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Posted on January 6th, 2021 in Local Government Education

~by Dr. Larry DeBoer, Purdue University

Can it be, is it possible, that 2021 won’t be terrible? The state revenue forecast was released on December 16 to provide a starting point for the Indiana General Assembly to craft a new state budget. Might the coming biennium be OK?

It didn’t look OK last June. State revenues suffered an extraordinary drop in the last quarter of fiscal 2020, down $1.4 billion, 27 percent less than expected. We covered the loss by restricting agency spending and drawing down balances. What had been $2.3 billion in the bank was suddenly $1.4 billion. It wouldn’t last long at that rate, and then much bigger budget cuts would be needed.

But it turned out that a large part of that drop, about $880 million, was deferred payments of individual and corporate income tax. Congress had delayed the due date for federal income taxes from April 15 to July 15, and Indiana followed suit. The income tax revenue that would have been collected in fiscal 2020—before July 1—was collected in fiscal 2021. Balances were restored.

State sales tax revenue continued to grow. By November, revenue was 3.7% over forecast, and 6.7% above the year before. Consumers had stopped buying services, to avoid face-to-face contact. Indiana doesn’t apply the sales tax to most services, so sales tax revenue was not reduced. Income aid from the federal CARES act helped support spending, and people bought goods, which Indiana does tax.

The economic forecast that supported the revenue predictions was pretty positive. It assumed that much of the population would get the vaccine by the summer, and expected a new federal stimulus bill before the end of this month. The state unemployment rate is projected to fall below 5 percent by the end of 2021.

The revenue forecast is confusing, because of the income tax delay. Subtracting $880 million from revenue in fiscal 2020 caused a big revenue drop. Adding that amount in fiscal 2021 caused a big increase in forecast revenue. But since that won’t happen in 2022, revenue will appear to drop again.

Let’s cut through that whole problem and just add the deferred income tax payments back into 2020 revenues. The forecast makes more sense that way. With that adjustment, revenue in 2020 fell about 1 percent. Job losses reduced individual income tax revenue, declining profits cut corporate income taxes, and gaming revenues dropped when the casinos closed.

The forecast for fiscal 2021 shows revenue rising by 3.6 percent, which is $578 million. Revenues are predicted to rise 2.2% in fiscal 2022 and 3.0% in fiscal 2023, which is $377 million and $522 million, respectively. Those are a lot like the increases Indiana saw at the end of the expansion.

But there was another forecast offered on December 16, for Medicaid spending. Medicaid is the health care program for low-income people. All those lost jobs pushed a lot more people onto the Medicaid rolls, and total program expenses increased 13.4 percent in fiscal 2020, which is more than $1.6 billion.

Fortunately for Indiana’s budget, Congress passed a bill to increase federal support for the program. Support rose almost as much as expenses, so the amount that the state had to pay increased only a little. Medicaid expenses will remain high in fiscal 2021, and so will federal support.

Falling unemployment means a much smaller increase in expenses in 2022. But the added federal support runs out. Indiana’s share of Medicaid is projected to rise by $447 million that year, and another $126 million in 2023.

The increase in Medicaid spending in 2022 is more than the $377 million in added revenue predicted for that year. That means money will be tight for other state services, such as education, public safety or new infrastructure. The second year of the biennium looks rosier, with almost $400 million in new revenue above Medicaid.

There will be another revenue forecast in April, right before the end of the budget session. By then we should have a much better idea about how the distribution of the vaccine is going, and we’ll know if there’s more federal aid.

Especially in year two, the coming biennium just might be OK.