Indiana Gov. Mitch Daniels Reaps Big Rewards for Fiscal Prudence

Published February 1, 2009

Gov. Mitch Daniels (R) of Indiana does not presume to tell other governors or lawmakers what policies they should follow, but he does hope they’ll take note of his easy re-election in November.

“I think my re-election shows there is clearly still a market for fiscal prudence,” said Daniels in a recent telephone interview. “You wouldn’t know it watching Washington right now or over the last few years. It probably helped that we came into office at a time of real fiscal emergency for the state [in 2005]. We used that opportunity well and have really maintained a tight control on spending.

“Sometimes I joke about the brilliance of our method, things like spending less money than we take in. What a blinding insight that is,” Daniels said.

Though Barack Obama won Indiana—the first time since 1964 a Democrat presidential candidate has won the state—Daniels had a cakewalk against his Democratic challenger, Jill Thompson. He won the state by 18 percentage points.

Indiana Has Surplus

With most states reporting budget deficits and asking the federal government for hundreds of billions of dollars of bailout money and fiscal stimulus, Indiana enjoys a budget surplus of more than $1 billion. Neighboring states, including Illinois, Michigan, and Ohio, are hemorrhaging red ink.

With property tax reform, the first truly balanced budget in nearly a decade, the first AAA bond rating in the state’s history, and the lowest unemployment rate in the Midwest, Indiana voters apparently recognized these accomplishments and appreciated them.

“On election night, I said I hope one effect of our time here will be that future Indiana politicians will be a little braver,” Daniels said. “These Hoosiers are grownups. We can talk about tradeoffs and say we can’t do everything at once, and they’ll understand. We can have adult conversation. Don’t be afraid to try it. A lot of states haven’t even tried it.

“Saying ‘yes’ is the path of least resistance for the short term,” Daniels noted. “But most people want the people’s business prudently dealt with and will reward that when it happens.”

Immediately Sought Savings

Daniels hit the ground running. On his first day as governor he created Indiana’s first Office of Management and Budget to look for efficiencies and cost savings across state government.

Indiana saw its first balanced budget in nearly a decade that year as the state went from a $600 million deficit when Daniels took office to a $300 million surplus—without a tax increase. The surplus went to repay hundreds of millions of dollars the state had borrowed from Indiana’s public schools in previous administrations.

In 2006 Daniels led the successful push to lease the Indiana Toll Road to private investors for $3.8 billion. As a result, Indiana is the only state with a 10-year, fully funded infrastructure improvement plan that includes construction or renovation of more than 400 roads and bridges—all without raising taxes or borrowing money.

Eased Tax Burden

In 2007 Daniels tackled property tax reform, persuading lawmakers to approve homestead tax credits at a state average of 30 percent, remove $1 billion from property taxes, cap tax bills at 1 percent of a residential property’s assessed value (higher limits for rental and business properties), and limit the growth of local spending.

This was done in part by removing from property taxes the costs of four child-welfare levies, juvenile incarceration and health care for the indigent, and school operations and special education preschool costs.

“Several historic factors converged in 2007 to produce a big run-up in property taxes,” Daniels said. “This is one of the most important things we’ve done. If we hadn’t dealt with it aggressively, I’m not sure we would have deserved re-election.

“Tax limitation is spending limitation,” Daniels said. “By capping taxes as a matter of justice and protection of homeowners and property owners generally, we are going to have the important knock-on effect of disciplining local and school spending. We are going to see in the next two to three years some discipline that might never have come any other way.”

Daniels notes that in Lake County, near Chicago, Illinois in the northwest corner of the state, the county council recently cut government employment and millions of dollars out of the budget. “No one can remember that happening there before,” he said.

Focuses on Excellence

Daniels said his moves to lease the state’s toll road and privatize other areas, such as prison services, have been done “not merely to make ends meet” but to keep government focused on core functions because “in those spheres where government ought to operate, it ought to be excellent.”

Many observers have credited the Daniels administration with improving state parks, child protection services, handling of tax filings, and the Bureau of Motor Vehicles, which recently won a national award as one of the nation’s best.

That’s not bad for a governor who had never held elective office before. Daniels spent years in business, including a stint as president of Eli Lilly and Company’s North American pharmaceutical operations.

Daniels said his business experience is “much more important” to his work as governor than his prior work in government, including serving as a senior advisor to President Ronald Reagan and as director of the Office of Management and Budget (OMB) early in George W. Bush’s first term, where he led negotiations for the 2001 and 2003 federal tax cuts.

“We look for consensus, but only after we make what we believe to be a good plan,” Daniels said. “We start with market principles and try to construct active solutions to real issues. I hope we’re building confidence that we are not only watching money but care deeply about its effective expenditure.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.