State Budget Agency reports tax revenues higher in 2024, but slower than expected 

By Larry DeBoer, Extension Specialist in Agricultural Economics at Purdue University 

Closeout day in the Indiana Statehouse is near and dear to the number crunchers among us. That’s the day the state comptroller and the State Budget Agency tell us about revenues, expenditures and balances for the just-ended fiscal year. The 2024 closeout came on Tuesday, July 23, about a week later than usual because of the Republican Party convention in Milwaukee. 

In fiscal 2024, revenues were 1.4 percent higher than in 2023. That’s much slower growth than the 9.3 percent annual average from the past three years. That rapid growth was due to federal pandemic aid to taxpayers and governments, and that’s over. 

Individual income tax revenue grew 6.9 percent, which makes sense in a growing economy. But sales tax revenues fell 0.9 percent, which doesn’t make so much sense with consumers spending more and inflation at 3 percent. One reason: the closeout reports general fund sales tax revenue, and we’ve been moving sales taxes on gasoline from the general fund to highway maintenance funds. Another reason: In Indiana most goods are sales taxable; most services are not. Consumers switched their spending from services to goods during the pandemic, and now they’re switching back. They’re spending more on untaxed services. 

Corporate income tax revenue fell by 21.6 percent in 2024. Corporate taxes are especially unstable, which is just a way of saying “who knows why?” Indiana manufacturing employment has been falling since mid-2022, though, and Indiana is a manufacturing state. Perhaps the corporations doing business here have been less successful lately. The decline in corporate taxes was more than offset by the rise in interest earnings on state balances. They nearly doubled as a result of higher interest rates. 

Another way to look at revenues is in comparison to what we thought we’d get when the 2024 budget was passed. The current two-year spending plan was passed in the 2023 session of the General Assembly, based on a forecast of revenues for 2024 and 2025.  Back then we thought we’d raise $21.9 billion in 2024. According to the closeout, we actually got $21.5 billion.  Revenues fell short by $369 million. 

We knew that was coming. Revenue forecasts are revised every December, and seven months ago expected revenues for 2024 were cut by $355 million. The closeout showed that the December forecast was off by only one-tenth of one percent. There were no new shortfalls in the closeout. 

The worst news last December, though, was a $1 billion increase in estimated Medicaid spending. Medicaid is an entitlement program, so spending depends on how many people qualify for care, and how much that care costs. Future service demand and costs have to be estimated, and the original budget estimates were too low. 

That problem shows up in a closeout document called “General Fund Combined Statement of Estimated Unappropriated Reserve.” Or, more concisely, state balances. Balances are money that has been collected in taxes but are not scheduled to be spent. They are invested to earn interest revenue. 

About halfway down the document is a category called “Augmentations.” That’s spending not anticipated when the budget was passed. The footnote lists “Estimated Medicaid shortfall” at $255 million for 2024 and $458 million for 2025. That’s $713 million in total, which is less than $1 billion but still a big hit on the budget. The state is looking for ways to save money while continuing to provide needed care. 

The legislature passed a spending plan for 2024, but revenues fell short and costs were unexpectedly high. This could be a big problem, except the state began the fiscal year with $2.9 billion in balances. One reason to keep balances is to maintain budgeted spending in the face of forecast errors. Total balances at the end of fiscal 2024 were down to $2.55 billion. That’s still 11.6 percent of the budget, in the middle of what’s sometimes called the “prudent range” of 10 to 12.5 percent. 

Balances are expected to fall again in 2025, to $2.3 billion, which is 10.6 percent of the budget.  Still prudent, but a little closer to that lower limit. That will be on the minds of legislators when they debate the 2026-27 budget, starting next January.