2018-09-05 / Front Page

Another slow, steady year for the Indiana state budget

Purdue Extension - Capital Comments

July is closeout month for the Indiana state budget. The state auditor releases the final revenue, spending and balance numbers for the fiscal year just ended. If it’s good news, the powers that be cry “huzzah!” and the loyal opposition looks for something to criticize. Fiscal year 2018 ran from July 2017 to this past June, and the closeout numbers were reported on July 12.

The closeout covers the general fund budget, which is about $16 billion. That’s the part of state spending that gets planned by the General Assembly during budget sessions in oddnumbered years. The rest of the budget is about $18 billion. Three-quarters of this is money from the federal government for specific purposes (mostly Medicaid). It also includes state dedicated funds for services like road construction. That’s where the motor fuel taxes go.

General fund revenues were up in 2018 by 1.9 percent over 2017. Almost $13 billion of general fund money is from the sales and individual income taxes. Those two were up 4.3 percent. Riverboat gaming revenue held steady at $442 million. That’s news, because gaming money had fallen every year since 2011, a 7-year losing streak. Interest earnings on state balances doubled, simply because interest rates went up.

The big negative in revenues was the corporate income tax, down by one-third from 2017. This was a surprise. Corporate profits were up in 2018. Indiana’s corporate income tax rate was reduced, but not by one-third. The State Budget Agency thinks it was partly due to corporate accounting changes, with more money classified as individual income and less as corporate profits. Maybe that’s why individual income tax revenue increased 7 percent, much more than the rise in Indiana income. The latest forecast for 2019 has corporate taxes back up again. We’ll see.

The budget for fiscal 2018 was passed in April 2017, based on the revenue forecast made that month. Meeting the budget plan depends on receiving the expected revenue, so in a sense the comparison between actual revenue and the budget forecast is more important than the yearover year change.

The forecast from April 2017 was $15.6 billion, and revenues came in at $15.6 billion. This is news, because revenues had fallen short of budget-year forecasts for four years in a row, 2014 to 2017. Usually revenues fall short only during recessions, but our economy has been expanding.

Of course, the expansion has been really slow. Perhaps forecasters have been thinking, “Surely in this next year the economy will start growing faster,” only to be disappointed. Back in December it looked like that would happen again. The revised forecast knocked expected revenues down below the previous April numbers. Then a surge in June brought revenues even with the budget forecast. The forecast for fiscal 2019, though, is for another shortfall. Again, we’ll see.

State general fund spending increased by 1.9 percent, the same percentage as revenues. Spending is growing, but not as fast as the state’s economy. As a share of Indiana total income, state spending has been falling, from 5.7 percent in 2014 to 5.2 percent in 2018.

We’ve slowed the growth of state government on purpose, by cutting taxes. The income tax rate was reduced in 2015 and 2017. The inheritance tax was repealed in 2013. Corporate income tax cuts began in 2013 and will continue through 2022. Since the budget must be balanced, slower revenue growth means slower spending growth.

The budget is balanced. State budget appropriations were more than revenues by almost $500 million, but there were about $500 million in reversions, which are appropriations that were not spent. The balance in the state’s account increased by $9 million.

That balance is almost $1.8 billion, which is 11 percent of the total budget. This is within the Budget Agency’s “prudent range” of 10 percent to 12.5 percent. We’ve been in or just above the prudent range since 2012. That’s unusual. In the past 40 years balances have usually passed through the prudent range, on the way up during expansions or on the way down during recessions.

The Indiana state budget is kind of like the economy: Growing modestly, more slowly than it has in the past, but very steady. Onward to fiscal 2019!

(by Larry DeBoer, Professor of Agricultural Economics, Purdue University, ldeboer@purdue.edu)

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