need to stay mindful of the recession, which forced them to withdraw $259 million to cover regular expenses. The state also received about $650 million in federal stimulus money and still ended up cutting services.

"I don't like to make bets, but I suspect the federal government's not going to ride to our rescue the next time that happens," Calvert said.