The revenue projections for the next two fiscal years were updated on Wednesday, giving the General Assembly revised numbers to use in finalizing a state budget before the session wraps up next week. The update also readjusted the current Fiscal Year 2017 numbers; the FY17 numbers that were reduced by nearly $300 million dollars in December were now adjusted back upward by $124 million (so FY17 won’t turn out as bad as previously thought).
That FY17 readjustment serves as a foundation for the forecasters’ confidence that the slow but steady economic growth will continue at a moderate pace over the coming biennium. The pleasant result: a modestly higher revenue forecast for FY2018 and FY2019. The forecast increase resulted from projected growth in sales tax collections (2.7% in FY18 and 3.4% in FY19), sales tax being the source that Indiana is most dependent on, and the larger percentage increase but smaller cumulative dollar increase anticipated in income tax collections (3.4% in FY18 and 5.9% in FY19) – the source that represents the next largest contributor to the state coffers.
The bottom line is that the forecast adds $200 million, only about six-tenths of one percent of the roughly $32 billion that the lawmakers now can expect to see collected in tax revenue over the next two years. While it is a small addition, it is still $200 million that they hadn’t planned on when they put together the budget numbers in HB 1001.
Understandably, the fiscal leaders caution against any major changes to what they have formulated to this point, but as the budget negotiations continue into the last days, they are certain to hear this additional money referenced as justification for some new or additional funding requests. Read the details from the forecasters’ presentation.
State budget watchers have been talking about the April update of the revenue forecast for months. This is because everyone knew that the numbers that came out this week revising the December projections for state tax receipts over the next two-plus years would be the numbers that control the final form of the FY 2014-FY 2015 biennium budget. While the significance of the April update is not to be diminished, the reality is that many of the “down in the weeds” budget crafters are the same people that generate the forecast. The Revenue Forecast Committee includes fiscal analysts from each of the four caucuses and a representative from the state budget agency – and these people are the ones that the fiscal leaders work with to put the budget together. So this means the folks who have been doing the hands-on budget detail work had a pretty good idea of what the April numbers would be earlier than when they were publically presented on Tuesday. But they couldn’t really generate revised numbers until they had enough indication of what the overall economic forecast would be. It is those trends and indicators that serve as the basis for the group’s revenue projections. The economic forecast (or outlook as they call it) is performed by IHS Global Insights (the largest and most renowned
economics organization in the world).
The revenue forecasters apply economic variables to their formula guided by IHS Global Insight’s economic forecast/outlook for Indiana. The group’s presentation this week indicated continuation of a stable but slow recovery, a slight slowing of consumer spending and higher nonwage income. In response to the economic picture, the revenue forecasters made some modifications to their revenue forecasting model and also made an adjustment to the gaming tax projections to account for more out-of state-competition. The resulting bottom line was an upward revision of $290 million over the previous forecast for the balance of FY 2013 (+$33M), FY 2014(+73M) and FY 2015 (+$184M). Nearly all of the increase is attributable to projected individual income tax receipts in the next biennium. The individual income tax projections were increased by 3% and 4% for FY 2014 and FY 2015 respectively. This translates to $70 million and $151 million more than the December forecast.
The forecast’s show of strength in personal income growth could itself become the subject of debate in the budget negotiations since it can be argued two different ways. Those supporting a tax cut will point to it as evidence that the state is collecting too much in this particular category of revenue, while those cautioning against a cut will suggest that this demonstrates the volatility and uncertainty of a steady income stream. Will the forecasts cause the House budget-makers and the Senate budgetmakers to change their thinking and reconsider the tax cuts? Perhaps, but consider that $290 million is only 1% of the total budget and is really nothing more than an adjustment of a prior estimate.
However you want to view it, it is a positive upswing and that fact alone should help the Governor’s cause for the individual income tax rate reduction.