Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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The State Revenue Forecast: Are You Sitting Down?

It was standing room only in room 404 of the Statehouse on Wednesday, Dec. 18, but, then, room 404 is pretty small. Legislators, staff, reporters and lobbyists had come to hear the state revenue projections for the next two-and-a-half years. Too bad there weren't enough chairs. For news like this, people need to be sitting down.

The 2003 session of the Indiana General Assembly will be a budget session. The legislators will pass a budget for the two-year biennium that starts July 1, 2003 and ends June 30, 2005. A budget is a spending plan, and before they can know how much to spend, they must know how much they'll have. That means estimating future revenues from state taxes, and that's what was announced on Dec. 18.

Indiana's way of projecting revenues has one big advantage. Representatives of the governor's office, both houses of the General Assembly and both parties all agree on the projections before they are announced. If that weren't true, the governor's office might announce one set of projections and the legislature another. Each political party could have its own, and lobbyists might chime in with projections, too. Much of the session's debate would be about whose projections to use, not on the substance of legislation. Getting a consensus on revenues before the session begins eliminates this problem.

Accuracy is something else, though. Like most states, Indiana overestimated the revenue to be received over the past three years. In particular, the nasty effects of the stock market crash on income tax revenues were missed. Since 2000, revenues came in about $2.4 billion short of projections.

That's a problem, because spending plans are made based on projections. Revenues might grow, but if they fall short of the projections that were used to make the budget, spending plans must be changed. Worse, revenues haven't grown, they've fallen for the past two fiscal years.

The governor and legislators have made a lot of changes to try to cope with this huge shortfall. They've slowed spending growth. General fund spending grew an average of 5.9 percent a year from 1993 to 2001, but only 1.7 percent since. They've delayed $550 million in payments to local governments, schools and state universities. They increased the sales, cigarette and riverboat taxes. Most of this new tax revenue will be for property tax relief, but about $500 million will be added to the state budget this year.

They've also lived off their savings, using up balances accumulated during the 1990s. In mid-1998, the state had balances of more than $2 billion. Before the latest revenue projection, balances were expected to be a little more than $600 million by June 30, 2003, the end of this biennium.

Revenues were last projected in November 2001. Those projections then were used to estimate how much extra money the new higher taxes would bring in. As of Dec. 17, they thought that figure would be $10.25 billion in the current fiscal year. On Dec. 18, the projection was lowered by $326 million.

We don't know for sure how that will affect balances, but unless more spending cuts, spending delays or fund shifts are found for this fiscal year, end-of-year balances will fall. $600 million is only 6 percent of the total budget, which is pretty low. Much lower than that, and the state may find it hard to pay its bills on time. The Indiana constitution says that balances can't be negative. Revenues are expected to grow faster after 2003. That's good news, but they won't grow fast enough to get budget-makers off the hook. The past few years have put us in a pretty deep hole, and digging out will be hard. We're looking at a very tight budget for the 2003-05 biennium, as well as a very tough budget session. 




Writer: Larry DeBoer
Editor: Olivia Maddox