Special State Report - December 2016 Indiana State Revenue Forecast Summary

December, 2016 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 after the biennium has begun.   Thus, the December, 2016 forecast is the first in the cycle of state revenue forecasts and is timed to provide the Governor and legislators with an initial projection of available funds that might be available to support the biennial budget beginning on July 1, 2017.  A summary of the revenue forecast is presented below.

Revenue Forecast

Revenue collections for the first five months of the current fiscal year (FY 2017) were $71 million, or 1.2% below target.  Most of the shortfall was attributable to lagging sales and corporate tax collections, partially offset by higher individual income tax revenue.  Reflecting this tax collection performance, the FY 2017 forecast was decreased by $300 million from the amount previously projected in December, 2015.  The forecast also provides first-time projections of revenues for each of the years of the upcoming biennium.  Here are the amounts forecast for each of the fiscal years (in $ millions):

Revised          

                                                               FY 2017          FY 2018          FY 2019

Total Revenue                                    $15,044           $15,481           $16,087

Yr. over Yr. Change                                $224                $437                $606

Yr. over Yr. % Change                            1.5%                 2.9%                3.9%

Change from Dec. 2015 Forecast      ($300)            

Economic Forecast

A key element of the state’s revenue forecast is an independent economic forecast produced by HIS Markit.  As part of the economic forecast a number of economic variables are produced which are incorporated into regression equations used to project various state tax revenues.  Here are some of the key economic growth indicators for Indiana, as projected by HIS Markit (% growth):

                                                            CY 2017         CY 2018         CY 2019

Unemployment rate                            4.3                   4.1                   4.0

Personal income                                  4.2                   4.8                   4.9

Personal Consumption Exp.             4.7                   4.5                   4.5

Real gross state product                     1.9                   2.3                   2.1

Conclusion

Like most states, Indiana is experiencing modest state revenue growth for a number of reasons as the period of economic expansion approaches its 9th year next June.  Notwithstanding an income tax rate cut, income tax collections, which lagged in the early stages of recovery from the Great Recession, have been relatively strong recently in conjunction with reductions in unemployment. Conversely, sales tax revenue has underperformed recently, in part due to low gas prices as well as likely changes in consumer spending habits, including increased personal savings. Corporate revenues are forecast to be constrained due to expected lower growth in corporate profits and phased-in implementation of a rate cut.  Finally, gaming revenues continued to decline, in part due to increased competition from Illinois and Ohio. 

JGrew\State Fiscal\State Revenue Forecast Long Summary 12-16