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Capital Comments: An Extra Billion and a Half in State Revenue

On April 19, 2023, in the Indiana Statehouse in the city of Indianapolis, one-point-five billion dollars appeared out of thin air. The state revenue forecast upped its prediction of revenues for the rest of this fiscal year and the coming biennium, 2023-25, by $1.5 billion over the prediction from last December. 

This is a just a prediction of future receipts from state sales and income taxes, gaming revenues, interest earnings and other sources. But it’s a prediction with consequences. The General Assembly passed the state budget through June 2025 based on this prediction. The budget is a plan for future spending and taxing. Legislators could plan to spend more, or tax less, than they thought just two weeks ago.

The revenue forecast has two steps. The state hires a consulting firm, S&P Global, to provide predictions of Indiana income, retail sales, corporate profits, and many other economic indicators. Those numbers are turned over to the forecast technical committee, made up of staff from both houses, both parties and the governor’s office. They develop equations that relate the economic data to Indiana revenues, based on historic trends. They run the forecast numbers through the equations, and out pop revenue predictions for the next two-plus years. The State Budget Agency documents the whole process on its website,

There was a forecast last December, to provide a starting point for the budget process. Then, in mid-April, the forecast was updated to account for the latest economic and revenue information. They raised the forecast for the rest of this fiscal year by $386 million. The forecast for fiscal 2024 increased $579 million, and for fiscal 2025 the increase was $540 million. The total is just over $1.5 billion.

What happened between December and now? Expectations for the U.S. and Indiana economies have improved from what was thought only five months ago. In December the forecast put the Indiana unemployment rate for 2023 at 4.0 percent. As of February, the actual rate was at 3.1 percent. The April forecast revised the 2023 unemployment prediction down to 3.3 percent. More employment means more wages. The 2023 wage growth forecast rose from 4.5 percent in December to 5.4 percent in April.  More wages makes for more income tax revenue. Predicted individual income taxes are up by $580 million through 2025.

The forecast of corporate income taxes is based on Indiana gross state product and the S&P 500 stock index. The prediction of the stock index for 2023 dropped a little from December to April but was higher for 2024 and 2025. In December, Indiana GSP had been expected to fall a tenth of a point in 2023; now it’s expected to grow 0.3 percent. Growth rates are predicted higher in 2024 and 2025 too. So, the corporate income tax forecast rose a little for 2023, but by a lot more in 2024 and 2025. That added $446 million to predicted revenues overall.

Lower unemployment, higher wages, more state output and rising stock values are good news. Higher inflation, not so much. But the sales tax is applied to the prices of taxable goods and (a few) services, so higher prices produce more sales tax revenue. As of March, actual sales tax collections were up 6.3 percent over the year before, the highest growth among the major taxes.

Inflation is coming down, but not as fast as the December forecast expected. The April forecast revised future inflation upward. That adds sales tax revenue. Higher wage growth also allows more purchases, even at higher prices. That contributes to added sales taxes too. The April forecast revised sales tax revenue upward by a total of $250 million.

The upward revisions of individual income, corporate income and sales taxes add up to about $1.3 billion. Most of the remainder comes from added interest income on state balances. Interest rates are expected to rise more as the Federal Reserve continues to battle inflation. 

More money at the last minute is always welcome. That debate about whether to fund this program or that one? Hey, we can do both! But what of those who expect bad times ahead? They’ll say, let’s keep the money in reserve, just in case.

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