Mitch Daniels and Opinion and Forefront

KETZENBERGER: Daniels will define legacy in key speech

January 8, 2011

John KetzenbergerThis week we’ll see.

We’ll see just how important education and economic development are to Indiana.

We’ll see if there is political will to put more money into these areas.

And we’ll see whether legislators can do it without raising taxes.

The map for all these discoveries is Gov. Mitch Daniels’ 2012-2013 state budget proposal that is at the heart of his State of the State speech. It’ll be the seventh time Daniels addresses a joint session of the General Assembly, and it’s likely the one that will define his mark on Indiana for years to come.

Here’s why.

The ambitious plans to reform education with an eye toward jump-starting the economy collide with a report showing little sign of recovery from the lingering recession. The $2.7 billion in federal stimulus that helped tide over the state’s operations is gone and the administration’s aggressive cost-cutting has already slashed the ranks of state employees to early 1980s levels.

Finally, the General Assembly’s budget-builders face a $1.3 billion structural deficit in fiscal year 2012, according to the Indiana Fiscal Policy Institute.

All these factors challenge the governor and fiscal leaders like House Ways and Means Chairman Jeff Espich, R-Uniondale, and Senate Appropriations Chairman Luke Kenley, R-Noblesville, as they contemplate how to shoehorn education reform into a tight budget.

Then there is the governor’s self-imposed limitation—no tax increases—that is likewise endorsed by legislative leaders.

A stagnant economy won’t produce enough new revenue from existing taxes to close the deficit. Additional budget cuts won’t, either, because no one wants to reduce education spending. It’s useful to note here that nearly two-thirds of every dollar the state spends is for education from kindergarten through college.

The governor’s fiscal staff believes strong management amid weak revenue growth and more cuts to already-strapped areas of government will lead to a balanced budget by the end of the second year of the two-year budget cycle.

This would be incredible in most states, including all those in the Midwest, but the goal has credibility here because of the administration’s track record. That Indiana anticipates a small surplus despite the prolonged economic trough and has done so without increasing taxes is a minor miracle.

The Vatican might want to send investigators if Daniels and legislative leaders manage to enact a truly balanced budget that does not include revenue from higher taxes. Statehouse veterans are skeptical.

This is an era of parallels. We look for them everywhere. Pundits compared the congressional elections with those in 1974 and 1994. President Obama’s midterm malaise strikes many as similar to the one President Clinton faced in his first term. This economy reminds many of the early 1980s in Indiana.

Will Daniels deliver his version of the vaunted A-Plus education program during his State of the State speech this week? You remember, the sweeping education package from 1987 that added five days to the school calendar, among other reforms, and increased taxes to pay for it?

Yes, the governor will encourage lawmakers to dramatically alter school funding, school charters and teacher pay. No, he will not ask for a tax increase to do it.

There hasn’t been a general tax increase in recent years that hasn’t been tied to a more popular program, including the 2002 sales tax increase that offset elimination of the inventory tax and other property tax relief.

There is talk now of enabling local governments to use local option income taxes as a way to replace property taxes lost to the now-constitutional caps. Indiana’s tax mix is becoming more complex as the desire to avoid general increases leads to specialized taxing districts and classifications.

This complexity makes it hard for taxpayers to understand the system and that, in turn, can lead to discontent. Daniels ought to consider a movement bubbling among some Statehouse wonks and work with lawmakers to start a movement to streamline the state’s tax code.

It’s not flashy, but it could burnish his legacy.•

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Ketzenberger is president of the Indiana Fiscal Policy Institute, a not-for-profit dedicated to nonpartisan research into the state’s tax policies and budget practices. Send comments on this column to ibjedit@ibj.com.

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