Revenue Forecast Shapes State Spending – And Surplus - Negotiations

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Chris Watts is president of the Indiana Fiscal Policy Institute. Chris Watts is president of the Indiana Fiscal Policy Institute.

This week, the State Budget Committee heard an updated revenue forecast that could best be described as overcast but not stormy – yet. 

Sales taxes, the largest source of state revenue, fared well from the December forecast – down a modest $15 million over the 2020-21 budget (and likely to be buoyed by new policies for online hotel and retail sales taxes moving through the legislature). 

Individual income taxes showed a more dramatic decline, continuing a recent pattern of missing monthly projections.  Updated numbers cut $160 million from biennial projections as federal wage data from last year was revised sharply lower and analysts fear a manufacturing slowdown around the corner.

Better-than-expected corporate tax collections and higher interest rates on the state’s bank accounts helped close the gap, however, and the overall forecast was off just $32 million for 2020-21.  Combined with a higher Medicaid projection, lawmakers begin their final budget negotiations in search of roughly $100 million in cuts, not a dramatic number in the context of a $36.4 billion two-year spending plan.

But the money will have to be found as Senate and House fiscal leaders debate other key differences between their respective versions of the budget (and Governor Holcomb weighs in on the priorities reflected in his original proposal).  What are some possible scenarios for readjusting to the report?

K-12 education accounts for half the state’s spending.  Given the vigorous debate over teacher pay and universal recognition of quality schools as a top priority, cuts here are unlikely.  But it’s worth remembering that the House originally trimmed $100 million from ‘complexity funding’ aimed at high-poverty school districts, a shift that was scaled back in the Senate.  Could negotiators revisit the issue?

Keep in mind that today’s budget dilemma is rooted in lagging wages, weakening income tax potential.  Education drives earning power and upward mobility, and complexity funding is targeted to communities across the state whose economic viability depend on today’s students doing better than their parents.

The same logic applies to higher education and training programs.  A better-educated workforce is the surest path to personal income growth (and more taxable income to replenish the state’s coffers); with a recent Commission for Higher Education study showing fewer Hoosier high schoolers enrolling in college, the legislature will think twice before pushing cutbacks. 

The House could agree with the Senate to appropriate less money for the Department of Child Services and encourage the Governor to tap into a special gas tax transition fund to make up the difference.  But state and local infrastructure also needs sustained investment; tapping into potential road and highway funding at the first hint of softening revenues doesn’t bode well for the ‘Crossroads of America.’

It’s always tempting to pass the buck to other units of government, but recent Fiscal Policy Institute research highlights the budgetary plight of many Indiana cities, counties and towns.  Spending to ease the costs of county jails and programs supporting water infrastructure, new trails and other projects are a minor slice of the state budget with a major impact on local finances and quality of life.

Looking up and down the line items in each version of House Bill 1001, there are certainly reasonable paths to reach $100 million or more in savings.  But let’s take a step back and consider a more straightforward – and obvious – solution.

Just as each new version of the budget has upped the ante on K-12 support, they also added to the state’s surplus, or ‘rainy day’ funds.  Indiana has more than rebuilt the level of reserves held before the Great Recession (a claim many other states still can’t make).  The Senate leaves a $2.2 billion surplus (versus $1.9 billion passed by the House).

Indiana is one of the better-insulated states against a future recession, and we now operate under a constitutional balanced budget amendment that could complicate our ability to tap into cash balances across budget cycles.  Keeping this in mind, splitting the difference on the surplus could be a better option than letting a cloudy revenue forecast compromise education, infrastructure or other priorities.

Chris Watts is president of the Indiana Fiscal Policy Institute.

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