DECEMBER
2012

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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12-27-12

 

A Conservative Revenue Forecast
for Indiana


Starting in January, the Indiana General Assembly will craft a budget for the state. The budget is a plan for spending on state services from July 1, 2013 through June 30, 2015, fiscal years 2014 and 2015.

To create the budget, legislators need to know how much revenue they're going to have. On Dec. 17, Indiana's forecast committee offered its best guess. The forecast was a bit more than a billion dollars above current revenues.

A billion dollars is a lot of money. But this is a pretty conservative forecast.

Indiana's revenue forecast is done in two parts. A forecast committee creates equations that link Indiana revenues to the economy. Then Global Insight Co. provides a forecast of the economy through 2015. The economic forecast is plugged into the equations to come up with the revenue forecast for the state's general fund. You can see the forecast documents on the Indiana State Budget Agency's website, http://www.in.gov/sba/2601.htm.

The forecast offers an update for fiscal year 2013 revenues. The committee put 2013 revenue at $14.34 billion. The forecast for 2014 was $14.66 billion, an increase of about $320 million. For 2015, the committee forecasts $15.09 billion, an increase of $750 million over 2013. For the two-year biennium, the General Assembly will have $1.07 billion more than it will have in 2013. That sounds pretty good.

But the growth in forecast revenues for 2014 is 1.5 percent. The growth in revenues in 2015 is 2.9 percent. Global Insight says inflation will be about 2 percent per year. Indiana's population has been growing by about 0.6 percent per year. This means that the added revenue will just about cover the cost of providing current state services at higher prices to a larger population.

That probably means no added services from the current revenue stream. And it probably means no additional tax cuts without cutting the services that the state provides.

Why so little added revenue? Revenues in this biennium have grown faster than the forecast: 6.4 percent in fiscal 2012 and 3.3 percent so far in fiscal 2013. Revenues in 2013 were running a little above the December 2011 forecast. But the Dec. 17 forecast revised 2013 revenues downward. That's a conservative forecast.

Slower growth is not due to the famous fiscal cliff. If Congress fails to act, federal taxes will rise and spending will drop in 2013, and Global Insight (like everyone else) says we'll have a recession. But that's not the forecast used for the revenue projections. The forecast has Indiana income growing 4.4 percent in 2014, which is more than it grew in 2012 or 2013.

The sales tax forecast shows that growth. Sales tax revenue is projected to grow 3.7 percent in 2014 and 4.1 percent in 2015. It's the other revenue sources that create the drag in the forecast.

State income tax growth is reduced because the budget agency will establish a reserve for local income taxes. A reserve for the locals means less revenue for the state.

Corporate income tax rates are coming down, and we're phasing out the inheritance tax. Lower tax rates mean slower revenue growth.

In the past two years we've used more cigarette tax revenue in the general fund, but in the next biennium, some of that money will go to the retiree health-benefit trust fund.

And, gaming taxes are likely to drop. Riverboat casinos and racetrack casinos seem to have reached market saturation, which means that everyone who might gamble at a casino already is. Revenue growth has slowed. Now we're expecting more competition from new casinos in Ohio, particularly in the Cincinnati region. There may be more competition from casinos in Illinois, too. That will reduce gaming revenue in Indiana.

All these reductions add up. Indiana income growth is projected to average more than 4 percent per year, but state revenue growth is projected to average only 2.2 percent per year. Again, it's a conservative forecast.

All this assumes no recession from the fiscal cliff or European financial collapse, or due to slower growth in Asia. If those things happen, this revenue forecast will be too optimistic. There's always a forecast revision in April, right before the budget is passed. This time, the forecast revision may be more important than ever.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox