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Capital Comments: State Revenue Growth Will Return to Normal

Thursday, December 15, was a much-anticipated day at the Indiana Statehouse. It was Revenue Forecast Day, when the General Assembly heard the prediction of how much revenue will be available for state spending during fiscal years 2024 and 2025. The legislature will pass a two-year budget, in the session starting in January, based on these revenue estimates.

The forecast is done in two parts. The state hires a private firm, S&P Global, to forecast changes in Indiana’s economy. Then a committee of Indiana budget experts uses this information to forecast state revenues. The economic forecasts come from the outside, so they’re not tempted to, say, increase the prediction of retail sales in order to raise estimated sales tax revenue. 

It’s a consensus forecast, meaning that the Senate, the House and the governor’s office all agree on the same predictions. Everyone starts the budget debate with the same numbers. The debate will be about policy, not about whose forecast is right.

On Forecast Day, the legislators really wanted to know how much money they’ll have for state spending over the next two-and-a-half years. But they pay good money for an economic forecast, so they patiently listened to the economist describe what S&P Global expects. S&P thinks there will be a mild recession at the beginning of 2023 (starting now!), with a recovery starting by July, then modest growth for the following two years. The Fed is expected to raise interest rates through the first half of 2023. S&P predicts that inflation will fall below 3 percent by the end of next year, and that the unemployment rate will top out at 5 percent in 2024. 

The economist finished, and it was finally time for the revenue forecast. First came the adjusted forecast for fiscal year 2023, which ends on June 30. Revenues have been running ahead of last December’s forecast, so 2023 revenue was revised upward by $368 million.   

Next, the first estimates of revenues in fiscal years 2024 and 2025. Revenues are expected to grow 3 percent in 2024, and 2.9 percent in 2025. That’s growth of $628 million in 2024 and $616 million in 2025. All three numbers add up to about $1.6 billion.

The Budget Agency also provided an update of state balances. By the end of fiscal 2023 the state expects to have $4.8 billion in the bank.

You can see the economic and revenue forecast on the Budget Agency’s website, at, under “Budget Information” and “Revenue Data.”

Those are the numbers, and they mean that state revenue growth is returning to normal. The past few years have been crazy. The COVID lockdown caused a one-third drop in revenues at the end of fiscal 2020 (that is, April through June 2020). The income tax deadline was delayed from one fiscal year to the next, which doubled up on income tax collections in fiscal 2021. The economy recovered rapidly starting in the second half of 2020 and into 2021. Federal COVID aid added to income and spending, accelerating income and sales tax receipts. 

Instead of a revenue disaster, the recession and recovery produced a revenue windfall. Total revenues grew 8.9 percent per year on average from fiscal 2019 to 2022. Growth had averaged 3.4 percent over 2016-19. The 3 percent revenue growth predicted through 2025 reflects the expected mild recession and recovery, and the fall of inflation. There won’t be big federal aid, and there won’t be record low interest rates, just modest growth in incomes and sales. You know, normal.

State balances are still well above normal, though. That $4.8 billion in balances is 22.8 percent of current revenues. They were $2.3 billion at the end of 2019, which was 13.6 percent of revenues. Balances will be more than double that just four years later. That’s even after another refund back to taxpayers, $935 million this time, and a big $2.5 billion transfer to cover unfunded pension liabilities.

Yes, revenue growth will slow, from spectacularly fast to merely normal. Legislators might decide to use big balances for added projects or lower taxes. But should a recession be deeper than expected, the state has the balances to cover a revenue shortfall.  

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