INDIANAPOLIS — It's the recession that drove Indiana's sales tax revenue down, and larger societal changes could keep it from picking all the way back up.
That's the message two advisers to the panel that produces Indiana's revenue forecasts, Dan Novreske and Bob Lain, left the State Budget Committee with earlier this month on a day in which they predicted Indiana's tax collections would tick upward during the next budget cycle.
They identified three key reasons:
- More people are shopping online, which means the state doesn't receive sales tax revenue from those purchases.
- Indiana, like many states, slowly is shifting from a goods-based economy to a service-based economy. Sales taxes are applied to goods, but not services.
- The high unemployment rate means money from financial transfers — money given by the government to an individual, such as unemployment benefits — is being spent on food, for which sales tax is not charged.
"The mix of our income stream is not very favorable for generating sales tax," said Novreske.
The point is important to the state's fiscal outlook because according to the revenue forecast for the upcoming fiscal year 2012, sales tax will make up $6.3 billion of the state's $13.4 billion revenue intake — or about 47 percent.
If Novreske is right, the question is, what can Indiana do?
On Internet sales, not much. While many Indiana politicians, such as Gov. Mitch Daniels and Senate Appropriations Committee Chairman Luke Kenley, R-Noblesville, say they understand the argument that taxing Internet sales would level the playing field, it's not within their power to act on the matter. Only Congress can do so.
Indiana could apply its 7 percent sales tax to some services — a move Indiana Fiscal Policy Institute President John Ketzenberger last year said could generate an additional $6.8 billion per year, or $2.3 billion if medical and legal services are not taxed.
But when asked about that idea last week, Daniels rejected it and said he wants no new taxes.
As for unemployment, the governor's administration and state lawmakers can keep up efforts to attract jobs.
But that might not be enough to address the problem of those who are receiving unemployment benefits and spending much of that money on food, which is not taxed.
Jim Diffley, the chief regional economist for IHS Global Insights, the economic forecasting firm that Indiana uses as it creates revenue forecasts, predicted that Indiana's unemployment rate will remain at 10 percent in 2011 and drop to 9.5 percent in 2012.
He said it could take until 2014 or 2015 to reach prerecession levels.
But Novreske warned that Indiana should seriously consider addressing the issue, especially because out-of-state competition in Ohio, Michigan and Illinois will send Indiana's gambling revenue tumbling in coming years, as well.
"It will be difficult for the General Assembly to fund a budget," he said, "without a reasonably growing sales tax."