Pence 10 percent tax cut
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Pence 10 percent tax cut Document Transcript

  • 1. THE STATE THAT WORKS: PRACTICE FISCAL DISCIPLINE AND PUT TAXPAYERS FIRSTPolicy Goal: Continue to practice the fiscal discipline necessary to make Indiana the state thatworks by balancing budgets, maintaining adequate reserves, and using the next dollar for taxrelief.Vision Plan Goals Served:Goal #1: Increasing private sector employmentGoal #2: Attracting new investment in Indiana, with emphasis on manufacturing, agriculture,life sciences and logisticsPolicy Steps:  Pass structurally balanced budgets without gimmicks or tax increases.  Maintain reserves equal to at least 12.5 percent of appropriations.  Allocate the structural budget surplus to enact a 10 percent, across the board income tax reduction for every Hoosier and to further enhance our savings.  Task the Office of Management and Budget to perform a new government performance review called PACE (Program Accountability Comprehensive Evaluation) that will focus on government operations and develop a plan to utilize performance-based budgeting to fund core government functions.  Practice the fiscal and debt management necessary for Indiana to maintain a top credit rating.  Enhance taxpayer transparency with a robust commitment to public disclosure at the state and local level.Rationale:Every Hoosier should be grateful for the fiscal stewardship of Governor Daniels. His leadershiphas left the state with more than $2 billion in reserves and a $500 million structural surplus in thestate budget. He has instilled a culture of performance management in state agencies, reducedgovernment debt, built our reserves and promoted transparency in government funds. All this isreflected in the fact that Indiana has a top credit rating from all three major credit rating agencies.We can never forget the fiscal situation that Governor Daniels inherited in 2005. The state had astructural deficit of $820 million.1 Our universities and local governments, including schools,1 See Indiana’s Fiscal Condition: A Different Set of Policy Choices, p.3, Indiana Fiscal Policy Institute (July 12,2012), located at http://www.indianafiscal.org/pdf/IFPI-Report-on-Indianas-Fiscal-Condition.pdf. 1
  • 2. THE STATE THAT WORKS: PRACTICE FISCAL DISCIPLINE AND PUT TAXPAYERS FIRSTwere owed over $700 million bythe state due to payment delays.2Our reserves were functionallynon-existent, equaling only 0.2percent of operating revenue inFY2005.3 State governmentagencies and programs were notconsistently measuring theirresults.4 Finally andunsurprisingly given the fiscalmess that Indiana was in, thestate had seen its credit ratinglowered twice between 2002 and2004.5To make Indiana the state thatworks, we must reject the Source: Calculations based on data from the Indiana Budget Agencypractices of borrowing, taxingand spending that left Indiana broke before Governor Daniels took office, and embrace fiscaldiscipline, living within our means, and performance-based budgeting and management, andreturn the fruits of these efforts to the taxpayers who earned the money in the first place.Indiana must continue to pass balanced budgets without gimmicks or tax increases. Each budgetmust be structurally balanced, meaning that our annual expenses should not exceed the annualrevenue collected by the state. We cannot return to the practices of the past, where lawmakersused tactics like raiding teacher pension funds or delaying payments to schools in order tosupport spending that was unsustainable based on current receipts. Finally, tax increases tobalance the budget should absolutely be off the table. Government should live within its means,just like Hoosier families.2 Id.3 Id at 4.4 In 2006, when OMB issued their first report on performance management, they found that only 38 percent of stateprograms had any performance measures in place. See Interim Report: Budgetary and Functional Review ofExecutive Branch Agencies, p.4, Indiana Office of Management and Budget (January 2006), located athttp://www.in.gov/omb/files/OMB_Interim_Report.pdf.5 http://www.in.gov/tos/files/BondRate.insideindianabusiness.com.pdf. 2
  • 3. THE STATE THAT WORKS: PRACTICE FISCAL DISCIPLINE AND PUT TAXPAYERS FIRSTThe next governor will work with the General Assembly to produce a budget for FY 2014 and2015. Assuming that revenue grows by 2.5 percent6 and appropriations grow by 1.5 percent,7 andthat funding for full day kindergarten is included in the next budget, the structural surplus will be$516 million in FY 2014 and $667 million in FY 2015 (see Table 1 and Chart 1). Structuralsurpluses are a sign of fiscal health and put Indiana in a position of strength nearly unheard of inother states.Table 1: FY 2014/2015 Surplus Projection (amounts in millions) FY 2013 (projected) FY 2014 (projected) FY 2015 (projected)General Fund Revenue $14,432 $14,793 $15,163Projected Growth Rate n/a 2.5% 2.5% 8Other Revenue $205 $223 $223Total Revenue $14,637 $15,016 $15,386General Fund $14,318 $14,532 $14,750AppropriationsProjected Growth Rate n/a 1.5% 1.5% 9Other Spending ($107) ($31) ($31)Total Spending $14,211 $14,501 $14,719Structural Budget $426 $516 $667Surplus Source: Calculations based on data from Indiana Budget Agency. Totals do not add due to rounding.In addition to a healthy structural surplus, it’s important that the state continue to maintainadequate reserves. Good kitchen table budgeting