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UPDATE: House GOP budget raises cigarette tax while funding some of Holcomb's wish list

February 15, 2017

The two-year state budget released by Indiana House Republicans on Wednesday includes a $1 per pack tax hike on cigarettes that could offset a hole in the budget created by their road-funding plan—and gives Gov. Eric Holcomb a few of his budget priorities.

But the plan has already encountered some pushback by a top Senate Republican.

House Republicans have advanced an infrastructure plan that would immediately shift the sales tax charged on gasoline purchases to pay for roads, leaving about a $300 million per year hole in the budget.

Raising the cigarette tax would help pay for Medicaid spending and smoking-cessation programs, freeing up about $287 million per year to help patch the hole in the budget.

The House GOP's $31.4 billion, two-year budget would leave the state with a structural budget surplus of $115 million in 2018 and $252 million in 2019.

House Ways and Means Chairman Tim Brown said “it would be much, much harder” to maintain a structural surplus in the budget by moving the remaining sales tax on gasoline over to pay for road funding without increasing the cigarette tax. 

But Sen. Luke Kenley, R-Noblesville, said Wednesday he was not in favor of shifting the sales tax on gasoline to the transportation fund, or raising the cigarette tax by $1 per pack. Kenley is the highly influential chairman of the Senate Appropriations Committee and chief budget writer for Senate Republicans..

Kenley said he is trying to convince his caucus to raise revenue for road funding this year, but he believes the state would be better off tolling on its interstates.

“I’ve been willing to dedicate a certain share of the sales tax on gas [to roads] as a display of good faith,” Kenley said.

Kenley said he though the plan to increase the cigarette tax was “problematic.”

“I think that’s a plug number to help diminish the problem you get into with the sales tax on gas issue,” Kenley said. “I’m not convinced that’s the right way to go."

The House budget plan funds the state's fledgling preschool program at $20 million per year. It also includes modest funding increases for K-12 education over the biennium—2.8 percent, or $273 million over two years—and higher education, where funding will increase $23 million, or 1.7 percent, over two years.

The budget plan also partially addresses some of Holcomb’s plans to grow the economy and strengthen the state’s workforce.

The budget would establish Holcomb’s proposed Next Level Indiana Trust Fund to invest in Indiana companies—but only allow about half of the $500 million Major Moves fund, which was formed from proceeds of the Gov. Mitch Daniels-era lease of the Indiana Toll Road, to be invested in the program.

It would also allow the Venture Capital Investment tax credit to be used to “stimulate investment in Hoosier start-ups” and would appropriate $10 million per year to “advance innovation and entrepreneurship programming at universities and in Indiana communities.”

The budget plan includes $2 million per year for a Workforce Ready grant program that would provide tuition for adults to get credentials in high-demand, high-wage fields, and $250,000 for the governor’s office to develop a “comprehensive workforce development plan to better align state programs.”

However, the House plan does not include money to incentivize nonstop flights from the state's airports, a component of Holcomb’s plan.

“In our prioritization in looking at what we wanted to do with every child [in education funding] and talking with the caucus, no, that is not included,” Brown said.

Here are a few other budget highlights from the plan, which is likely to change slightly as it moves through the House and is later debated by the Senate:

Police: The budget provides funding to increase Indiana State Police salaries by 12 percent over two years.

Veterans: The plan increases the military retirement and survivor’s benefits deduction from $5,000 per year to $16,000 per year by 2019.

Department of Revenue: The House plan provides $33 million over two years to “begin the modernization of DOR’s revenue collection system.”

Child and adult services: Funding for the Department of Child Services would rise by $50 million per year and adult protective services funding would rise by $3 million per year. Funding for sexual assault victims’ assistance would rise by $500,000 per year.

Opioid epidemic: The budget plan would give $5 million per year to support the work of the governor’s new executive director of drug treatment, prevention and enforcement, Jim McClelland. It would also provide $185 million over two years for investments in local correction programs “that focus not just on incarceration but on rehabilitation” and $5 million per year to support so-called “nurse-family partnership” programs to help new mothers.

After the debut of the House GOP plan, Holcomb praised the effort to keep the state's budget balanced and maintain healthy reserves.

“I’m also happy to see that it provides support for key priorities of my Next Level legislative agenda—including economic development, transportation, education, drug addiction prevention and treatment, and government service," he said. "I’m encouraged and looking forward to the work ahead as we progress through this long legislative session.”

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