Indiana lawmakers got an early Christmas surprise back in December — a newly projected tax revenue boost. But that money puts them in a bit of a bind.
Do they let the state surplus rise to $5 billion by the middle of 2027 while also cutting state agency budgets, laying off workers and slashing social service assistance for poor Hoosiers?
It appears so.
“Though the state’s revenue forecast has improved compared to April 2025, it’s not responsible to spend money that hasn’t yet materialized. Senate Republicans will hold the line on major spending proposals, as budget decisions should be made during budget sessions,” the caucus said in a Wednesday news release.
Let’s review how we got here.
The two-year budget process began in December 2024 with a forecast that estimated how much tax revenue was expected to come in over the next two fiscal years. Then, state fiscal leaders spent months crafting a budget that would run from July 1, 2025, to June 30, 2027.
But just before they finalized the budget in April 2025, an updated forecast showed that much of the new revenue that had been expected wouldn’t materialize.
That forecast process has been used for decades and has generally served the state well. Lawmakers technically always spend money that is expected to come in the future.
It can be confusing, but think of it as if you were told you’d receive a 3% raise next year, so you used that to budget for the year. But, before it took effect, your employer dropped the raise to 1%. You will still receive more pay, though not as much as you had planned for.
So, lawmakers in April 2025 reduced the appropriations in the budget bill by about $2 billion. The two-year spending plan was signed into law in May. That led to Gov. Mike Braun cutting agency budgets, laying off hundreds of state employees and limiting child care subsidies, among other austerity measures.
Fast forward to December 2025, and the annual forecast comes around again. Except this time, the projections move in the other direction — a surprise boon! That means the state will now take in far more money than it is scheduled to spend.
This would be your boss unexpectedly going back to the 3% raise. Would you adjust your spending for the year, or save the additional amount?
The state surplus is now expected to rise to nearly $5 billion by mid-2027 — about double what was anticipated last summer. That’s almost 22% of annual state spending, when legislators usually try to keep it between 10-15%.
Future action?
Democrats are pushing to reverse some key cuts.
House Democratic Leader Phil GiaQuinta, D-Fort Wayne, said the first thing state government should do is eliminate the waitlist for low-income child care vouchers.
“Child care is such a big issue out there, for parents, for employers, something that we could do, we need to really work on that. We could use some of the money for that,” he told reporters Thursday. “I’ve toured a facility in Fort Wayne back in October, and then in December, they put out a notice that it’s closing. And it’s not the only one closing throughout the state. So the providers need paid; the parents need safe, productive places … where they can take their children. And that’s something that we really should do, and that’s everyone’s asking for. It very disappointing that it’s not on their priority list.”
The waitlist has entered its second year. There were more than 32,000 children in line in November, according to the latest update to a state dashboard. That’s constricting enrollment at providers already struck by the state’s cuts to voucher reimbursement rates.
Is the state really going to stockpile $5 billion when day cares are closing? And state employees are not getting a pay raise.
State Budget Director Chad Ranney told the Indiana Capital Chronicle the contingency fund that covers salary adjustments was reduced by 90%. While he hopes to find a way to help employees it might not be possible.
“The revenue has to materialize before we can spend it,” he said. “That’s a ton of money for the state to sit on but that’s 18 months away.”
Ranney also mentioned that the budget cut capital repair and rehabilitation funds, which could be adjusted
House Speaker Todd Huston (R-Fishers) said lawmakers were surprised when the forecast was downgraded last April and were surprised again with the positive news in December.
“That probably suggests to me that we probably should wait and see how this all shakes out. We know going into 2027 there are all sorts of changes taking place economically at the federal level and those types of things, and we really should probably wait to see how all that turns out,” he said Thursday. He hoped that would lead to a strong budget session in 2027.
There is a mechanism in state law to return surplus money to state taxpayers. The automatic taxpayer refund splits excess revenues between pension relief and income tax relief for Hoosiers. But it only kicks in during odd-numbered years unless lawmakers choose to change the schedule.
It doesn’t seem very conservative to take more taxpayer money than necessary, so Republicans have a choice: return it now or invest it in key areas that were previously slashed. Either can happen and still maintain an appropriate surplus to protect Indiana’s vaunted AAA credit rating and mantle of fiscal discipline.