DECEMBER
2011

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

Download the audio files or subscribe to our podcast.

 

 

12-22-11

Download the audio of Capital Comments: MP3, WMV

Suddenly the State Has Money


All of a sudden the state has money.  The recent December forecast revision increased expected revenues by $516 million for the biennium. It’s been almost 10 years since we’ve seen that much added revenue at the start of a legislative session.

And that’s not all.  Suddenly, there’s an added $288 million in state balances, the money in the state’s checking account. That’s in addition to the added forecast revenue.

Part of the added money recognizes that revenue has been running ahead of projections so far this year.  Projections have been adjusted upward.  Much of it, though, results from money we collected but didn’t know we had.

Here’s what happened: Tax payments are deposited into a collections fund when they first arrive at the Department of Revenue. Then a computer program sweeps this money into the appropriate fund, like the general fund. The budget passed by the General Assembly then authorizes spending out of these funds.

In 2007 business corporations were offered a new way to pay their corporate income taxes, called “e-Check.” Taxes could be paid by check electronically. Unfortunately, the software that ran the sweep was not modified to catch this new source of corporate taxes. When the sweeps happened, the corporate e-Check money was left in the collections fund. The money wasn’t lost.   All of it was still there in the collections fund, and it even earned interest. 

The e-Check payments were small at first, less than half a percent of the $12 billion a year that passes through the collections fund. Then e-Check payments jumped from $58 million in 2010 to $139 million in 2011. A Department of Revenue auditor found the error in November. 

The newly discovered e-Check money totaled $320 million. Of this amount, $288 million has been added to state balances. That’s the tax money collected through 2011 but not spent because we didn’t know it was there. The $32 million from this fiscal year, 2012, has been added to this year’s revenue estimate. 

But the discovery of the error affects the forecast, too. Corporate income tax revenues were higher than we knew, so future growth starts from a higher number. Corporate tax projections are up $202 million for fiscal years 2012 and 2013 as a result.

The General Assembly has three basic choices of what to do with this added money. They could increase spending, they could reduce taxes, or they could add the money to state balances. 

That’s where the new “excess state reserves” law kicks in. If state balances exceed 10 percent of the budget at the end of a fiscal year (on June 30), the excess has to be distributed half to the pension stabilization fund to help cover teacher pension commitments and half to income tax credits. In other words, excess balances trigger an automatic tax cut.

When the law was passed earlier this year, it didn’t look like it would have much effect any time soon. Balances were expected to be a little less than 10 percent at the end of the biennium in 2013. Now, with all the extra money, balances are expected to be 12 percent of the budget at the end of this fiscal year, June 30, 2012. If nothing is changed, the Budget Agency expects that $167 million will be used for tax cuts when taxes are paid in 2013.That would amount to a credit of about 3 percent on your income tax payment, perhaps $60 for the average taxpayer.

What could our legislators do? They could let the tax cut happen; everyone likes lower taxes. Or they could spend enough of the added money so that balances do not top 10 percent; this would make up for a fraction of the $1.6 billion or so in spending cuts during the last biennium. Or they could change the law to raise the balance ceiling above 10 percent; Indiana balances have averaged about 14 percent over the past 35 years, so the 10 percent ceiling is a little low historically.

In a sense, we’ve put an explicit price on added spending or higher balances. Support school spending or shore up the checking account, and it costs you and me $60. We’ll soon see if this price affects what the General Assembly does.

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox