Report: State must cut spending, hike taxes or both

State officials next year will have to make more spending cuts, increase taxes or both as they face the most challenging fiscal outlook in 30 years.

Those were the conclusions of an Indiana Fiscal Policy Institute report released Thursday detailing the impact of the recession on the two-year budget that goes into effect July 1, 2011.

Dwindling tax revenues will cause a projected $1.3 billion budget gap as the state enters its next budget, which would have an estimated spending base of $14.6 billion, according to the report.

That deficit equals the amount needed to pay for government functions such as prisons, police, parks and the General Assembly—essentially everything but education and social services.

To make up the gap, the state will have to look at increasing sales or income taxes, eliminating services or a combination of both, said John Ketzenberger, the Indiana Fiscal Policy Institute’s president.

“Their only choices are to make cuts and hope that the economy grows enough that cuts and growth offset the deficit—and there’s really no sign the economy is going to grow at a rate that’s enough to make that happen—or make cuts and look at increasing revenues through taxes,” Ketzenberger said.

Gov. Mitch Daniels’ administration refuted the notion that tax increases could be needed.

“We’ve proven time and again we will make the reforms and decisions required to live within our means and keep Indiana in the black without raising taxes,” Chris Ruhl, the director of the state's Office of Management and Budget said in a statement.  “We are leading the nation in recovering lost jobs in large part because we did not raise taxes while other states did. The Institute’s suggestion of a general tax increase on Hoosiers is a terrible and unnecessary idea and one the governor firmly opposes.”

The state has faced tough economic times for the last two years in the midst of a long-lasting recession. A high unemployment rate—now at more than 10 percent—and slow gross domestic product growth have made sales and income tax revenues volatile.

That’s a problem, the report says, because those two taxes make up 80 percent of Indiana’s revenue.

The result is apparent: The state’s revenue collections in 2010 were more than $900 million less than in 2008.

Indiana House Speaker B. Patrick Bauer said the report highlights the challenge Indiana faces.

"Now that we see the results of a study by an independent group of fiscal experts, the public can see that Indiana is not the island of prosperity that the governor has continually talked about these past few years," Bauer, D-South Bend, said in a prepared statement.

In the last few years, a $2.7-billion boost from federal stimulus programs and about $3 billion in spending reductions by Daniels’ administration helped the state survive the losses.

The stimulus and many of the governor’s tactics, however, aren’t sustainable. And the economy is hardly expected to rebound next year.

That means the next budget, according to the report, will require “some creative thinking and tactics.”

If there is good news in the report, it’s that Indiana is hardly alone. The national Center on Budget and Policy Priorities reports that 46 states faced shortfalls in their 2009 or 2010 budgets.

Compared with states such as Illinois, Ketzenberger said, Indiana is faring well.

“But tough times are on us,” he said.