Larry DeBoer: Indiana state sales could trigger more refunds

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Mid-July is numbers crunch nirvana if you follow the Indiana state budget. That’s when the Indiana State Budget Agency releases its closing for the previous fiscal year. This year, the glorious day fell on Friday, July 15, and we learned an astonishing fact: At the end of June, at the end of fiscal year 2022, Indiana’s balances were 6.1 billions of dollars.

Our state has $6 billion in the bank.

Maybe a billion dollars isn’t as impressive as it once was. It’s small change for our richest billionaires. This is a rounding error for the federal government. For Indiana’s budget, however, that’s a very large number.

So far, the highest year-end balance we’ve ever had was $3.9 billion a year ago at the end of fiscal year 2021. Prior to that, the highest was of $2.3 billion at the end of 2019. Current balances are 2.5 times greater than those of 2019. Number. The State Budget Agency said it was prudent to keep balances of up to 12% of the budget, to cover possible shortfalls. Current balances are more than double, at 29%.

How did it happen? We can gather clues by comparing what we thought would happen when the budget was written and what has actually happened between then and today. When Budget 2022 was passed in April 2021, we expected the balances to be $2.8 billion. Actual balances are $3.3 billion higher.

Revenue was nearly $1 billion higher than expected in May and June 2021, so there were significant sales at the start of fiscal 2022. Revenue continued to rise from there. The forecast called for 2022 revenue at $18.1 billion. The close showed $21.2 billion, $3.1 billion higher.

Budgets are spending plans for the future, so they are written based on revenue forecasts. We have budgeted appropriations of $17.7 billion for the general fund in 2022. This budget plan has not changed, but there is a law that says that if the balances become very high, the money is automatically transferred to a pension stabilization fund, and the money is returned to taxpayers. Combined, this added nearly $1.1 billion to credits.

So for fiscal 2022, opening balances were $1.3 billion higher than forecast, revenue $3.1 billion higher, and total expenses $1.2 billion higher. Add $100 million in small adjustments and we’ve accounted for the additional $3.3 billion in balances.

We haven’t explained it, though. Why were revenues $4.4 billion higher than forecast between May 2021 and June 2022? These were primarily personal income, corporate income and sales taxes. Personal income tax revenues increased by $1.9 billion, corporate income tax revenues increased by $1.1 billion and sales tax revenues increased increased by $1.3 billion.

Indiana’s labor market has been better than expected. The April 2021 forecast predicted that Indiana’s unemployment rate would be 3.6% in 2022. In May, it was 2.2%. Forecasts predicted that salaried employment would increase by 2%. In May, it had increased by 3.8%. More people earning paychecks means more tax revenue for the state. National corporate profits grew 25% in 2021, and Indiana got a cut of that in corporate taxes. Forecasts predicted inflation of 1.5% in 2022. It is closer to 9% now. Sales taxes are a percentage of retail prices, so some of the additional sales tax revenue must come from higher inflation.

If a private company sees its revenues rise rapidly above its costs, its stock price will rise and the CEO will receive a bonus. Indiana is not a private company. Balances are tax revenues that have not been used to pay for utilities. It’s prudent to have balances, but just about everyone would agree that $6 billion is too much.

We have already budgeted $2.5 billion in fiscal year 2023 to reduce Indiana’s unfunded pension liability. Despite the large transfer, the State Budget Agency believes balances will be $5.1 billion by this time next year. These high balances could trigger another automatic taxpayer refund. The governor has already requested another $1 billion payout from taxpayers in the current special session.

Even with these additional expenses, however, sales are likely to remain exceptionally high. In next year’s budget session, the General Assembly will have some money to work with.

Larry DeBoer is an agricultural economist from Purdue University. Send feedback to [email protected]

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