Inside Nebraska’s budget: Why the state faces structural deficit after $1B surplus

State Sens. Christy Armendariz of Omaha, left, and Rob Clements of Elmwood, the vice chair and chair, respectively, of the Legislature’s Appropriations Committee. Jan. 29, 2026. (Zach Wendling/Nebraska Examiner)

BY:ERIN BAMER

LINCOLN — Within the last two years, the outlook of Nebraska’s financial health has taken a U-turn from having a near $2 billion surplus to now facing a structural deficit that could last years.

Lawmakers are in the midst of debating proposed budget adjustments to fill a projected deficit that grew to $646 million. Last year, the Legislature formed the two-year budget and filled a separate deficit.

Combining both years, lawmakers will have dealt with a total shortfall of well over $1 billion this budget cycle, using mostly cash fund sweeps and spending cuts.

However, the adjustments have not been enough to prevent a new projected deficit from emerging in the out years that make up the state’s next regular biennial budget cycle.

Budget observers in Nebraska identified a pair of major contributors to the problem — increased spending on property tax relief eating state dollars and income tax cuts reducing the revenues the state collects.

For the past two weeks, lawmakers have been warning about a supposed $874 million projected deficit waiting for them in the next budget. That number is expected to fluctuate between now and 2027.

The $874 million projection came from a meeting between the Revenue and Appropriations Committees, during which fiscal analysts presented possible scenarios for the next biennium based on various estimates for revenue growth.

However, all of the possible scenarios were factored with the current $125 million projected deficit still in effect. Once this year’s deficit is eliminated, that will reduce the future deficit by the same amount, according to Legislative Fiscal Analyst Keisha Patent.

Subtracting $125 million from the estimations, lawmakers could face a projected deficit likely to range from less than $100 million to roughly $1 billion, depending on revenue flows.

Reasons given for the structural deficit have ranged from national economic factors to the state’s phased income tax rate reductions that still have one more step to go. More often than not, people point to choices made during the surplus years as a top contributor to why the budget is in its current state.

“We knew, to a degree, that we were going to be here now,” said State Sen. Rob Dover of Norfolk.

COVID spending

In 2023, Nebraska’s surplus peaked at $1.9 billion due to a windfall of one-time federal funds meant to help the state recover from the COVID-19 pandemic and higher-than-expected revenues also driven by nationwide economic recovery efforts.

The surrounding years were marked by big spending, including $575 million on the Perkins County Canal project, and $313 million for a new state prison. Former State Sen. Lou Ann Linehan, who previously chaired the Revenue Committee, said the Legislature was under pressure to allocate the funds, because some could be lost if not spent.

According to State Sen. Machaela Cavanaugh of Omaha, the mindset among a majority of lawmakers at the time was “spend baby spend.”

Some have criticized the spending during that period, as several purchases used the one-time dollars for ongoing projects. Perhaps the most notable was Gov. Jim Pillen’s push in 2023 to transfer $1 billion in general funds to establish the Education Future Fund, with the intent to add $250 million each year after.

Today, the Education Future Fund has a documented sustainability problem and is on track to depletion in the next biennium without a significant infusion of funds. Part of that is due to larger-than-anticipated increases in special education costs, which the state promised to cover 80% of the share through the fund.

Also in 2023, lawmakers had the state absorb most community college costs by establishing the Community College Future Fund, which is slated to cost the state roughly $280 million each year, with baked-in accelerators increasing allocations in the coming years.

Then, during 2024’s special session, lawmakers expanded the School District Property Tax Relief Cash Fund, frontloading property tax credits that Linehan said were going underutilized because many Nebraskans didn’t know they were available.

First established in 2020, the school district fund was set to start with $125 million in credits doled out that year, with phased increases each year until fiscal year 2024-2025, when it would reach $375 million.

Nebraska’s current general fund financial status as of March 17, 2027, highlighting the proposed transfers out of the general fund. (Screenshot)

When FY 2024-2025 came around, the amount actually spent from the fund was $750 million, due to legislation passed during a property-tax focused special session. It’s now one of the largest cash funds within the state budget, slated to cost over $800 million per year by the end of this budget cycle, with year-over-year increases predicted.

This spending can be seen in the transfers out of Nebraska’s general fund, which saw a spike in 2023 that has remained the new normal in state budgets.

The transfers, while not listed as spending in the state budget, function effectively the same as direct spending. State Budget Administrator Neil Sullivan said he wouldn’t classify the property tax credit funds as state spending, instead calling it “aid to local governments.”

Cavanaugh argued that Pillen’s claims that he has reduced state spending is incorrect. In reality, she said Pillen has reduced general fund spending, not government spending overall.

