Indiana University Public Policy Institute 10/3/ Vehicle Excise Tax rate reduced Property Tax Homestead Credit increased

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1 Indiana State and Local Public Finance Past, Present, Future Matt Nagle IU Public Policy Institute Changes to fiscal policy 1999 Personal Income Tax standard deduction increased 1998 St. John decision = changes in property tax assessments 1997 Renter s deduction, low income deduction and increased property tax credit 1996 Vehicle Excise Tax rate reduced Property Tax Homestead Credit increased 1995 Off track betting and riverboat revenues

2 TIMELINE 2004/5 Constitutional amendment to eliminate inventory tax and homestead credit R&D equipment exemptions 2003 Corporate Income Tax restructuring Gaming revenues shared 2002 Statewide market value property assessment Max Levy Growth Quotient Sales Tax rate increased from 5% to 6% Motor Fuels Tax rate increased Cigarette Tax rate increased General limits on state general spending enacted TIMELINE 2010 Property tax caps amended to Indiana Constitution 2008 County welfare, K-12 Ed, Public Safety Pensions funded by state Referendum required for large local debt issuances Phasing out of PTRC and State Homestead Credit Tiered statutory cap system on property tax rates Sales Tax rate increased to 7% 2007 LOITs for property tax relief and public safety 2006 EDGE Credit increased Corporate Income tax to 100% SSF Utility Services Tax created Exemptions for home energy sales Property inventory tax eliminated (from 2002 reforms) Trending in real property assessments

3 Lines in the sand TIMELINE The Big Picture: State and Local Government 3

4 Big Picture: State and local revenue STATE & LOCAL GOVERNMENT $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Total own-source revenue 2010 dollars Major Moves Other state/local sources State Income Tax and LOIT Sales Tax Property Tax Sources: State Budget Agency; Dept. of Local Government Finance Big Picture: Income in context STATE & LOCAL GOVERNMENT Year Revenue Per capita As % Indiana personal income Appropriations Revenue Appropriations % 10.5% $ 3,858 $ 3, ,805 3, ,745 3, ,927 3, ,044 3, ,069 3, ,230 3, ,336 3, ,256 3, ,724 3, ,499 3,358 Sources: State Budget Agency; Dept. of Local Government Finance; Bureau of Labor Statistics; US Census Bureau 4

5 Big Picture: Trends in the Big 3 STATE & LOCAL GOVERNMENT 35% 30% Taxes as a percent of own-source revenue State and local income taxes 25% 20% Property Tax Sales Tax 26.1% 25.6% 23% 15% Sources: State Budget Agency; Dept. of Local Government Finance Big Picture: Revenue portfolio STATE & LOCAL GOVERNMENT Revenue class (State + Local) 2010 Revenue (millions) Annual % change (inflation-adjusted) Total % change (inflationadj.) Sales Tax $ 5, % -5.9 % 2.4 % 27.1 % Property Tax (Net) 5, Individual Income Tax 3, LOITs 1, Gaming taxes Motor fuels taxes Corporate Income Tax All revenue sources 23, Sources: State Budget Agency; Dept. of Local Government Finance 5

6 The State Picture State revenue: Sales tax hikes drive growth STATE GOVERNMENT $16,000 $14,000 $12,000 $10,000 $8,000 State revenue by type 2010 dollars All other Gaming Corp. Income Individual Income Tax $6,000 $4,000 Sales tax (+1%, 2002) Sales tax (Base level) Sales tax (+1%, 2008) Source: State Budget Agency 6

7 State spending: K-12 is king STATE GOVERNMENT $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 State spending by function 2010 dollars Other Property Tax Relief Other Health Medicaid Higher Education K-12 Education Source: State Budget Agency State cash balances STATE GOVERNMENT $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 Operating Revenue (left) Net Funds Balance (right) $2,500 $1,500 $1,000 $500 $(500) Source: State Budget Agency 7

8 Policy decisions to make up for stagnant revenue STATE GOVERNMENT $600 $500 Rainy Day Fund balance 12% State reversions as % appropriations 10% $400 8% $300 6% $200 4% $100 2% 0% Source: State Budget Agency The Local Picture 8

