Indiana budget outlook shows bigger tax revenue jump

Indiana’s state tax collections are expected to bounce back even stronger than expected from the pandemic recession.

A new state tax revenue forecast given to state legislators Thursday projects those collections going up by more than 4% in each of the next two years. That could mean about $2 billion more available for the new two-year state budget being completed by legislative negotiators after the last forecast in December projected growth between 2% and 3%.

“We knew we were performing well,” Senate President Pro Tem Rodric Bray told reporters Thursday, noting Indiana’s 4% unemployment rate is 2 percentage points lower than the national rate. “… But this exceeded our expectations.”

Republican budget writers will likely face pressure to further increase school funding and the amount of money going to other state programs. However, Bray and House Speaker Todd Huston provided few specifics on exactly how the extra revenue would be spent.

The latest budget proposal endorsed by the Senate this week would increase overall school funding by 1.2% the first year and about 3% the second year, slightly more than a plan that the Republican-dominated House endorsed in February.

Those plans include a contentious expansion of the state’s private school voucher program. Democrats have criticized the budget plans for doing little to directly boost the state’s lagging teacher pay or take up recommendations from the teacher pay commission appointed by GOP Gov. Eric Holcomb.

Both Republican leaders reinforced that education would remain the state’s top priority, with Medicaid being a “far second,” according to Bray, R-Martinsville. But when asked specifically whether the first-year school funding increase would get a bump, Bray said only that there was “a lot of work to do on this as we figure that out.”

“Our priorities are our priorities,” the Senate leader added, saying the state would not stray from its investment in education. He noted education funding is 50% of the state’s budget.

Teacher pay will also remain a priority, according to Huston, R-Fishers. While conversations will occur over the next week over how to best allocate the additional revenue, the House speaker said he was confident that if more money goes toward K-12 funding, “those dollars … will get in the hands of teachers.”

“We will be very focused on that issue in the coming days,” he said.

The Senate’s version of the budget pulled back on plans to create a new education savings account program, which would provide stipends to parents of children with special needs, Chalkbeat Indiana reported. House Republicans have supported ESAs, but Bray said the additional revenue does not necessarily mean the Senate will now support the program

“There’s the budget piece that’s part of that conversation, but there’s also the policy piece,” he said. “… This is a new policy for the state of Indiana, and I’m a little bit wary of it.”

Though Thursday’s revenue forecast brought excitement, it also brought an “inordinate amount of responsibility,” Bray said. Education is the most important consideration, but there are an “awful lot of other things” worthy of investment, he said.

Huston spoke of both one-time investments and longer-term budget increases. Decisions on how to best invest state funds would largely depend on which programs could yield the best returns on investment, he said.

The House speaker spoke of investments in infrastructure, regional economic programs and broadband as having immediate or medium-term ROIs. Also, he raised the possibility of paying down debt and making “strategic investments” in teacher pensions.

Last May, Holcomb asked state agencies to take a 15% budget cut for 2021 in response to the pandemic-induced recession. Asked whether the additional projected revenue could restore those funds, Huston said legislative leaders are taking a comprehensive and targeted approach to what should be restored and “what we found out we can live without.”

The goal, Huston said, is to give the state flexibility moving forward.

Holcomb espoused similar ideas in response to Thursday’s revenue forecast.

“Our next two-year budget will place Indiana in the enviable position to make long-term, wise and historic investments in our schools and education partners, market-driven workforce development programs, law enforcement officials, local community quality of life and place programs, transformational infrastructure projects, enhanced and expanded economic development tools, pay off debts, and pay cash for once-in-a-lifetime state facilities assets,” the governor said in a statement.

“Credit is due to many over the coming weeks, but Hoosier resiliency and all our healthcare workers who stood in the gap have powered our state’s success,” he continued. “They’re the reason we’re realizing the gains we celebrate today … .”

But legislative leaders also raised the specter of another economic downturn, which they said is inevitable at some point in the future.

“In the coming days there will be a lot of debate on what the right thing to do is in light of this forecast, and I think it is paramount to hold true to the principles that got us where we are today — we need to make responsible, prudent decisions that fund our priorities, like education, and that have the highest return on investment for Hoosiers from every walk of life,” Bray said. “However, we must also be wary of the day when the economy begins to turn, because we dare not expect this economy to last forever.”

To that end, Huston spoke of ensuring the state keeps proper reserves and has a proper structural surplus.

While the 2021 Indiana General Assembly must adjourn by April 29 by law, legislative leaders had set a goal of an April 21 sine die. Bray acknowledged the revenue forecast and responsive budget discussions could push that date out but said the goal was still to adjourn by the end of next week.