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.

Governor to Legislators: A Billion is a Billion (in Reserves)

Governor Mitch Daniels presented his revised budget proposal to a special legislative committee this afternoon. He closed with announcing that the special session will begin on June 11 (1 p.m.). Among his key earlier points:

  • The special session is "not something to be regretted, but something to be grateful for."  He made it clear that he would have vetoed the proposed budget (defeated in the House in the last minutes of the regular session) due to the unrealistic revenue forecast that was in place at the time
  • He hopes legislators give serious consideration to an education trigger. If revenues do exceed projections at some point in the next two years, half of the excess would go toward education and the other half to the state’s rainy day fund
  • He indicated flexibility within his parameters to legislative wishes with the following exceptions: no gimmicks, no dipping into pension funds and only using one-time federal stimulus money for one-time purposes. "A billion means a billion (for reserves). It’s not a starting point."

Sen. Luke Kenley (R-Noblesville) offered a preview of things to come for the committee:

  • State Budget Director Chris Ruhl answering more legislative questions on Thursday. A recommendation from the administration on the CIB funding crisis for Indianapolis sports and convention facilities is expected later that day
  • Testimony Thursday and Friday from proponents for K-12, higher education, Medicaid/social services and economic development/worker training
  • Legislative caucus presentations on Tuesday, June 9, with a focus, according to Kenley, on "major points you would like to see in the budget, not bringing in the additional bills you would like to see addessed in the special session"

Text of the governor’s address to the public on Monday and slides used in his presentation are available here

State Budget Director Talks Taxes, Stimulus on First Friday Call

Indiana State Budget Agency Director Chris Ruhl was kind enough to join our VP of Taxation and Public Finance Bill Waltz on this morning’s monthly First Friday Call.

During the call, Ruhl discussed the state’s current budget and the impending federal stimulus plan. 

"It’s certainly a dramatic proposal just because of the magnitude of it," he said. "It’s likely going to be over $900 billion."

Ruhl explained the importance of using the state’s stimulus funds for one-time expenditures. He says that Indiana should avoid just plugging gaps in state operating budgets because that would cause problems in two years when the money runs out. Ruhl asserted the remaining shortfalls would not be able to be made up in state tax dollars. This is why the state plans to remain focused on infrastructure investments and tax reductions to grow the economy.

He also stated that while the state would receive $4-5 billion, that number could be deceptive as the distribution of that money must be formulaic in many cases, meaning the state wouldn’t have total autonomy or leeway to maneuver the money around.

Ruhl added that Indiana is one of the 10 best financially positioned states, and that states like California and Michigan are really struggling.

"California has an annual deficit that’s three times larger than our state budget," he noted. "Things are much worse in other states, because they spent heavily in the good times and spent all their reserves. Now the only way out is stimulus dollars and tax increases — we saw that in Michigan."  Continue reading