9 Local revenue: LOIT and state grants up, property down LOCAL GOVERNMENT $20,000 Local revenue $18, dollars $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 Other MVH Excise/FIT Basic grant (schools) Property taxes LOIT Sources: State Budget Agency; Dept. of Local Government Finance Local budgets LOCAL GOVERNMENT Local budgets by function year annualized growth rates -2% 0% 2% 4% 6% General Operating 0.2% Other 22% Capital Projects Debt Service 1.3% 4.3% Debt Service 10% Operating 61% Transportation Airport/Highway Police/Fire -0.2% 0.6% 4.4% Capital Projects 7% Pensions Other -0.2% -1.1% Source: Dept. of Local Government Finance 9

10 The LOIT lags LOCAL GOVERNMENT $1,750 $1,500 $1,250 $1,000 $750 $500 $250 $(250) $(500) $(750) LOIT Distributions LOIT Collections Balance $1,750 $1,500 $1,250 $1,000 $750 $500 $250 $(250) $(500) $(750) Source: State Budget Agency Replenishing the LOIT bank account LOCAL GOVERNMENT CY CY % change in LOIT Certified Distribution Number of counties Total $ change (000s) Average $ change per county Number of counties Total $ change (000s) Average $ change per county More than 10% drop 1 $ (2,069) $ (2,069) 1 $ (2,878) $ (2,879) 5 to 10% drop 3 $ (3,074) $ (1,025) 7 $ (9,551) $ (1,365) Under 5% drop 5 $ (1,023) $ (206) 28 $ (16,481) $ (589) No change 0 46 Under 5% increase 27 $ 11,320 $ $ 732 $ to 10% increase 33 $ 36,466 $ 1,105 2 $ 475 $ 238 More than 10% incr. 22 $ 41,480 $ 1,885 0 TOTAL* 91 $ 83,095 $ $ (27,704) $ (304) * Lake County not available Source: State Budget Agency 10

Property tax caps: Levy losses LOCAL GOVERNMENT $600 $500 Total circuit breaker credits $546M $527M $400 $300 $398M $200 $100 $126M 2009 2010 2011 est. 2012 est.

11 Property tax caps: Levy losses LOCAL GOVERNMENT $600 $500 Total circuit breaker credits $546M $527M $400 $300 $398M $200 $100 $126M est est. Source: Legislative Services Agency LOCAL GOVERNMENT Circuit breaker credits as % gross levy (2010) 0% 2% 4% 6% 8% 10% 12% 14% Counties Townships 5.4% 7.1% Cities and Towns 11.8% School Districts 3.6% Libraries Special Units TOTAL 7.2% 6.5% 9.3% Source: Legislative Services Agency 11

12 Thousands THE FUTURE Prospects for fiscal sustainability Prospects: Economic recovery? THE FUTURE 3,100 3,000 2,900 Indiana Nonfarm Payrolls 10% 8% 6% 4% 2% 2,800 2,700 2,600 2,500 Indiana Leading Index 0% -2% -4% -6% -8% -10% Source: St. Louis Federal Reserve 12

13 Prospects: Jobs recovery? THE FUTURE Indiana employment by sector (Indexed to start of recession) recession Education and health services All other Mfg, non-durable Mfg, durable Construction Source: Bureau of Labor Statistics Prospects: Income growth? THE FUTURE $350,000 $300,000 $250,000 Indiana personal income 2010 dollars Projected at 4% growth Projected at 1990s growth $350,000 $300,000 $250,000 $200,000 Actual Projected at 2000s growth $200,000 $150,000 $150,000 $100,000 $100,000 $50,000 $50,000 Source: Bureau of Labor Statistics 13

14 Prospects: Revenue growth? THE FUTURE 6% 5% 4% 3% 2% 1% State operating revenue growth 2010 dollars 1.3% 2.2% 1.5% 5.5% 4.2% 3.0% 0% -1% -2% -3% -2.4% Source: State Budget Agency Projections for state government THE FUTURE State income and fund balance projections (millions) $8, % annual revenue growth 2% growth 2.5% growth $6,000 $8,000 $6,000 $4,000 Fund Balance Net Income $4,000 $(2,000) $(2,000) $(4,000) $(4,000) Source: Author s calculations 14

15 Matt Nagle IU Public Policy Institute

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