Indiana’s tax collections are the latest victim of the coronavirus. Foreseeable as it was given the economic shutdown, the report from the state budget agency last week more than confirmed the devastation that is being done to Indiana’s fiscal situation.
The hard numbers show that major tax revenues were off by $964 million in April. That’s 44% lower than the collections projected in December of last year. Sales and use taxes were down 15%, which looks trivial compared to individual income tax and corporate tax collections that were down 58% and 64%, respectively. (For context: Sales tax makes up nearly half, 48%, of the state tax revenues. The individual income tax is about 37%, and the corporate income tax only 5%.)
But there is more to the April picture. The biggest reason that income taxes fell so short was because the traditional April 15 due dates for returns and payments were extended to July 15. Much, but not all, of these losses should be made up as delayed payments come in. Consequently, fluctuations in income tax revenues are expected in the next few months. However, ongoing estimated payments and payroll withholding will go down, and there will likely be a greater degree of non-compliance.
Further out, there’s no doubt that unemployment, lost earnings and the general economic downturn will all have a substantial negative impact on income tax projections going into next year. This longer-term impact will definitely take its toll. If individual income tax revenues take only a 10% hit, probably a very optimistic number, that would still be roughly half a billion dollars.
On top of the income tax loses, the reduction in sales tax collections poses its own threat to Indiana’s fiscal well-being. The April hit alone equates to $100 million. It’s impossible to predict how long it will take for sales tax collections to recover, but you can expect this level of shortfall for months to come. With something of a “reopening,” we can be hopeful that sales will come back relatively fast.
But indications are it will be a more gradual comeback and probably take a good number of months to get back up to pre-COVID numbers. Even if the sales tax revenues climb back up by 10% each of the next 10 months (pretty doubtful), it would still mean the state takes an additional half a billion dollar hit.
The arbitrary percentages above are intended only as a means to gauge how things are looking as we go forward. And those optimistic numbers still put us in a billion dollar hole, even after the delayed payments come in and sales taxes rebound. So, watch these two factors: (1) how much individual income taxes are ultimately impacted, and; (2) how long it takes for sales taxes to recoup. They will largely determine how fiscally ill Indiana gets.
In any case, revenue projections will have to be revised downward in significant amounts, the baseline will be reset, reserves will have to be used – and the next fiscal year will be challenging. How challenging we can’t yet know. It will take the good work of real revenue forecasters, work already begun, to come up with real projections to give us a better picture. Fortunately, Indiana has an extraordinary group of revenue forecasters, fiscal analysts, budget-makers and money managers to serve as caretakers for the fiscal health of Indiana. We can all be confident that they will see us through.
Resource: Bill Waltz at (317) 264-6887 or email: bwaltz@indianachamber.com
