To quote Newton’s Second Law of Gravity: “What goes up must come down,” and that unfortunately has happened with the revenue forecast numbers reported for the month of October.
Overall revenues collected were $134.7 million below forecast and after three months of relatively moderately-above forecast collections, state revenues are now unfortunately $69.2 million below forecast estimates.
With eight months remaining in this fiscal year, it is possible that state revenues will recover, and the state may end the fiscal year at or above forecast because, as many in the revenue forecasting field say, “One month does not make a forecast.”
However, last month’s dismal collections should serve as a sobering wake-up call to the Indiana General Assembly for two primary reasons.
First, I consistently warned the General Assembly to be careful when it comes to the impact of Senate Bill 2 on our revenue stream earlier this year during the legislative session. Senate Bill 2, again, was a bill to help Indiana small business owners calculate their taxes in a manner that helped them save money on their federal taxes. No one questioned the importance of allowing this methodology to be used by Hoosiers since other states were doing the same. But, I repeatedly cautioned my colleagues in the General Assembly to be cognizant of the short term impact on our revenue collections because the manner in which this accounting mechanism worked would see the state reaping a windfall in revenue in the short term as initial tax payments were made. Later, however, as those same taxes were finalized and reconciled, refunds would have to be paid which would undo the short-term blip in revenues the state received. Now, after four months of strong income tax revenue collections, the short-term bounty the state received that I warned about is having to be refunded, thus undoing a great deal of our initial income tax collection windfall for the fiscal year.
Second, sales tax revenues have missed forecast each month of the fiscal year so far and this month was no exception, with the sales tax coming in at almost $50 million below forecast in October. Again, it is not certain if this downward trend will continue, but at the very least it should animate any further discussions the State and Local Tax Review Task Force (SALT) Committee has when it comes to eliminating the income tax, especially if part of that elimination involves shifting the burden to the sales tax.
Hopefully, we can collectively use the bad news of last month’s revenue collections as a moment to pause and reflect on the fact that even though we had a couple of exceptional years when it came to revenue collections and record surplus amounts, there is a still a business cycle that inevitably has as many downturns as upturns when it comes to tax collections and sound budgetary and policies must flow from accepting that real world fact.