$2.4 billion revenue drop leaves Indiana lawmakers with few options

By GARRETT BERGQUIST
WISH-TV | wishtv.com

Lawmakers on Thursday again said they will try to avoid cutting the most critical services to close a multibillion-dollar revenue gap.

State budget analysts on Wednesday afternoon announced they project Indiana will take in $2.4 billion less in revenue between now and the end of the 2027 budget year than had first been forecast in December. Those December numbers had been driving budget planning until now.

House Speaker Todd Huston, R-Fishers, said lawmakers will do everything they can to preserve K-12 education funding. He also indicated legislators will try to minimize cuts to the most critical programs.

“We’ve always and will continue to prioritize agencies like FSSA (Family and Social Services Administration) and DCS (Department of Child Services), and fully fund what our Medicaid obligations are, those types of things,” Huston said. “Obviously, there are programs that maybe needed a closer review in an economic time like this, but we certainly don’t want to impact programs that have an impact on everyday Hoosiers.”

That could be a hard promise to keep.

The legislature’s own budget planning documents show K-12 education is by far the largest category in the budget, accounting for 47 percent of all state spending. Medicaid is the second-largest, at 22 percent. When higher education, public safety and child services are added in, those five categories combine for nearly nine in 10 state dollars.

Ball State University economist Prof. Michael Hicks said Indiana’s state government is already very lean, so budget writers don’t have much room to maneuver.

“Certainly, we should expect state parks to suffer. Community funding in agriculture is going to be at some risk. I do think public safety is going to see cuts,” he said. “The problem is, if we enter into a steep recession, the demand for those services and Medicaid and child services are going to be going up and the state has to cut those budgets.”

Hicks said lawmakers likely will have to look into ways to raise revenue, such as raising taxes on cigarettes and alcohol, as legislative Democrats have long proposed. He said other options include delaying further income tax cuts or delaying the implementation of the property tax changes in Senate Bill 1, which Gov. Mike Braun just signed into law on Tuesday. Lawmakers could also use some of Indiana’s roughly $2.7 billion in reserves, but Hicks said economic activity will be slow as long as President Donald Trump’s tariffs are in place.

Rep. Gregory Porter, D-Indianapolis, the ranking Democrat on the House Ways and Means Committee, said Wednesday that relying on budget reserves to make up the lost revenue would leave the state short of cash in the event of an emergency.

State budget analysts on Wednesday said the drop in revenue is due to a combination of weaker-than-expected jobs growth and projected losses to corporate income due to ongoing U.S. economic turmoil. Hicks echoed that view. When asked what drove the revenue drop, he replied, “There are three reasons: Tariffs, tariffs and tariffs.”

Former State Sen. Jim Merritt isn’t sure cuts will be necessary.

Merritt, a Republican who was in the Senate during the 2008-2009 financial crisis, said he thinks lawmakers should take a wait-and-see approach for now and get frequent revenue updates as Trump’s tariff policy unfolds. He said the tariffs and their attending economic impacts could stop as quickly as they started.

“I think it’s highly possible the tariff issue is solved. I think it’s highly possible that grants, that money coming from the federal government to help fund the General Fund of the state of Indiana is going to be there,” he said. “They are not going to want to starve off the state of Indiana or any other state. They do not want to add a match to a fire that would create a recession.”

If revenue problems persist, Merritt said, lawmakers could hold a special budget session during the 2026 short session. He said lawmakers also could use a tactic employed during the financial crisis: withhold funding disbursements to counties for a few months and letting the counties run off of their own savings.

Late Thursday afternoon, Senate President Pro Tempore Rod Bray, R-Martinsville, said Republicans hope to have a new budget proposal put together by Monday. He echoed Huston’s assertion that lawmakers should make every effort to preserve K-12 funding.

When News 8 asked about the possibility of budget work during the short session, Bray said he does not believe midcycle budget changes are a good idea.

Senate Minority Leader Shelli Yoder, D-Bloomington, said the state could raise nearly $3.6 billion over the next two years if it imposed a managed care assessment fee, or MCAF, on health insurers to help cover Medicaid costs and combined that with legalizing and taxing marijuana, pausing planned reductions in the state income tax and holding school vouchers down to 2021 levels. She said those actions would eliminate the need to cut any services.

This story was originally published by WISH-TV at wishtv.com/news/politics/indiana-budget-cuts.