From 2007 to 2022, yearly transfers out of the general fund steadily grew from roughly $128 million to $518 million. In 2023, the transfers increased more than 170% to nearly $1.4 billion, with another 21% increase on top of that to nearly $1.7 billion transferred in 2024.

The transfers are set to continue in future budgets, with steady increases planned in the next biennium. Former State Sen. John Stinner, who chaired the Appropriations Committee for several years, identified the transfers as a primary cause of the state’s current budget woes.

Stinner noted that the state’s net revenues for the current biennium stand at about $13.6 billion, and its planned general fund appropriations is less than $11 billion. Without the annual transfers — totaling nearly $3.5 billion for this biennium — he argued Nebraska would not be facing a budget crisis.

“It’s like filling a bucket with a hole in it,” Stinner said.

Policy researchers at the progressive think tank OpenSky Policy Institute said growth in Nebraska’s property tax offset programs now “dwarfs” growth in general fund appropriations.

The problem is lawmakers would face blame for property tax increases if they tried to lessen the impacts of the transfers. The vast majority bolster property tax relief.

More than $1.2 billion of the general fund transfers each year is directly doled out as refunds on Nebraskans’ property tax statements, and even the community college and K-12 future funds are meant to discourage local school boards from increasing tax levies.

Former state treasurer and lawmaker Tom Briese said if state senators were to completely dissolve both of the state’s property tax credit funds, it would amount to roughly a 60-65% property tax increase. Any reduction to either fund would be considered a “state-imposed property tax increase,” Briese said.

Said Cavanaugh: “Political suicide is raising taxes.”

State Sen. Rob Clements of Elmwood, the current Appropriations chair, said the property tax credit funds may not be the wisest way to implement property tax relief, but it was “the easiest way.”

Many believe the root of Nebraska’s property tax problem lies in rising assessed valuations, but that’s a harder question to answer.

“There’s no way to catch up with that,” Stinner said of assessed valuations.

Sullivan said it’s important to ensure the property tax credit funds don’t remain “a leaky bucket” indefinitely. He said as the credits grow and have a greater impact on the state budget, he expects more lawmakers to propose more reforms.

“When that gets painful enough, they will be able to find 33 senators in the Legislature to control spending at the local level,” Linehan said.

Income tax rate reductions

At the same time lawmakers were approving big projects using one-time COVID funds, the Legislature also passed phased reductions to Nebraska’s personal and corporate income tax rates. In 2022, the state’s top income tax rate was 6.84%, and under Legislative Bill 754 in 2023, the top rate will reach 3.99% on Jan. 1, 2027.

Linehan, who introduced LB 754 at Pillen’s request, said the measure was worked out as a compromise with Briese meant to appease Nebraskans who were calling for property tax relief and residents who wanted income tax relief. She said it’s important for Nebraska to have a competitive income tax rate to prevent people from leaving.

“You cannot be a high-tax state and think you’re going to grow,” Linehan said.

However, Stinner argued it’s irresponsible to reduce income tax rates simultaneously with increasing property tax relief. OpenSky officials estimated the income tax reductions cost Nebraska’s budget about $447 million in potential revenue this year and is on track to cost nearly $900 million by 2029.

Individual income taxes have historically been the largest source of tax revenue collected by the state, but in the years since the phased reductions took effect, sales and use tax revenues have narrowed the gap. For the first time since at least the mid-1980’s, sales and use tax collections exceeded individual income taxes in FY 2024-2025, to the tune of about $330 million.

Jared Walczak, senior tax policy advisor with conservative think tank the Platte Institute, said lawmakers were right to pass the income tax reforms, because it improved Nebraska’s growth trajectory. However, he noted that most other states that passed income tax cuts paired it with “sales tax modernization measures” that broadened the tax base.

Lawmakers attempted to expand the number of services covered by sales taxes during this time — it’s an idea that both Linehan and Briese said they still support — but there wasn’t enough support among the full Legislature to pass anything significant.

The top income tax rate in Nebraska is currently 4.55%. State Sen. Tom Brandt of Plymouth has a bill on the books this session that would temporarily pause the final reduction to 3.99%, which is estimated to preserve about $200 million in revenue per year.

However, Brandt said he hasn’t seen much appetite from other Republican lawmakers to advance the bill, and he doesn’t plan to push it unless their views change.

Clements has said he expects income tax revenues to bounce back once the rate hits 3.99% in 2027. However, he acknowledged it’s unclear how fast they will.

Sullivan said he doubts the income tax cuts contributed to the structural deficit. Without the cuts, he said Nebraska would have seen higher tax revenues, but lawmakers likely would have spent it all, leaving the budget in the same situation.

