April 2013 Indiana State Revenue Forecast Summary
By 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 after the biennium has begun. Thus, the December forecast is the third in the cycle of biennial forecasts and is timed to provide legislators with the latest revenue expectations early in the implementation of the state’s biennial budget. A summary of both the revenue and the economic forecasts are presented below.
Revenue collections for the first five months of the fiscal year were $141 million below target. Much of the shortfall was attributable to tax changes enacted at the close of the 2013 legislative session, after the April forecast was released. These changes, which include a re-direction of sales tax revenue for highway funding, total elimination of the inheritance tax (which was in the process of being phased-out), and the reduction in the state income tax rate (which only impacts FY 2015), have now been accounted for in the December forecast and have reduced state revenues by approximately $150 million in FY 2014 and $300 million in FY 2015. The revenue shortfall from July through November was also due to disappointing individual income tax collections and to a lesser degree, sales tax receipts.
Reflecting these factors - tax cuts and lagging tax collections - the FY 2014 forecast was decreased by $340 million from the amount projected in April, 2013 while the FY 2015 forecast was reduced by $413 million. Here are the amounts forecast for each of the fiscal years (in $ millions):Actual
FY 2013 FY 2014 FY 2015
Total Forecast Revenue $14,462 $14,389 $14,859
Year over Year Growth $337 ($73) $470
Year over Year % Change 2.4% (0.5%) 3.3%
Decrease from April, 2013 Forecast ($340) ($413)
An essential component of the state revenue projection process is an independent economic forecast. In addition to providing a general economic outlook, this forecast, prepared by Global Insight (GI), a private company, provides key economic data that are used in the equations that produce state tax revenue projections. During their presentation, Global Insight summarized its economic outlook as follows:
- Consumers will cautiously increase spending as employment, personal income, and personal wealth improves
- Business investment will increase, led by spending on equipment
- In the Midwest, manufacturing will improve, and auto industry performance continue to be strong
- Real GDB growth will pick up in 2014 and 2015
- Interest rates will rise significantly over the next four years
The updated revenue forecast was especially influenced by tax cuts enacted at the end of the 2013 legislative session and by both disappointing revenue performance through July and November, with tax cuts contributing 60% of the biennial reduction in state revenues. Together they resulted in a $750 million reduction in forecast revenues for the biennium.
We continue to live in a time of great economic uncertainty. Let’s hope that 2014 will provide for real economic progress and improved state revenue performance.