Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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A State Budget Surprise

The state has had a lot of trouble with its budget in recent years. During and after the recession, revenues fell short of predictions by almost $3 billion. The legislature passed a very tight budget this past spring, trying to bring the state back to fiscal health.

But things are looking up. In 2005, revenues came in above predictions for the first time since 1999. Many people expected that the revenue forecasts would rise again at the annual forecast update on Dec. 14.

Surprise! It didn't happen. Here's why.

The state withholds money from your paycheck for both the state income tax and the local income taxes. Every April, you figure your state and local income taxes with the same tax return and write a single check or receive a single refund. The state collects the money, sends the locals their share and keeps the rest.

Local governments hadn't seen increases in their income tax receipts for several years. That's because the state paid too much to locals during and after the 2001 recession, so payouts were reduced to make up the shortfall. After that mix up, the state decided to pay local governments only what has actually been collected. Locals have already been told their income tax revenue for 2006, based on what the state received and counted by June 30, 2005.

This spring, the state administration decided to deliver more revenue to local governments, so it had the Department of Revenue process income tax returns faster. That meant that the state could guarantee more income tax revenue to local governments in 2006.

In a sense, the state moved some payments to local governments from the future to the present. The locals would have received their money anyway, but with the faster processing of returns, some revenue that would have been counted in fiscal 2006 was counted in 2005 instead. This means that some revenue that the locals would have received in 2007, they'll get in 2006 instead.

Back in April, the state's revenue forecast technical committee predicted future state income tax revenue, assuming the normal processing pattern. Then came the unexpected processing speed-up, which increased the promised income tax revenues for locals.

More for the locals means less for the state.

On Dec. 14, legislators were surprised (and unhappy) to find that Indiana's income tax revenue forecasts were being cut by $300 million for the rest of the biennium. This comes despite the continuing expansion and rosy revenue reports in states all over the country.

Riverboat tax revenue projections were down too, by $72 million over the biennium. That's not much of a shock-riverboat taxes are about as difficult to predict as any part of the state's collections. The boats haven't been around very long, so we don't have much experience predicting their tax payments. We don't know how much of the growth in gaming taxes is new people deciding to gamble for the first time, or existing bettors betting more. We don't know the maximum amount a boat could bring, since there's only so much room and so much time available for betting. Maybe high gasoline prices are keeping people from the boats, or making them bet less when they get there.

There was some good budget news. Corporate income tax and other revenue forecasts (like cigarette tax, insurance tax and interest earnings) went up, so the overall revenue forecast loss was about $75 million over the next year and a half. And the state still gets the money from the tax amnesty, which netted $159 million.

Overall, the state budget is in slightly better shape at the end of 2005 than it was in the middle of the year. Now the budget agency thinks we'll have balances of $974 million by mid-2007. Then they thought only $921 million.

Without the income tax shortfall, balances could have looked a lot better. As it is, they look a little better. Either way, though, we've got less than we'll need if we're going to weather the next recession, whenever it comes.




Writer: Larry DeBoer
Editor: Olivia Maddox