Indiana revises its revenue forecast

Indiana released its revised revenue forecast in December, the same week the National Association of State Budget Officers released its fall report for the 50 states. It’s a nice opportunity to compare Indiana to the nation. How are we doing?

Indiana passed a two-year budget in April, which set state spending for fiscal years 2016 and 2017. That’s July 1, 2015, to June 30, 2017. A budget is a plan for the future, so we need a forecast of future revenues to know how much we can spend. The budget was based on a forecast done in mid-April. Every December, the revenue forecast is updated in time for the next session of the Legislature. You can find the forecast documents on the State Budget Agency’s website at

The December revenue forecast was disappointing. Revenues are expected to be $40 million or 0.3 percent lower in fiscal 2016, and $135 million or 0.9 percent lower in fiscal 2017, than had been forecast in April. The sales tax revenue forecast saw the biggest drop. Revenues are still up from last year, but just a little. Now we’re expecting 0.2 percent growth in 2016 and 2.8 percent growth in 2017.

According to the national organization, lots of states have reduced their revenue forecasts since last spring. Back then, all states combined were looking for 3.1 percent revenue growth in fiscal 2016. In the December report, this was scaled back to 2.5 percent. The average state saw a downward revision in its revenue forecast. Indiana was not alone.

But our forecast of 0.2 percent growth is much less than the national average of 2.5 percent. Indiana’s economy is growing a little slower than the nation’s. Over the last year, Indiana’s total income grew 3.5 percent, compared with the national average of 4.1 percent. That may explain part of our slower revenue growth.

Lower gasoline prices may play a role. Indiana is one of the few states that applies its sales tax to gasoline on top of its gasoline excise tax. Drivers in Indiana buy about 3 billion gallons of gasoline each year. At $2.50 a gallon and with our 7 percent sales tax rate, sales taxes on gasoline would be $525 million. At $2 a gallon, taxes would be $420 million. Lower gasoline prices could cut sales taxes in states such as Indiana where the tax is applied to gasoline.

The rest of the explanation for our slower revenue growth may be tax cuts. Our individual income and corporate income tax rates are lower in fiscal 2016 than in 2015. Those rate cuts probably knocked about a percentage point off the forecast growth rate for 2016.

The revenue forecast was down, but projected state balances actually increased. At the fiscal 2015 budget closeout last July, the State Budget Agency projected end-of-2017 balances at a bit more than $2 billion. After the downward revenue forecast revision, projected balances are up to $2,177 million. The biggest reason appears to be $162 million in unspent Medicaid appropriations. Medicaid costs came in lower than expected, so those funds remained in state balances.

One way to assess the size of these balances is to compare them to the size of the budget. Balances are projected to be 15 percent of total operating revenue in 2016 and 14 percent in 2017. The budget agency puts the prudent range for balances at 10 percent to 12 percent of the budget. By 2017, balances will be more than $600 million above the prudent minimum.

Our balance percentage also is higher than in most states. According to the national organization of state budget officers, state balances nationally are 8.8 percent of budgets. We’d regard that as less than prudent. Only six states have higher projected 2016 balance percentages than Indiana’s 15 percent.

More-than-prudent balances are one reason why there seemed to be so little concern about the downward revenue forecast revision. Revenues 0.3 percent lower in 2016 or 0.9 percent lower in 2017 could be covered out of balances, and the balance percentage would still be more than 12 percent.

So the revenue report gives mixed signals. Revenues are expected to be $175 million less than originally forecast. Balances are expected to be more than $600 million above the prudent minimum. How are we doing? Compared with the U.S., Indiana has slower growth in revenue but more money in the bank.