A delayed tax filing deadline and closed businesses in Nebraska has resulted in April state tax revenues that are $292 million below previous monthly projections.
While this is a very noticeable impact from the pandemic, the data released by the Nebraska Department of Revenue this morning tells us a bit more about our tax code and what we can expect in the future. Also, thanks to the anticipated surplus from earlier in the fiscal year, as of right now, the state’s cumulative tax receipts are still above forecast by 0.1% or $4 million.
This lets policymakers know that the core government services of FY2019-20 should be able to be funded under current conditions. Even if May tax receipts come in a bit lower than projections, Nebraska is in a much better situation than a lot of states since we had a good amount in our Cash Reserve Fund. BUT, what this does mean is that any new spending in the budget will need to be put on hold until the pandemic is over and tax receipts are more predictable.
Normally, in the month of April there are many people that file their income taxes, sometimes resulting in an “April surprise” where more revenue is collected than anticipated. However, with the tax filing deadline moved to July 15th, we should see a much larger variance in tax collections for July 2020 than normal. This will make the tax collections for the next fiscal year look artificially higher than they would otherwise, because people will be filing their taxes twice during the fiscal year (in July and again in April).
Also, it is important to note the percent difference in the overall sales tax receipts. Even during a month when most businesses were closed, the sales tax was only off from projections by $1 million, or less than one percent. This is confirming evidence of something economists and the Platte Institute have said many times: the sales tax is one of the most stable revenue sources for government (even during economic fluctuations).
Income taxes tend to be one of the least stable because they are directly tied to business cycles. Confirming that, we see the biggest variance in personal and corporate income tax collections for the month.
*totals may not add due to rounding. For exact figures, please click here for the Department of Revenue’s data
So, what do I think will happen next month and in the future? Well, since it is already the middle of May and all our businesses are not allowed to reopen yet, I would expect to see another below forecast revenue picture for the month of May. I also anticipate seeing corporate and personal income taxes below forecast due to the delayed filing deadline. Especially when people have been out of work or corporations are not hitting their revenue projections, both will delay paying taxes until absolutely necessary (or if a business goes bankrupt due to the crisis, they might not pay their taxes at all).
What does this mean for policymakers in Nebraska? This means the state needs to cut any spending that is not absolutely necessary. Yes, the state has a healthy cash reserve, but we don’t need to use all of it, and if possible, we need to put more money aside in case there is a second wave of COVID-19, requiring additional health measures. Lawmakers also need to take this time to reassess our state tax code. I think it is worth noting the impact this has had on the different revenue sources in the state. As more time passes, we can do an in-depth analysis of how this pandemic affected other states and their respective tax collections.
As far as the future, I think we need to be very careful in how we interpret the revenue numbers for the next fiscal year. Delayed tax filing deadlines, delayed impacts from the crisis, and a significant shift in people’s behavior will all affect the state’s tax collections. I anticipate a surplus in revenues for FY2020-21, but that doesn’t mean the state needs to spend that money frivolously. Policymakers could see a budget shortfall in FY2021-22, especially since public health officials are expecting this pandemic to last 12-18 months, with the economic effects possibly lasting longer.