provides a strong savings account forunexpected emergencies. Reserves also serve as a last line of defense for taxpayers in aneconomic downturn. Currently, the state has very healthy reserve levels, exceeding $2.1 billionin FY 2012 and projected to exceed $2 billion at the end of FY 2013.10 These levels exceed 14percent of appropriations in each of those fiscal years (see Chart 2). Moving forward, the stateshould maintain reserves at a minimum of 12.5 percent of appropriations, to adequately protecttaxpayers in a downturn or emergency situation.6 The current state revenue forecast predicts 2.5 percent general fund revenue growth in FY 2013.http://www.in.gov/sba/files/rev_forecast_20111214_revenue_forecast.pdf7 Appropriations growth in the current biennium (FY 12/13) is 0.7 percent. Given Indiana’s fiscal health, it’sreasonable to assume that appropriations growth will roughly double in the FY 14/15 biennium.8 Includes, most significantly, revenue collected from the Quality Assessment Fee (QAF) and the HospitalAssessment Fee (HAF).9 Includes full day kindergarten augmentation and reversions.10 http://www.in.gov/sba/files/FY_2012_Surplus_Statement.pdf. 3
  • 4. THE STATE THAT WORKS: PRACTICE FISCAL DISCIPLINE AND PUT TAXPAYERS FIRSTWith adequate reserves in place and a strong budget surplus, the state will need to determine how to allocate the surplus. Surplus funds are the result of years of careful, prudent management of state resources, and they must be managed with the same level of care. Therefore, they should be allocated to further enhancement of broad- based tax relief for Hoosiers and further enhancement of our reserve accounts. The state should first allocate the surplus to phase in a 10 percent, across-the-board reduction in the state’s Source: Indiana Budget Agency individual income tax rate (see Table 2). The rate would bereduced by 5 percent in FY 2014 and another 5 percent in FY 2015.11 This would reduceIndiana’s state income tax rate from 3.4 to 3.06 percent.Table 2: Proposed Allocation of Projected Budget Surplus FY 2014 FY 2015Projected Budget Surplus $516 million $667 millionPhased in 10 percent reduction $261 million $534 millionin individual income tax rateTransfer to Reserves $255 million $133 million Source: Calculations based on data from the Indiana Budget AgencyWhile Indiana has relatively low tax rates and a competitive tax system overall,12 Indiana has an“all of the above” tax system as shown by our middle of the pack ranking on state and local tax11 The current revenue forecast projects that Indiana will collect a little over $5 billion in individual income taxrevenue in FY 2013. See http://www.in.gov/sba/files/rev_forecast_20111214_revenue_forecast.pdf.12 Indiana ranks 11th best on the Tax Foundation’s State Business Tax Climate Index.http://taxfoundation.org/article/2012-state-business-tax-climate-index. 4
  • 5. THE STATE THAT WORKS: PRACTICE FISCAL DISCIPLINE AND PUT TAXPAYERS FIRSTburden paid by Hoosiers.13 Furthermore, neighboring states like Illinois are raising taxes due totheir inability to control spending, while states like Michigan and Ohio are looking at taxreductions. An across the board tax cut for all Hoosiers would send a strong signal that we aremanaging our funds wisely and also reducing the tax burden on our taxpayers and businesses.For a family of four in Indiana, the tax cut will be more than $228.14 For a small business withnet income of $300,000, the tax cut will be more than $1,000. In total, this will deliver a tax cutto approximately 92 percent of all business establishments in the state which pay through theindividual income tax, providing a direct jolt to the Indiana economy by allowing them to hiremore and invest more.15A 10 percent, across the board income tax cut would also give Indiana the lowest tax burden inthe Midwest. According to the Tax Foundation, Indiana’s state and local tax burden is currentlysecond lowest in the Midwest (see Table 3). Reducing income taxes by $533 million per yearwould give us the lowest overall tax burden in the Midwest. Achieving the lowest tax burden inthe Midwest would be a major improvement in our state’s overall business climate and evenbetter position Indiana to grow private sector jobs and attract new investment.Table 3: Income Tax Cut Gives Indiana Lowest Taxes in the MidwestState State/Local Tax Rank (1st is lowest) State/Local Tax Rank (1st is lowest) Burden Burden (with income tax cut)Illinois 9.97% 6 9.97% 6Indiana 9.49% 2 9.25% 1Iowa 9.53% 3 9.53% 3Kentucky 9.28% 1 9.28% 2Michigan 9.67% 4 9.67% 4Minnesota 10.29% 7 10.29% 7Ohio 9.71% 5 9.71% 5Wisconsin 10.98% 8 10.98% 8 Source: Calculations based on data from the Tax Foundation13 Indiana ranks 25th (1st is highest) on tax burden as a percentage of personal income.http://taxfoundation.org/article/indianas-state-and-local-tax-burden-1977-2009.14 Median income for a family of four in Indiana in 2010 was $67,296. See State Median Family Income by FamilySize (1-Year), available for download at http://www.census.gov/hhes/www/income/data/statemedian/.15 According to an analysis by Robert Carroll and Gerald Prante, 92 percent of Indiana business establishments arenon C-corporations, which means their business income is taxed via the individual income tax system. http://www.s-corp.org/wp-content/uploads/2011/04/Flow-Through-Report-Final-2011-04-08.pdf. 5
