Last Tuesday was Organization Day, the ceremonial preamble to each session of the Indiana General Assembly; as legislators gathered to be sworn into office, it was impossible not to notice a few absences versus 2019.

Last November, thousands of teachers crowded the hallways to demand higher pay. This year, spectators were sparse, for obvious reasons. (And instead of rallying in Indianapolis, many teachers were busy shifting classes back to remote learning as COVID cases rise across the state).

Nearly a billion dollars of last year’s state surplus is gone too, transferred to cover unexpected public health costs and fill in the budget gaps left by declining and delayed tax collections.

And that means something else is missing – some of the confidence lawmakers felt in late 2019 about state revenues, which continued to outperform expectations and push rainy day reserves past $2.4 billion. That confidence is replaced by uncertainty, adding complexity to the legislative challenges ahead.

In January, the General Assembly will reconvene with a focus on passing a new two-year budget for 2022 and 2023. But the work is already well underway, including the delivery of a state revenue forecast released in December that starts shaping expectations and negotiations around spending priorities.

Indiana uses a bipartisan committee of fiscal analysts and university economists, working with expert consultants to create a consensus revenue forecast. The process produces a solid blueprint for the legislature; over the last decade, actual revenues have always finished within three percent of their projections.

But next month’s forecast will be released during a surging pandemic that’s already wreaked havoc on the state’s finances in a number of ways. For example, the extension of the income tax deadline to July 15 pushed roughly a billion dollars of revenue into Fiscal Year 2021 (starting July 1) as individuals and employers took advantage of the extra time to file.

Most of these ‘cash flow’ issues are behind us. But sixteen months into the current budget cycle, we remain $515 million below the pre-pandemic (December 2019) revenue forecast due to the economic impacts of the COVID crisis.

State agencies were able to cut nearly $400 million in planned spending in FY2020, so this deficit seems manageable as we head into the homestretch of the 2020-2021 biennium. But does the current situation give us any clues about what’s ahead for revenues?

The majority of this shortfall is from individual income taxes, as COVID-related business closures and cutbacks hit employment and taxable earnings. Indiana’s unemployment rate soared from 3% in March to 17.5% in April, settling back to 5% in October.  

But with the unabated spread of coronavirus, Hoosiers face renewed pressure to stay home and cautionary restrictions on business. New unemployment claims rose last week; will joblessness trend higher as employers adjust capacity and customers cut back, and will income tax revenues fall further below projections?

Sales taxes – Indiana’s largest revenue source – have been relatively steady and even outperformed monthly forecasts recently. Federal action increasing unemployment benefits seemed to support consumer spending through the summer, and a 2019 change to Indiana’s tax laws captured sales taxes from more online transactions (so homebound Amazon shopping sprees actually stabilized revenues).

But will sales tax revenues hold up as COVID takes a toll on consumer confidence, and as enhanced and extended federal unemployment benefits expire?

The state revenue forecast has to contend with all this volatility, and then attempt to look all the way into the summer of 2023. Before then, what’s a realistic timeline for deployment of the COVID vaccine? Will another federal aid package boost household income and spending in the meantime? How long will the traumas of 2020 linger in our economy and with our workforce, and what shape will Indiana’s recovery take once we finally flatten the COVID curve for good?

Organization Day gave us a preview of a socially distanced Statehouse. What we don’t know yet is the distance between revenue projections and spending demands, for local schools and state universities, infrastructure investments, workforce and economic development, public health and all the other priorities jostling for resources in the 2022-2023 budget. The next few weeks will bring some preliminary answers, before the opening gavel kicks off the public debate on January 4th.

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