December, 2015 Indiana State Revenue Forecast Summary

By John Grew

Indiana University Office of State Relations

State revenue and economic forecasts are produced in December and April (prior to the beginning of a new biennium) and the following December, during the first fiscal year of the biennium.   While the April, 2015 forecast provided the latest revenue projection to guide legislators during final deliberations over the biennial budget during the conference committee process, the December forecast provides an updated view about half-way through the first year of the biennium. 

Revenue Forecast

Actual revenue collections for FY 2015, ending on June 30, were stronger than forecast - $274 million, or 1.9% more than projected.  Most of the increased collections were attributable to strong individual and corporate income tax collections.  However, total revenue collections for the first five months of FY 2016 (July through November, 2015) were $40 million below target and only $18 million (0.3%) above tax collections the prior year.  Most of the shortfall is attributable to lagging sales tax collections, in part due to low gasoline prices. 

Reflecting this tepid tax collection performance for the first five months of the fiscal year, the FY 2016 forecast was decreased by $40 million from the amount projected in April, 2015.  The reduction in the FY 2016 tax base carries over to FY 2017 by reducing the amounts forecast in April by $135 million. 

Here are the amounts forecast for each of the fiscal years (in $ millions):

                                                          Actual                        

                                                          FY 2015          FY 2016          FY 2017

Total Revenue                                     $14,898           $14,931           $15,343          

Yr. over Yr. Change                                                           $33                $412                

Yr. over Yr. % Change                                                     0.2%                2.8%            

Change from April 2015 Forecast                                ($40)              ($135)               

Conclusion

Indiana’s unemployment rate has declined dramatically from its peak during the Great Recession, but tax revenue performance for FY 2016 has lagged typical expectations for a period of economic expansion.  There could be a number of factors that are negatively impacting state tax collections, resulting in lower growth:

• Sales tax collections are      being impacted by low gasoline prices, increased spending on non-taxable      services (e.g. health care), minimal price inflation on goods, and      increased personal savings.  Sale      tax collections are likely also being impacted by changing demographics,      including the aging of the population (likely impacting income tax      collections as well).
• Individual income tax      collections are being impacted by a reduction in the tax rate that is being      phased-in.  In addition, growth in      wage withholdings (state income taxes withheld from paychecks) has been      moderate in FY 2016, despite higher employment levels.
• Finally, tax cuts enacted      in recent legislative sessions continue to be phased-in, impacting corporate      income tax collections while gaming revenues continue to be impacted by      competition in Ohio and Illinois as well as by tax reductions enacted      earlier this year Indiana.

State Fiscal\ State Revenue Forecast Short Summary - 12-15