  • 6. THE STATE THAT WORKS: PRACTICE FISCAL DISCIPLINE AND PUT TAXPAYERS FIRSTIt is also recommended that the state set aside $255M in budget surplus in FY 2014 and $133Min FY 2015 to further augment the state’s reserve accounts. This is recommended not only ascushion against a future downturn, but also to give the state additional flexibility to meet futurechallenges or investment needs.After allocating the surplus to a 10 percent income tax cut and further enhancement of ourreserve accounts, Indiana would remain in a strong fiscal position. Reserves would equal 14.3percent of appropriations at theend of FY 2014 and 15.0percent of appropriations at theend of FY 2015 (see Chart 3),putting the state in an evenstronger position to addressfuture challenges.This plan is responsible andflexible, puts taxpayers first,and will grow our economyinstead of growing government.If economic circumstanceschange before or after thebudget passes, we will haveadditional flexibility in ourreserve accounts to manage thechanging circumstances. The Source: Calculations based on data from Indiana Budget Agencyphased-in nature of the tax reliefwill give us two years to monitor how it is impacting the bottom line. This plan puts taxpayersfirst while also giving the state flexibility to meeting future challenges.State government also should continue to manage taxpayer funds to deliver results for taxpayersin a cost-effective, efficient manner. In 2005, Governor Daniels ordered OMB to review thebudgets and functions of each executive branch department, agency, and instrumentality for thepurpose of finding cost-saving efficiencies and establishing performance measures.16 This effortwas called the PROBE (Program Results: an Outcome Based Evaluation).16 See Executive Order 05-02, located at http://www.in.gov/gov/files/EO_05-02_Creation_of_OMB.pdf. 6
  • 7. THE STATE THAT WORKS: PRACTICE FISCAL DISCIPLINE AND PUT TAXPAYERS FIRSTA fresh comprehensive review should be undertaken, called PACE (Program AccountabilityComprehensive Evaluation). Under PACE, OMB should review all agency performancemeasures, including an evaluation of program performance since the measures were adopted.OMB should concentrate its review on those policy areas that are most crucial for job growth,such as education, regulatory,17 tax, and transportation. In addition to efficiency review, eachprogram should be explicitly measured for its support of private sector job growth.After this review is complete, OMB should prepare a plan to move from performance-informedto performance-based budgeting, including the adoption of a performance-funding matrix thatwill guide budget development and the budget management process.18 Taxpayers deserve to seetheir hard-earned dollars flow toward programs that work and away from programs that don’t.Programs that consistently fail to meet their measures should be re-evaluated. To supportperformance-based budgeting, OMB should devote management resources to agencies andprograms that are not meeting their performance targets, to assist agencies with best performanceand financial management practices.Indiana currently has a top credit rating from all three major credit rating agencies.19 A top creditrating is more than just a tool for acquiring low-interest debt. It is a market signal of the state’sfiscal health. Indiana’s underlying strengths in its balanced budget, sound fiscal management,low debt per capita, and an ever-diversifying economic base provide the foundation for a topcredit rating. Conversely, losing a top credit rating would put Indiana at a competitivedisadvantage with other states and increase the State’s cost of doing business. Therefore,maintaining a top credit rating should be a continued priority.With billions of dollars running through the hands of state lawmakers, the public has the right toknow how their dollars are spent. Under the leadership of Governor Daniels, the state establishedthe Indiana Transparency Portal and the Gateway system for state and local governments anddeveloped the first tax expenditure reports for taxpayers. As technology changes andinformation becomes increasingly easy to access, so too should government disclosure of itsfinancial condition be easier to access.17 OMB’s new performance review will be integrated with the OMB regulatory review that Candidate Penceannounced earlier.18 OMB’s 2006 report called for moving toward a performance-informed budgeting process.19 INDIANA FINANCE AUTHORITY, INVESTOR RELATIONS, available at http://www.in.gov/ifa/2717.htm. 7
  • 8. THE STATE THAT WORKS: PRACTICE FISCAL DISCIPLINE AND PUT TAXPAYERS FIRSTBuilding on the success of Governor Daniels, there are several enhancements that can be pursuedto offer further transparency to taxpayers. First, the tax expenditure reports should be codifiedand presented on an annual or biennial basis. Second, state government should begin processingall contracts electronically to improve transparency for taxpayers and efficiency for government.Third, we should ensure that all documents posted on the Indiana Transparency Portal are easilysearchable by the public. Fourth, OMB’s review of existing performance metrics should includea review of how they are presented to the public on the Indiana Transparency Portal. Finally, agubernatorial commission should be established, consisting of local units of government, localbusinesses, and concerned citizens, to review the Gateway project and begin to develop anunderstanding of important financial metrics at the local level. 8