Smaller State Revenue Collections Continue: How Will It Impact 2017 Legislative Session?

Each December the state budget makers receive a revenue forecast prepared by group of very knowledgeable and conscientious fiscal analysts, economists and academics. The group considers economic predictions, uses elaborate models and applies involved equations to generate what has proven to be remarkably accurate predictions of how much the state will collect in taxes over the next two years. Every other year, including this year, their numbers serve as the basis for building the state’s biennium budget. While lawmakers will debate how the projected revenues should be spent, Indiana is fortunate that lawmakers accept the consensus of these experts and do not debate how much money there is to spend – as is the case in many other states.

Forecasters project that Indiana will take in $31.5 billion in FY2018 and FY2019. This is around a billion dollars more than what was projected for the last biennium. However, as good as the predictions have been historically, FY2017 estimates turned out to be off the mark by $378 million. Low gas prices were a major contributor to the inaccuracy. Unexpectedly cheap gas meant less sales tax on those less expensive fill-ups.

When coupled with generally weaker sales tax collections, the FY2017 (ending in July) collections are now expected to be about 2.5% less than earlier projections. That money will have to be made up in the first year of the biennium, from the projected 2.9% year-over-year (FY2018 over FY2017) growth. Fortunately, the forecasters see a little better growth, 3.9%, in the second year of the biennium (FY2019). The bottom line is that the money available to cover growing expenses and new funding desires will be very modest, somewhere around $1 billion – that’s only about 3% more money for the entire two-year period. And essentially it all comes in the second year, so look for budget makers in the 2017 legislative session to be very frugal in FY2018 and then build in some increases in FY2019.

Economic uncertainty, sluggish sales tax collections, further diminishing gaming revenues and other factors will all put additional pressure on the budget process. As these things play out, the forecasters could shift their numbers a little more before they update their two-year projections in mid-April, just a couple of weeks before the budget has to be passed by the General Assembly.

State Revenues Under Projections, but Nothing to Worry About Yet

It’s true: The tax collections for the first two months of the new fiscal year and new state budget have fallen slightly below the forecasted target. Specifically, general fund revenues for July and August combined are $65 million short of the projections. That is 3.2% under the combined forecasts for those two months. But to worry about $65 million at this point is not warranted. First, $65 million is only a blip when you consider that we are talking about a $30 billion budget. Secondly, as in surveys and polls, a variance of less than 5% in revenue forecasting is statistically insignificant.

And lastly, there are 22 more months in the biennium. There will inevitably be fluctuations in the revenue numbers throughout the balance of this fiscal year and next fiscal year. The variance could double or it could disappear in the next couple months. The point is – until we experience a full quarter of shortfalls that total more than 5% – concern is premature.

This is not to say that the numbers are meaningless or that they should be ignored. Keeping a close watch on the revenues and reacting accordingly has been a key to Indiana maintaining its strong fiscal status over the last several years. Discrepancies between the forecast and the actual collections can result from many things, as can be noted in the budget agency commentary that often accompanies release of the hard numbers each month. Changes in the law, special transfers and timing issues can all explain monthly anomalies.

However, closer looks at the individual sources, plus year-over-year and month-to-month comparisons can evidence significant trends. Sales tax revenues are by far the largest single source, making even small differences between the actual year-over-year growth and the projected annual growth something to pay close attention to. While corporate income tax collections are not as critical to the bottom line, they are a major source of revenue and have been very strong (46.7% above the target through the first two months). Another positive aspect of the short-term numbers is the modest uptick of gaming revenues (7.2% above target).

So keep in mind that the numbers will fluctuate and most probably balance out over time – if not, adjustments can and will be made to assure that Indiana maintains its prudent fiscal posture.