Indiana has a $6.1 billion surplus. Will taxpayers get some of it back?

As the Legislature prepares to consider Gov. Eric Holcomb’s proposal to return $1 billion of the state’s surplus to taxpayers, some legislators, economists and business leaders are questioning whether putting that money directly into the pockets of Hoosiers is the best use of the windfall.

A national poll showing that the economy and inflation are Americans’ top concerns will make it difficult for lawmakers to leave the upcoming special session without providing some sort of financial relief.

But that doesn’t necessarily mean it will come in the form of Holcomb’s proposal to issue individual tax refunds of $225—on top of the $125 automatic taxpayer-refund checks triggered last summer. Other approaches could emerge, especially as the Democratic minority pushes to reduce or suspend Indiana’s gasoline tax, and some Republican legislators express a greater desire to pay down obligations to the teachers’ retirement fund or safeguard state finances against an economic downturn.

“The Senate has some concerns about paying down the debt,” said Sen. Travis Holdman, R-Markle, who chairs the Senate Tax & Fiscal Policy Committee and serves on the Senate Appropriations Committee. “And [Gov. Holcomb’s proposal] looks a lot like the automatic taxpayer refund.”

A recent Associated Press poll shows Americans rank personal finances and inflation as their top two priorities for government to work on in the next year, ahead of issues like gun control, politics and abortion rights.

John Brewer, 57, of Indianapolis, was waiting for a bus at the Julia Carson Transit Center on Monday when he was asked if he was in favor of Holcomb’s proposal to issue tax refund checks.

“Look around. All of us could use it,” said Brewer, an Army veteran who works as a driver for auction houses.

Brewer, a former tank crewman for the U.S. Army, said he would set aside $150 from his refund check for transportation costs and spend the rest on a nice dinner for his girlfriend.

“I’m a veteran, so I believe that anything that was given to me, I earned it,” he said.

The governor’s proposal

In June, Gov. Eric Holcomb said he would call lawmakers back to the Statehouse for a special session on July 6 to consider his plan to provide economic relief for Indiana residents by sending $1 billion of state reserves back to taxpayers in the form of $225 tax refund checks.

“This is the fastest, fairest and most efficient way to return taxpayers’ hard-earned money during a time of economic strain,” Holcomb said in a statement. “Indiana’s economy is growing, and with more than $1 billion of revenue over current projections, Hoosier taxpayers deserve to have their money responsibly returned. I’m happy to be able to take this first step and look forward to signing this plan into law as soon as possible.”

But shortly after the Supreme Court’s landmark decision on June 24 to overturn Roe v. Wade, Holcomb and Republican leaders in the House and Senate chose to delay the start of the session until July 25 to give lawmakers more time to consider legislation to restrict or ban abortion.

Under the governor’s economic relief plan, Indiana residents who filed taxes for the 2020 tax year would receive $225 in addition to the $125 Hoosiers are currently receiving from the automatic taxpayer refund triggered last summer when the state ended fiscal year 2021 with almost $4 billion in cash reserves, nearly $1.2 billion more than expected.

New figures released Friday by the State Budget Agency show Indiana finished fiscal year 2022—which ended on June 30—with a $6.1 billion surplus. (The new data was released after the print edition of the IBJ went to press.)

That’s largely due to increasing sales and income tax revenue after the economy rebounded more quickly from COVID lockdowns than most experts anticipated. A state revenue report for May showed tax receipts were $209 million higher than the state’s forecast, and for the first 11 months of the fiscal year, tax revenue was $1.08 billion over forecast.

With the state coffers flush with cash, politicians have turned to the populist idea of tax refunds to help ease inflationary pain. But with some economists fearing a recession as the Federal Reserve plans to continue raising interest rates, many are wondering whether lawmakers should redirect the surplus.

Short-term solution?

According to the latest report from the U.S. Bureau of Labor Statistics, the inflation rate in June was 9.1%—its highest level since the early years of the Reagan administration—so it’s a given that many Hoosiers would welcome an extra $225 to offset the skyrocketing costs of gas, groceries and many household products.

But some business leaders would rather see the surplus address systemic issues, including Indiana’s underwhelming college-going rate. The number of Hoosier high-school graduates opting to go to college fell to 53% in 2020, a 6% drop over the previous year and a 12% drop from five years ago, according to the Indiana Commission for Higher Education.

David Ricks, chairman and CEO of Indianapolis-based pharmaceutical giant Eli Lilly and Co., made waves in April when he suggested the state is far behind in educational skills, workforce development and health care affordability.

Kevin Brinegar, head of the Indiana Chamber of Commerce, said a $225 rebate would have only a nominal and short-term impact on the state’s overall economy while failing to address workforce development needs.

The chamber wants to see the surplus used “to create lasting and transformational impacts for Hoosiers and on our state’s economy,” Brinegar said.

But he added that he is encouraged that many lawmakers “recognize that spending the bulk of the overall surplus on policies that will have far-reaching, long-term impact for Hoosiers is really what needs to happen.”

Sen. Vaneta Becker, R-Evansville, said she would rather see the surplus allocated to improve services for families or to pay down debt, while safeguarding the state against a potential economic downturn.

“Initially, I think [a tax refund] sounds good,” Becker said. “But I think business leaders know that our economy is not going to stay this rosy, and I think we need to be really prudent. You don’t really have a surplus when you owe the teachers’ retirement fund $9 billion.”

