Revenue forecast shows hard choices ahead

It’s the holiday season, and in the Indiana Statehouse that means one thing: Time for the state revenue forecast.

Legislators gathered in Room 404 on Dec. 18 to learn how much money they’ll have to work with for the 2016 and 2017 budgets.

First came the economic forecast, though. The forecast committee’s economic consultant spent an hour talking about the modest prospects for economic growth, falling energy prices, possible interest rate hikes by the Federal Reserve, and all that. It was a good presentation, and everyone listened patiently. But let’s face it; we really wanted to hear the revenue numbers.

Then we heard them. For fiscal year 2015, revenues will be down $129 million from the forecast last December. For 2016, up 2.4 percent or $361 million over 2015. For 2017, up 3.2 percent or another $482 million over 2016.

The 2015 shortfall shows the

hazards of forecasting. The

April 2013 revenue forecast that was used to write the budget for 2015 was just too optimistic. The December 2013 revision knocked $413 million off the original budget forecast. Through this November revenues were short another $85 million, and by the end of the year that shortfall is projected to be $129 million.

Indiana incomes have grown more slowly in 2014 than expected a year ago. The new forecast cut the estimate for the income tax by $158 million. Gaming revenues were cut by $52 million, too, because of unexpectedly fierce competition from new casinos in neighboring states.

But corporate income taxes and insurance taxes are doing better than expected, which added revenue to the 2015 forecast.

Tax cuts caused part of the 2015 shortfall, compared to the original April 2013 forecast. That forecast had inheritance tax revenues at $115 million, but the General Assembly eliminated that tax earlier than expected.

The economic forecast has Indiana income and retail sales growing faster by 2016, which leads to more rapid sales tax growth, at 4.1 percent in 2016 and 4.7 percent in 2017. The sales tax provides almost half the General Fund’s revenue, so that growth is important.

Individual and corporate income taxes will grow more slowly than that, partly because of scheduled tax cuts. The individual income tax rate will drop from

3.4 percent to 3.3 percent in 2015, and to 3.23 percent in 2017.

The corporate income tax rate has been reduced each year since 2012, and the cuts will continue through 2021. Because of tax cuts, something like $400 million will remain in taxpayer pockets during the biennium, instead of funding state services.

The Indiana State Budget Agency took the revenue forecast and the budgeted spending for the rest of the fiscal year, and calculated that Indiana will have $2.2 billion in balances by June 30, 2015. That’s 14.5 percent of the budget.

The money is collected from taxpayers but not spent on government services. So why keep so much money in the bank? One reason is cash flow, to have enough to pay our bills on time.

The rule-of-thumb says we need balances of 5 percent of the budget for cash flow. That’s about $750 million for Indiana’s budget.

We also use balances to guard against revenue shortfalls due to forecasting errors or recessions. The recent Great Recession was (we hope) as bad as recessions get. During fiscal years 2009, 2010 and 2011, revenues fell short of appropriations by about $4.5 billion, averaging $1.5 billion per year.

So balances of $2.2 billion cover 5 percent cash flow, plus enough to handle one year of severe recession. These balances are why the $129 million downward revenue revision for 2015 need not cause spending cuts. We’ve got enough in the bank to handle small shortfalls like that.

The revenue forecast sets the limits for the biennial budget for the next two fiscal years. If we maintain balances at $2.2 billion, it looks like appropriations can grow by about 2.5 percent in both fiscal 2016 and 2017.

That’s about $1.1 billion

more than in the current biennium. It’s enough to handle inflation and population growth, and maybe a little bit more. It’s not enough to grant very many items on the spending increase or tax cut wish lists of legislators or interest groups.

Once again, hard decisions will have to be made.

Larry DeBoer is professor of agricultural economics at Purdue University. Send comments to