Better Economy Boosts Indiana’s Revenue Projections

Published February 1, 2005

Budget officials for the state of Indiana are projecting revenue increases over the next two years, the result of an improving state economy. This is the first projected increase in revenue since 2000.

The state expects to collect nearly $1.8 billion in additional taxes over the next two years, mostly because of increases in individual and corporate income tax receipts, according to Bob Lain, a member of the State Budget Agency, which presented its estimates to the State Budget Committee on December 14.

The report shows Indiana taking in $11.7 billion in fiscal year 2006 and $12.3 billion in fiscal year 2007.

Money Already Likely Spent

But projected increases in the cost of Medicaid and other programs are expected to consume most of the additional money.

“Medicaid is the 500-pound gorilla of Indiana state expenditures, as it is for many other states,” noted economist Barry Keating, Jesse H. Jones Professor in the Mendoza College of Business at the University of Notre Dame. This “is the single most important area for meaningful reform–that is, spending reductions.”

Keating explained, “Any program like Medicaid that splits funding between Indiana taxpayers and the federal government breeds expansion beyond what the cost would be if the total bill were paid by Indiana taxpayers. Governor Daniels would do well to concentrate on Medicaid reform as a source of help in balancing the state budget.”

“What impresses me about the December 14 revenue forecast,” said Cecil Bohanon, professor of economics in the Miller College at Ball State University in Muncie, Indiana, “is that its forecast revenue for 2005 is about $300 million more than in the previous forecast for 2005. That pares the expected budget deficit for 2005 down from $900 million to around $600 million–good news, but the State is still $600 million in the hole.

“Indiana must either increase taxes, reduce spending, or engage in some combination of the two to restore long-term fiscal balance,” Bohanon noted. “Since over half the state’s spending is for K-12 and higher education, any spending restraint must include these ‘sacred cows.'”

The higher projected revenues mean “we can pay for a good deal of the automatic growth factors built into law, but nothing new,” said Rep. Jeff Espich (R-Uniondale), chairman of the state House Ways and Means Committee, to reporter Niki Kelly of the Journal Gazette newspaper (December 15). “This allows us to pay the bills we know we have.”

Espich’s projection counts on the state not spending $301.3 million that was to have been spent on new buildings in the current $22.8 billion, two-year budget. A recent court decision requiring casinos to pay higher taxes, and the expiration in 2007 of the state’s Earned Income Tax Credit for low-income working families, are expected to add another $237 million in revenue over the next two years.

Spending Keeps Rising

Governor Mitch Daniels (R), who took office January 10, said after his election victory that Indiana’s budget situation was worse than he believed during the campaign. Nonetheless, he has presented a plan for his first 100 days in office that includes tax cuts. That plan says cutting unnecessary spending and streamlining government “will be in the best interests of Indiana’s economy.”

The urge to spend the additional revenue may be strong.

“Unfortunately, this revenue forecast raises everybody’s expectations,” said State Rep. Eric Turner (R-Marion), to reporters at the Indianapolis Star (December 15). Turner is a member of the state House Ways and Means Committee, which writes the state budget.

One of the biggest areas of concern in the budget is the Medicaid program. Costs have risen nearly 8 percent annually over the past five years, according to the state Office of Medicaid Policy and Planning. Costs are projected to rise another $716 million over the next two years.

The Indiana General Assembly went into session in January and has begun work on the next two-year budget. By law the legislature must finish the budget by April 29.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.