IFPI: New Legislature/Governor Will Face Temptation to Spend

An interesting report from the Indiana Fiscal Policy Institute, via Inside INdiana Business:

The Indiana Fiscal Policy Institute (IFPI) today released its report "Indiana’s Fiscal Condition – A Different Set of Policy Choices" that provides analysis regarding the State’s financial picture and also anticipates the challenges facing a new governor and the General Assembly in 2013.

"The new governor and legislators still will certainly have a tough time balancing the budget, but this time it will be in the form of resisting temptation to spend instead of identifying ways to cut expenses," said John Ketzenberger, president of the IFPI. "There will likely be pent-up demand among many constituents for new or additional spending and it is harder for policymakers to say no to them when there are surplus funds."

The report previews the unique set of circumstances facing the state as it enters a transition phase after Nov. 6 when, for the first time in eight years, the state will have a new governor. It’s likely, too, that nearly 40 percent of the members of the General Assembly will be entering their first or second terms, a remarkable period of turnover for the legislative body. Just days after taking office the new governor and the remade Legislature will begin the work of assembling the state’s next two-year budget. Add the fact there will be a new chair of the House Ways and Means Committee, and this will be a most interesting session from a fiscal perspective.

Among the questions likely to be considered in the 2013 General Assembly session are:

  • How will any new spending affect the state’s surpluses? Will these expenditures be one-time expenses, such as capital projects, that reduce the overall surplus, or will they be ongoing expenses, such as education, that will affect the structural balance?
  • Will surplus funds be used to further reduce taxes?
  • Should the state undertake plans to reform how it funds the Teachers Retirement Fund?

These questions and others also are affected by the sluggish economic recovery and concerns that another recession would create renewed havoc on tax revenue. Indiana’s increased reliance on sales and income taxes to pay for education, especially, makes it vulnerable to economic downturns that would make additional spending moot. The new policymakers will have to carefully consider these economic factors as they consider the state’s fiscal future.

The full report can be found on the Indiana Fiscal Policy Institute Web site – www.indianafiscal.org

Need to Raise Indiana Taxes?

The Indiana Fiscal Policy Institute (IFPI) says in its September report that a combination of tax increases and spending cuts is "the politically obvious path … and likely …" but in reaction to such a suggestion, the budget makers and politicians are all saying otherwise.

Chris Ruhl, the governor’s director of the Office of Management and Budget, said, "A general tax increase on Hoosiers is a terrible and unnecessary idea and one the governor firmly opposes." Sen. Luke Kenley (R-Noblesville), chairman of the Senate Appropriations Committee, is reported as saying "… Hoosiers are already suffering … and it would not be fair to them for the state to raise their taxes, too." The leaders of both caucuses in the House were likewise dismissive. Speaker Pat Bauer (D-South Bend) simply said,  "We are not going to raise taxes" and Minority Leader Brian Bosma (R-Indianapolis), who could well be speaker if the Republicans gain a majority in the House, said, "Republicans pledge to enact a balanced state budget without a general tax increase."

So, increasing taxes doesn’t seem to be too obvious to those in charge. But do increases remain a possibility, regardless of across-the-board rejections? Well, maybe. Unfortunately, tax increases can take many forms. And what exactly is being ruled out when a politician says there will be no "general tax increase" is open for interpretation and qualification. Similarly, the constituent-friendly term "Hoosiers" rather than "taxpayers" may indicate they mean only individuals and the general taxes they collectively pay – or conversely, to exclude business entities and the taxes they pay.

Suffice it to say, these "no-new-tax" statements may not end up covering things like changes in how a business’ taxable income is defined, special application taxes, tax law changes that only impact a group of taxpayers, fees or other changes that raise revenue but do not affect broad categories of taxpayers. Yet, these actions are all effectively tax increases for somebody. Don’t be surprised if at some point down the road, the politicians qualify what they mean when they say they won’t raise taxes.  

Whatever happens from here (suggestions of tax increases aside), the IFPI is to be commended for nicely compiling the facts in appropriate context, presenting the issues and focusing attention on the realities of our fiscal situation. The steep decline in revenues is a problem and certain to make it very difficult to formulate a budget. But, the problem cannot be resolved by looking at the revenue side of the equation. Expenditures must be kept in line with revenues – whatever they may turn out to be. One reality that cannot be ignored: budget makers must look at education expenditures.

K-12 funding is by far the biggest piece of the pie and the only category where relatively small percentage reductions translate to significant savings. (Everything else has been cut to the bone or legitimately considered non discretionary.) As undesirable as it is, it should be acknowledged that the only way to balance the books is to find ways to reduce this biggest ticket item. How the problem is addressed will depend on how severe the situation is come next year.

Read the IFPI study here.