Forecast: State revenues to miss expectations through 2015

New projections show Indiana will have nearly $300 million less in tax revenue to spend over the next two years than lawmakers thought when they wrote the current two-year budget, which could jeopardize tax cuts and other programs proposed by Gov. Mike Pence.

Sales, income, corporate and gambling taxes will all generate less money for the state in 2014 and 2015 than originally projected last April, fiscal analyst David Reynolds told the State Budget Committee on Friday.

As a result, Indiana will bring in $182.6 million dollars less than expected in 2014 and $115.1 million less in 2015.

State Budget Committee Chairman Luke Kenley, R-Noblesville, said that’s not good news but not likely to require budget cuts.

“I think the forecast is probably in line with the recent revenue receipts that we’ve had, and we’ve had a little bit of a shortfall, so we’re kind of downgrading the forecast slightly,” Kenley said.  ”If we can meet that forecast, though, I think that there’s a good opportunity for us to possibly be able to meet most of the funding appropriations that we made in the last session.”

But Kenley – who also chairs the Senate Appropriations Committee –said the state probably can’t afford this year to start eliminating the property on business equipment or to cut individual income taxes for those who take the standard deduction and have children. Pence has put both those ideas on his 2014 legislative agenda.

“These are all important issues worthy of discussion, and I’m glad to talk about them in 2014, but I doubt if we’re going to see real action on these until we get to the 2015 budget,” Kenley said. “For one thing, all of these things that have a fiscal impact need to be discussed at the same time that every other funding or tax cut request would be impacting the budget so that we have a playing field where everybody has an equal chance to present their case.”

The downgrade in the forecast is no surprise. Through the first five months of the current fiscal year, tax receipts missed the previous forecast by $114 million. That led Pence to order cuts for universities and state agencies and to put a state plan up for sale.

But those moves weren’t necessary for cash flow. The state has some $2 billion in reserves, money Pence has said he needs to protect. And even after the latest downgrade in the forecast, the state is still projected to have nearly $1.9 billion in reserves at the end of the current budget cycle.

John Ketzenberger, president of the Indiana Fiscal Policy Institute, said the revenue shortfalls so far have been small enough to be essentially “a rounding error” on a budget of nearly $15 billion a year. And he said it’s too soon for fiscal leaders to panic.

“While the trend has ben down a little bit, it’s too early to say it’s bad. There will be a surplus regardless,” Ketzenberger said. “The state’s fiscal condition is still very strong, despite the revision downward on revenue anticipated this year.”

But he said Pence will now face a larger hurdle in winning support for tax cut and spending plans.

“It’s more difficult to ask for additional spending if you’ve said you anticipate having less revenue and you’re not willing to part with some of the surplus,” Ketzenberger said. “It’s more difficult in the wake of this report.”

Despite the reduced state forecast, James Diffley, a chief regional economist with IHS Global Insight, told the budget committee the national economy will continue to see growth. Diffley said an increase in consumer spending caused by increases in the national employment level, personal incomes and asset values caused the U.S. gross domestic product to grow by 4.1 percent in 2013. This is the largest GDP growth in three years.

Diffley also said Indiana’s economy is seeing growth. He said the state economy is only 1 percent away from returning to its pre-recession peak and the employment growth rate in 2013 was 1.5. He also said Indiana is outperforming other Midwestern states.

But, Kenley said he thinks Diffley’s forecast might be too optimistic.

“I thought that Mr. Diffley’s presentation was kind of extraordinarily positive, where he thinks the overall national economy’s going, and we’re not seeing that with our monthly numbers here in Indiana,” Kenley said. “So I’m having trouble reconciling those two points of view.”