Longtime lawmakers also know that an economic downturn can quickly cause state revenue to come in way below projections. They often point to the aftermath of the Great Recession as an example, noting that $300 million had to be cut from public school funding due to unexpected revenue shortfalls.

Sen. Sue Glick, R-LaGrange, said she and her Senate colleagues might consider other types of inflation relief.

“The Senate [is] the deliberative ones, so we’ll be looking at whether this is the most effective use of funds … and will it be beneficial to the taxpayers at large?” Glick said.

Republican Sen. Phil Boots of Crawfordsville, who serves on the Senate Appropriations Committee and chairs the Pension and Labor Committee, said he does not support the governor’s plan.

“Supposedly we have a $6 billion surplus. In reality, we have a $10 billion deficit in our pension plans,” Boots said. “I think we need to address that before we start sending money back to people.”

Republican Rep. Tim Brown, also of Crawfordsville and chair of the House Ways and Means Committee, declined an interview request from IBJ to discuss the issue, instead referring to a statement he made on June 9 following Holcomb’s initial announcement of the tax refund plan.

“This is a great opportunity to return money to taxpayers and it’s worth seizing,” Brown said. “In looking at our state’s strong finances, an additional automatic taxpayer refund is an efficient way to provide direct relief to Hoosiers who are working very hard but are also stretched thin. We can continue to responsibly manage the needs of our state, pay down debt and save for economic downturns while also giving Hoosiers some relief.”

Sen. Ryan Mishler, R-Bremen, who chairs the Senate Appropriations Committee, declined to comment when asked about possible uses for the surplus.

Inflation concerns

Michael Hicks, an economics professor and director of the Center for Business and Economic Research at Ball State University, argued that Holcomb’s plan is merely returning inflated dollars back to taxpayers, and said Hoosiers are more likely to turn around and spend that money on services.

“The worst thing you could do in terms of inflation would be to give the money straight back,” Hicks told IBJ. “It’s going to be a wash. It’s like ditching the money.”

Hicks also argued that the surplus is more a consequence of inflation and government spending than of a stable economy, and that elected leaders would better serve their constituents by being more forthcoming about a global economic phenomenon like inflation.

“There was a time in America when elected leaders had the capacity to explain to constituents that the best options are not good, and sometimes the government can’t do anything in the short run,” Hicks said. “This would be a time where that type of leadership is desperately needed.”

Cris Johnston, director of Indiana’s Office of Management and Budget, recently told the Indiana Capital Chronicle that he didn’t believe the $1 billion rebate would prolong inflation.

“You’re assuming all of this money is going to be spent in-state … people are either going to save it or pay down debt,” Johnston said. “I think that mitigates that risk.”

Kyle Anderson, clinical assistant professor of business economics at the Indiana University Kelley School of Business, said the $1 billion rebate would not have a significant effect on inflation, although, like Hicks, he said the state should invest more in infrastructure and education.

“While stimulus can be inflationary, the magnitude is likely to be so small as to be negligible,” Anderson said.

Long-term tax cuts also could be a mechanism for inflation relief, but Senate Republicans have shown little appetite for such measures.

In February, the Senate’s tax committee removed provisions from a House bill that would have cut around $1 billion a year in various business and individual income taxes. The measure was opposed by local governments and school districts, which rely on property taxes charged on business equipment. At the time, Holdman said he and committee members were more concerned with paying down the state’s future pension obligations and not harming local government.

Ultimately, the Legislature did repeal the state’s utility tax and cut the income tax rate from 3.23% to 2.9% over the next seven years, provided the state’s fiscal condition remains strong.

Political appetite

Although having a Republican governor and a Republican supermajority in the Legislature gives the GOP a firm hold on the political agenda in Indiana, Holcomb often receives pushback from the social-conservative wing of his party.

The governor received a lukewarm reception at the Indiana Republican Convention last month, where the party nominated Diego Morales to be their candidate for secretary of state in the November election instead of Holcomb appointee Holli Sullivan. Like many hard-right conservatives, Morales criticized the governor over his pandemic shutdowns and his veto of a bill barring transgender girls from K-12 girls sports.

Micah Pollak, associate professor of economics at Indiana University, wonders whether Holcomb has the political capital to get his tax-refund plan approved.

“He can only suggest or encourage the Legislature to move in a certain direction,” Pollak said, “but they’re going to do what they want to do.”

Laura Merrifield Wilson, an associate professor of political science at the University of Indianapolis, said she believes the governor does have the political support to get the tax refund passed. “No one wants to vote against giving taxpayers back money, particularly amid chronic inflation and record-high gas prices,” she noted in an email.

Chad Kinsella, associate professor of political science and director of the Bowen Center at Ball State University, said if the measure isn’t passed, it could be a sign that the rift between the governor and the more conservative wing of his party is nearly irreparable.

“Overall, given the proposal and the popularity of tax refunds with Republicans, it should be a near slam dunk for the governor, or it may be proof he has little to no political capital left with the state Legislature and some members of his own party.”

Not even taxpayers are uniformly on board with the refund.

Shanon Clark, 47, who works construction jobs in the Indianapolis area, said the government has already given out too much money in the form of stimulus checks and he would rather see the surplus used to boost teacher salaries or invest in infrastructure.

“We’re giving way too much money out, and it seems like nobody wants to work anymore,” Clark said. “I’ve always worked for everything I had.”•