OPINION: The revenue forecast revision and the state budget

A forecast like that leads to (at least) two questions. What made the forecast go up? What will the extra money go?

Indiana does its revenue forecasts in two parts. First, Global Insight Co. provides a prediction of what will happen to the Indiana and U.S. economies over the next couple of years. The company forecasts hundreds of economic indicators, but the most important are Indiana income, the Indiana unemployment rate, and a stock market index. These economic indicators enter the calculations in the second part of the forecast. The Indiana forecast technical committee develops equations that relate economic indicators to Indiana revenues. These three important indicators are used to forecast the sales tax and the individual income tax, which are by far the state's biggest revenue sources.

Why did forecast revenues increase? Global Insight actually reduced its prediction of income growth, and increased its projection of the Indiana unemployment rate. Those two indicators are used to forecast the sales tax, and, sure enough, that forecast was down by $87 million.

The income prediction is used for the income tax, but so is the stock market index, to capture the effects of capital gains on revenues. The forecast for the stock market was up. That's one explanation for the increase in the individual income tax forecast by $427 million for 2013-2015. That was an increase bigger than the forecast's total increase in revenue. The forecast for all other state revenues fell by $137 million.

There may be other reasons for this big increase than a better performance from the stock market, though. The December 2012 forecast was pretty conservative. In the first nine months of fiscal 2013, actual income tax revenues are $121 million above the December forecast. The revision adds only $70 million to income tax revenues in 2013, so the forecast for this fiscal year still seems conservative.

By 2015 the forecast has both sales and income tax revenue growing by 5 percent per year. That's faster than the projected growth in either retail sales or Indiana income. The forecast gets less conservative towards the end of the biennium.

The forecast revision comes just in time for the conference committee on the budget. The House and Senate have passed different budgets, and the differences must be worked out by the end of April.

The Senate's version of the budget, passed April 9, includes modest increases in appropriations of about 1.6 percent per year. It eliminates the inheritance tax earlier than scheduled, at a cost of about $179 million for the biennium. Some sales tax revenue is diverted from the general fund to road maintenance, which cost about $147 million.

And the state income-tax rate was cut by one-tenth, from 3.4 percent to 3.3 percent, starting in calendar year 2015. The cut reduces revenue by $71 million in fiscal 2015. The doubles once the tax cut is in effect for an entire fiscal year.

The governor wanted a 10-percent income-tax cut, from 3.4 percent to 3.06 percent. Neither the House nor the Senate version of the budget included this tax cut. House Bill 1418 proposed such a cut (it didn't pass). But the Legislative Services Agency analyzed the bill and found that a 10-percent tax cut, starting in calendar 2014, would cost $723 million for the biennium.

That is a lot more than the added $290 million in the forecast revision. And this meant the 10-percent tax cut could go forward only if the General Assembly cut appropriations or removed the other tax cuts from the budget.

So what happened to the extra money? The General Assembly could have increased appropriations or added the money to state balances. But in the end, legislators cut the income tax by 5 percent - half of what the governor had wanted, but more than the General Assembly had offered.

The revenue forecast was up. But it wasn't up enough to make budget decisions easy.