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Even after the Great Recession and throughout the stubborn economic recovery, it’s getting harder to recall when Indiana’s fiscal house was a shambles.
Budget deficit? That’s so 2004.
So what I have to say might seem impertinent a week after Gov. Mike Pence hailed “a great victory” when the Republican-dominated General Assembly approved a budget with new tax cuts and a projected surplus. But I can’t shake the old Prince tune “1999”—especially the chorus, “2000 zero zero party over, oops out of time.”
Lawmakers and Gov. Frank O’Bannon cut taxes for business, homeowners and families by a projected $600 million during the 1999 session. The state’s revenue surplus then was $1.6 billion and the mood was to lighten the load on taxpayers and boost education spending.
Sound familiar?
The recession began to eat into the surplus in late 2000, and by 2001 the Democrat O’Bannon and the politically split General Assembly struggled to reach agreement on a deficit budget.
O’Bannon and majority Democrats in the House openly disagreed on budget priorities and the governor drew the ire of a majority of lawmakers when he vetoed their carefully crafted pay raise. The next two-year budget included more money for education but little else as the state scrambled to reduce a projected $800 million deficit between revenue and expenditures.
Let’s step out of the Wayback Machine now and step up to a graph of economic growth since World War II. The pattern of growth and retraction looks like rolling waves, up for a few years, then down for a year or so, then back up. It gets a little distorted over the last 20 years, but you get the idea.
We don’t want to believe it, but the economy will shrink again. When the next recession happens, it will magnify the loss of tax revenue caused by the reduction of income and financial institutions taxes, and the elimination of the inheritance tax. At some point, the General Assembly will recalibrate. Lawmakers will cut spending and they might even raise taxes. It’s the way things happen.
None of this is meant to dismiss or demean the policy choices exhibited in the new budget. As the governor observed right after the budget passed, it “put taxpayers first.” State revenue will decline $500 million a year due to the tax reductions.
The state plans to use cash to pay off some debt early and build some university buildings without bonds. Increased appropriations for education and roads also will reduce the surplus. Yet last month’s rosy economic forecast leads to a projected surplus of $1.5 billion to $2 billion when fiscal year 2015 ends.
Were there other options? Sure. Instead of income tax cuts, lawmakers could have put more money into education, roads or assistance programs. Even with the 3-percent increase for primary education in this budget, the appropriation is about on par with the fiscal year 2010-2011 budget, because $300 million was cut during the recession and not restored in the current budget.
Indiana’s fiscal strength allowed the General Assembly many policy options, and it chose to reduce taxes and boost some appropriations. These are logical and reasonable choices.
Yet try as we might, we cannot control the economic cycles. Gov. Robert Orr wasn’t even through his second year in office before he called a 1982 special session to raise income and sales taxes after the last worst recession since the Depression.
History’s tough.•
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Ketzenberger is president of the Indiana Fiscal Policy Institute. Send comments on this column to ibjedit@ibj.com.
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