Term limits

A hidden factor that some lawmakers say has contributed to the current budget struggles is term limits, which first took effect in 2006, limiting state senators to no more than two consecutive terms with a four-year break before running again.

To Cavanaugh, term limits may be the biggest factor adding to the ongoing deficit, because limiting lawmakers’ time in office has instilled a short-sighted mindset where many don’t think about long-term consequences.

When Stinner was in office, he said the top priorities among lawmakers were workforce development and growing the tax base, both of which would aid Nebraska’s economy. Now, the vast majority of senators serving in the Legislature identify property tax relief as their top — and sometimes only — priority.

This is likely because property taxes are most often the top complaint lawmakers hear from voters while campaigning, Clements said.

Sullivan agreed that term limits pose a challenge with budgeting, as the intricacies of Nebraska’s budget takes time to understand. On top of that, substantive ideas for reform often take years of work to pass, he said.

Term limits lessened the institutional knowledge of lawmakers serving in the Legislature, which was exacerbated by a wave of retirements that lessened institutional knowledge among Capitol staff in recent years.

Stinner said when he first took office in 2015, the lowest amount of experience in state government he saw when interviewing potential staffers was eight years. That’s not the case today.

What can be done?

As with theories of what caused the structural deficit, ideas for how to fix the problem also ran the gamut. Sullivan said state revenues are on track to eventually remove the deficit naturally, though he still expects a deficit in the next biennium.

Linehan and Briese said they still support broadening the sales tax base, with Linehan saying it’s “crazy” to her that the state can’t tax pop and candy. However, there doesn’t appear to be enough legislative support to do that.

Cavanaugh argued lawmakers should consider pausing the final income tax rate cut, saying it’s better to temporarily pause the reduction than be forced to raise taxes later on. There doesn’t seem to be enough support behind that idea, either.

Dover said it doesn’t make sense to use income or sales taxes to offset property taxes unless lawmakers are doing so to ease unfunded state mandates on local governments.

State Sen. Jason Prokop of Lincoln said he’s focused on workforce development proposals and other ideas with return on investment.

State Sens. Christy Armendariz of Omaha, left, Paul Strommen of Sidney, center and Mike Jacobson of North Platte meet on the floor of the Nebraska Legislature. Jan. 29, 2026. (Zach Wendling/Nebraska Examiner)

One idea mentioned by lawmakers and other state officials is implementing a harder spending cap on schools and local governments. Sullivan said hard caps could help level off the annual increases to the state’s property tax credit funds by reigning in local spending.

Caps have been proposed in the Legislature many times, but they’ve run into resistance from critics who say they would violate local control. Briese said he bought into that argument when he served in the Legislature but has since changed his mind.

“I believe a hard cap may be the answer,” Briese said.

Linehan said she would support a hard cap if it passed a 60% vote of the people. Dover said he was open to the idea, suggesting a sunset mechanism that would allow for inflationary adjustments.

However, Prokop argued that preserving local control should still hold weight in the Legislature.

“Small governments have to be responsible to the voters just like we do,” Prokop said.

Cavanaugh argued that lawmakers need to be brave enough to stand up for “the greater good” and consider reducing or even dissolving Nebraska’s property tax credits. Stinner said he would support halting the accelerators to the credits.

Cavanaugh said if taxpayers paid attention to how much the credits have hindered the state budget, there wouldn’t be political blowback to doing that.

“This is costing us way more than it’s saving us,” Cavanaugh said.

Sullivan said budget talks for the next biennium are already underway, and he expects balancing the future projected deficit will once again rely on cash fund sweeps, which has become a pillar of Pillen’s budget strategy in recent years. While it may seem surprising, Sullivan argued that many of the swept cash funds gain more revenue than they spend each year.

These cash fund sweeps have come under heavy criticism from lawmakers and other analysts that argue the sweeps undermine the longevity of government services. OpenSky Executive Director Rebecca Firestone called the strategy “a band-aid solution,” that at best makes the state budget more unstable.

“The economic track record shows we cannot cut our way to prosperity,” Firestone said.

Stinner said he finds it “unconscionable” for lawmakers to be cutting services when he doesn’t believe they’re in a true budget crisis. He said Pillen has been too reliant on cash fund sweeps to bolster property tax relief.

Stinner added that he doesn’t believe Pillen understands what some of the cash funds he’s asked to sweep are meant to do. He aired concerns about proposed transfers from Nebraska’s Cultural Preservation Endowment Fund and the Nebraska Environmental Trust as examples.

“We’re taking money out of really worthy causes,” Stinner said.