Some Puzzling State Revenue Numbers

The Indiana State Budget Agency recently released the revenue collections report for October. The overall collections for the fiscal year now stand 2.8% ($136 million) below projections; not good, but not critical at this juncture.

The troubling numbers for the revenue watchers are the corporate tax collections. They were down again this month and are now at 52% below the April revenue forecast projections. Nobody really knows how to fully explain the drop. While the corporate collections historically fluctuate widely from month to month and are the hardest to predict for many reasons (that are not directly related to predictable economic activity), the gap between projections and collection is extraordinary. Fortunately, corporate collections have never represented a big piece of the pie (only around 6%) when compared to sales (48%) and individual income (36%) tax collections. Still, the unforeseen drop accounts for $126 million of the $136-million-dollar shortfall.

The State Budget Agency has drilled down on the matter and is attributing it to a high volume of refunds. But what is triggering the refunds is not clear either. Sometimes refunds can cover a number of years. They could be tied to a recent settlement of numerous cases or result from changes in the law – lots of possible factors. Whatever they are attributable to, they probably don’t mean that corporate collections will stay down; they are likely to rebound over the balance of the fiscal year and smooth out the impact, but they are not likely to recover to the total of the original projections. Let’s hope this is just a temporary mysterious dip that is evened out over time.

For those interested, you can review all the numbers and commentary from the State Budget Agency.

Budget Forecast is New — and Different

At today’s State Budget Committee meeting, a new revenue forecast for fiscal years 2009-2011 showed a nearly $1.1 billion decline from the forecast offered less than six weeks ago.

No, as committee chair Luke Kenley (R-Noblesville) pointed out, that doesn’t mean a $1.1 actual loss but a decline from a projected increase that many had doubted when it was delivered.

The forecasters went back to the drawing board to try and figure out why the April projections were so far off of the actual April collection. An expanded group of technical advisors decided to revise their sales tax collection model and added variables to the income tax model to adjust each of the three fiscal years.

The projected decreases (from April’s outlook): $444 million in fiscal 2009, followed by $331 million in 2010 and $316 million in 2011. While the projected revenue decline of 7.5% from 2008 to 2009 is unprecedented in state history, forecasters noted that it is a smaller decline than nearly all other states (including Michigan at an astounding 20%).

Kenley offered that more attention should be paid to the actual revenue numbers — $12.9 billion, $13.1 billion and $13.6 billion for the 2009-2011 period, respectively. That compares to a state that operated in 2008 on a budget of less than $13 billion after state agency budget cuts were ordered and enacted. His conclusion, including the addition of the federal stimulus funds: "If we can flat fund or come close to it over the next three years, we will be OK."

Bill Crawford (D-Indianapolis), chair of the House Ways & Means Committee, isn’t ready to buy into that approach. He said during the meeting that he and House Speaker Pat Bauer (D-South Bend), "want to make sure if we adopt the hunker down, man the barricades mentality, that we don’t allow the education infrastructure to decline unnecessarily." It appeared that others on the committee, through their reactions, were questioning whether flat-lining would be enough. In other words, this battle is far from over.

Crawford expressed "discomfort" with the fact that a dramatically different budget forecast was presented today as compared to April 17. He noted that while part one of his AAA philosophy (acquire information) is complete, it is time for analysis before deciding how to act.

Next up: a budget proposal from Gov. Mitch Daniels, likely next Monday, June 1.