Indiana state government finished its fiscal year on June 30 with an annual surplus of about $50 million—meaning Gov. Mike Pence’s administration spent a little less than the $15 billion it received in tax revenue.
That helped the state’s overall savings grow to about $2.24 billion, providing Indiana with a budget cushion that plenty of people are eager to spend.
But there’s a problem lurking behind those shiny numbers—one that could threaten state services and that big surplus. Year-over-year tax receipts fell in fiscal year 2016 —for the second time in the past three years.
That’s notable because the revenue drops came not during a recession, when states regularly face shortfalls and use rainy day funds to make up the difference.
Instead, they came during relatively good economic times.
Unemployment is low. The state is adding private-sector jobs. Pence boasted at the Republican National Convention of putting more money into schools, roads and health care.
Still, tax revenue in fiscal year 2016 couldn’t keep up with the prior year. That’s in part because the state is phasing in a Pence-backed individual income tax cut passed by the Legislature. The state recently cut the inheritance tax and is phasing in corporate income tax cuts as well.
But state revenue also failed to meet the most recent projections—and the state’s fiscal forecasting crew took those tax cuts into consideration when developing the numbers.
Low fuel prices could be at least partly to blame for the shortfall. Indiana can’t collect as much from its 6 percent tax on gas when a fill-up costs less than it has in more than a decade. And Indiana’s per-capita income continues to lag the nation as a whole, meaning that, even during a recovery, the state’s income tax revenue just isn’t keeping up.
Regardless of the reason, though, missing the fiscal forecast consistently is a big deal. Taking in less revenue than during the prior year is even worse. It’s a sign the state’s economy isn’t actually growing.
Brad Gottschlich authored a report about the state budget for the Indiana Fiscal Policy Institute and wrote that “missing the revenue projection makes managing the second year of the two-year budget more difficult, but collecting less revenue in FY 2016 compared with FY 2015 presents immediate and long-term challenges.”
The Pence administration ended the last fiscal year in the black thanks in part to money state agencies had been allocated by the Legislature but didn’t spend under orders from the Governor’s Office. According to the Indiana Fiscal Policy Institute report, the state could be facing bigger reversions, budget cuts or a dramatically reduced surplus unless tax revenue experiences “extraordinary growth of 3.5 percent” over the next year.
But consider that, since the end of the Great Recession, growth in the state’s annual revenue “has barely topped 2 percent in a given year,” the report said.
That means the next governor and General Assembly could be facing some tough decisions. The candidates should explain now how they’ll deal with the state’s revenue challenges without losing its valuable AAA bond rating and cutting services for Hoosiers.•
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