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Capital Comments by Larry Deboer - state budget

 

On April 16, the Indiana General Assembly heard the long-awaited revenue forecast update. "Up" is the right word. Expected revenues for the remainder of fiscal 2013, and for the coming biennium, were up by $290 million over the forecast from last December. You can see the forecast documents on the Indiana State Budget Agency's website.

A forecast like that leads to (at least) two questions. What made the forecast go up? Where will the extra money go?

Indiana does its revenue forecasts in two parts. First, Global Insight Co. provides a prediction of what will happen to the Indiana and U.S. economies over the next couple of years. The company forecasts hundreds of economic indicators, but the most important are Indiana income, the Indiana unemployment rate, and a stock market index. These economic indicators enter the calculations in the second part of the forecast. The Indiana forecast technical committee develops equations that relate the economic indicators to Indiana revenues. These three important indicators are used to forecast the sales tax and the individual income tax, which are by far the state's biggest revenue sources.

Why did forecast revenues increase? Global Insight actually reduced its prediction of income growth and increased its projection of the Indiana unemployment rate. Those two indicators are used to forecast the sales tax, and, sure enough, that forecast was down by $87 million.

The income prediction is used for the income tax, but so is the stock market index, to capture the effects of capital gains on revenues. The forecast for the stock market was up. That's one explanation for the increase in the individual income tax forecast by $427 million for 2013-2015. That was an increase bigger than the forecast's total increase in revenue. The forecast for all other state revenues fell by $137 million.

There may be more reasons for this big increase other than a better performance from the stock market. The December 2012 forecast was pretty conservative. In the nine months of fiscal 2013, actual income tax revenues are $121 million above the December forecast. The revision adds only $70 million to income tax revenues in 2013, so the forecast for this fiscal year still seems conservative.

By 2015, the forecast has both sales and income tax revenue growing by 5 percent per year. That's faster than the projected growth in either retail sales or Indiana income. The forecast gets less conservative toward the end of the biennium.

Where will the money go? The forecast revision comes just in time for the conference committee on the budget. The House and Senate have passed different budgets, and the differences must be worked out.

The Senate's version of the budget, passed April 9, includes modest increases in appropriations of about 1.6 percent per year. It eliminates the inheritance tax earlier than scheduled, at a cost of about $179 million for the biennium. Some sales tax revenue is diverted from the general fund to road maintenance, which costs about $147 million.

And the state income-tax rate is cut by one-tenth, from 3.4 percent to 3.3 percent, starting in calendar year 2015. The cut reduces revenue by $71 million in fiscal 2015. This doubles once the tax cut is in effect for an entire fiscal year.

The governor wants a 10 percent income tax cut, from 3.4 percent to 3.06 percent. Neither the House nor the Senate version of the budget includes this tax cut. House Bill 1418 proposed such a cut (it didn't pass). The Legislative Services Agency analyzed that bill and found that a 10 percent tax cut starting in calendar 2014 would cost $723 million for the biennium.

That's a lot more than the added $290 million in the forecast revision. And that means that the 10 percent tax cut can go forward only if the General Assembly cuts appropriations or removes other tax cuts from the budget.

If the 10 percent income tax cut doesn't happen, what will? Perhaps there will be an income tax cut smaller than the governor wants, but larger than the General Assembly has offered. Perhaps there will be an increase in appropriations. Perhaps money will be added to state balances.

The revenue forecast is up. But not up enough to make budget decisions easy.