On Monday, December 18, Indiana legislators, state officials, reporters, and policy geeks gathered in the Statehouse and online, for the annual reveal of the state revenue forecast update. Would Santa arrive early with a pack full of added revenues so legislators could make rather merry in the coming session of the General Assembly? Or would the Grinch leave revenue even too small for a mouse?
It was the Grinch. The revenue forecast was revised downward. We’ll have less money to spend during the rest of the 2018 fiscal year, and less in 2019, too.
Budgets are based on estimated revenues. That has to be, because a budget is a plan for the future. We decided in April 2017 how much we would spend for the next two years on schools, universities, health care, and everything else the state funds. We don’t know how much revenue we’ll have in those future years, so we need to guess. If we have an accurate revenue forecast, we plan to spend what we have, but no more.
The last revenue forecast was back in April, right before legislators passed the budget for the next two fiscal years. We’ve collected seven months of data since then. Now it’s time to see how we’re doing and adjust our guess about the rest of the biennium.
We adjusted down. Revenues for the rest of fiscal year 2018, which goes through the end of June, are expected to be $175.5 million less than first projected. Revenues are expected to be $219.2 million less than first projected in fiscal 2019. That’s a 1.1 percent reduction for this year, and a 1.4 percent reduction for next year.
That happened in fiscal year 2017, too. Revenues came in lower than the original forecast from April 2015, when that year’s budget was passed. It was the fourth straight year that revenues had fallen short.
It’s curious, because the economy is expanding. Consider past expansions and recessions. When the economy was expanding at the end of the 1990s, revenues came in above forecast. Then during and after the 2001 recession, revenues fell short. During the 2000s expansion, revenues again exceeded the budget-year guess, and then the Great Recession came and revenues were much lower than predicted.
For the first two years of the recovery revenues came in ahead of projections. Revenues in 2012 were 2.8 percent higher than the April 2011 guess. Revenues in 2013 were 1.5 percent higher. It was just like during the 1990s and 2000s expansions. But starting in 2014, revenues have fallen short of the budget-year forecasts. What’s going on?
Here’s a possibility. The expansion that started in 2009 has been long and steady, but slower than any expansion we can remember. Every year we think, “This is ridiculous. Next year it will have to speed up!” Every year we predict that revenue growth will increase. Every year, so far, we’ve been disappointed.
Here’s another possibility. We’ve cut the corporate income tax, the individual income tax, and eliminated the inheritance tax. (We raised the motor fuel taxes, but those aren’t part of this general fund revenue forecast.) We’ve been cutting taxes, and revenues have fallen short. It’s harder to predict revenues when the economy is growing but tax rates are falling.
Actually, this time almost all of the shortfall from the April forecast was due to corporate income taxes. For this year, the corporate income tax forecast was down $174.4 million, while everything else was down just $1.1 million. Corporate was revised downward by $104 million for fiscal 2019. The forecasters blamed that on new trends in corporate tax accounting, increased use of economic development credits, and changes in the split between corporate and individual income.
The state has about $2 billion in balances, which could be used to fill in the revenue shortfall and support budgeted spending. It seems unlikely that big spending cuts will be needed, though state agencies may be asked to take it easy.
Has the Grinch taken our state revenues to the top of Mount Crumpit, leaving us with nothing but hooks and some wire? Not really. Fortunately, with our balances, we’ve got a vault full of packages, boxes, and bags at the bank.