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.




Download the audio of Capital Comments: MP3, WMV

More Monster Months?

Indiana Gov. Mitch Daniels called it a "monster month." That would be April, when state revenue collections were $206 million more than predicted. For the year, revenues are almost $300 million above last December's forecast. You can see the Budget Agency's monthly revenue report on its Web site, at

Godzilla arrived at the Statehouse, and he brought cash. What does this monster mean for the state budget? The answer is, as always, "it depends." If Godzilla brings his friends -- if Mothra and Rodan follow in coming months -- our budget problems will be solved. If the monster is a fluke -- if the big guy stomps away, never to return -- state budgets will be tight through the end of the decade. Which is it?

Let's look at the different taxes that delivered the extra cash. About two-thirds of the unexpected revenue came from the income tax. That's $132 million. Some of that came from the Department of Revenue's extra efforts to process tax returns faster. This puts money in state accounts earlier than expected, but it might mean that revenues will be below predictions in later months. This part of the monster is a one-time thing. The department thinks that faster processing accounts for 40 percent of the extra income tax money.

The remainder could be due to more employment and higher incomes by Indiana taxpayers. Maybe the economy is doing better than expected. If so, it could mean more monster months to come.

Only about $23 million of the extra revenue came from sales taxes. Some of this must be due to higher gasoline prices. Motor fuel is subject to the sales tax as well as the excise tax. Gas prices rise and fall so much that this part of the extra revenue could disappear in a moment. The Budget Agency thinks that gasoline is only a small part of the added revenue, though. The rest may be due to more consumer spending in a better-than-predicted economy.

Corporate income taxes accounted for $56 million of the monster. Maybe more businesses are locating in Indiana, and maybe existing businesses are more profitable. Corporate collections are pretty unstable, though. They depend partly on the timing of quarterly tax payments. So far this fiscal year, collections have been above predictions in July, September, December, March and April and below predictions in the other months. They could easily fall short of predictions in May and June.

Riverboat revenue was a little below forecast in April. Tobacco and alcohol taxes, inheritance taxes, interest earnings and other revenues were only a million dollars above forecast. Not much potential for added revenue from these sources.

All together, maybe half of the extra revenue in the monster month of April resulted from Indiana's economy growing faster than predicted.

This would be enough. If there are a lot of half-sized Godzillas in our future, the state budget will reach one definition of "fiscal health" by mid-2007. This means balances above 10 percent of expenditures and reversing all of those school and local government payment delays from the last recession. Then, the General Assembly could write a more generous budget for the 2007-09 biennium, with added state services or more aid to local schools. Or, if legislators prefer, they could provide more property tax relief or reduce state taxes a little.

What if Godzilla is a fluke, and we never see his like again? Then we'll need a tight budget in the next biennium to reach fiscal health by mid-2009. This means few extra services, little or no added school aid, less chance for property tax relief and no tax cuts.

We'll get another read on state revenues early in June, when the Budget Agency publishes revenue results for May. If revenues just track predictions, or if they fall short, then it's more likely that April was a fluke. The General Assembly may be writing a tight budget next year.

But if it's another monster month, or even a half-sized monster, then maybe Indiana's economy really is growing faster than expected. The outlook for the budget will be much brighter. Godzilla arrived. Will Mothra and Rodan follow?




Writer: Larry DeBoer
Editor: Cindie Gosnell