What to do with Indiana’s budget surplus – if it’s real

The words “structural surplus” should raise a red flag for anyone who has followed the history of Indiana state government finances. But more on that later.

Let’s assume that Gov. Mitch Daniels knew what he was talking about when he said Indiana is running a structural surplus of more than $500 million – in other words, the budget is structured so that the state takes in at least a half-billion dollars more than it spends per year.

As a result of the state’s having spent less than it took in for several years, Indiana’s budget reserves reached $2.155 billion at the end of the 2011-12 fiscal year, state Auditor Tim Berry said this week.

Under a law approved by Indiana’s Republican-controlled legislature and signed by the governor, some of the excess will go to taxpayers in the form of a tax refund of about $100 per individual or $200 per couple, to be handed out next year. But there could be alternatives.

First, Daniels claims that implementing the federal Affordable Care Act could cost the state $50 million to $65 million a year to set up health insurance exchanges and another $200 million a year to expand Medicaid to cover the working poor. Those figures are likely to be worst-case estimates. But even if they’re accurate, implementing the law would take only half the structural surplus.

But this is an education blog, so let’s suggest a couple more options:

// Create a state-funded pre-kindergarten program at least for poor and at-risk children, something that 39 other states have already done. The cost would probably be around $100 million a year.

// Restore more of the $300 million in education funding that Daniels cut in December 2009. The legislature did restore some of the funding in 2011 and added money for full-day kindergarten this year. But education funding is still well short of what it was.

As Indianapolis Star columnist Dan Carpenter argues, Indiana has balanced its budget on the backs of the poor, children and the elderly. Shouldn’t they be first in line for assistance now that the state has more money than it knows what to do with?

Now, back to that red flag.

Old-timers will remember that Indiana had budget reserves of nearly $2 billion in the late 1990s. Republican lawmakers squawked that that was ridiculous – the state wasn’t “a bank” and it needed to give the money back through massive tax cuts. Rep. Jeff Espich, the House GOP budget leader, insisted Indiana had a “structural surplus” of several hundred million dollars.

Democrats, especially Sen. Vi Simpson, now the Democratic candidate for lieutenant governor, urged caution, suggesting the state budget surplus was an artifact of the go-go economy of the Clinton years. Remember those?

Sure enough, the national economy went into recession, and Indiana’s surplus disappeared. The state struggled to balance the books until Daniels took office in 2005 and brought out the big knife.

But here’s the funny part: Back in 1998, when the surplus hit its peak, House Speaker John Gregg – now the Democratic candidate for governor – proposed giving the money back to taxpayers in the form of a one-time rebate, about $100 for individuals and $200 for couples.

Republicans mocked the idea, calling it a one-time gimmick designed to buy votes — yes, they were against it until they were for it. They insisted the budget surplus was structural and the state should adopt big, permanent tax cuts.

They were wrong. So who knows? Maybe those of us who think the current surplus is grounds for increasing spending on education and health care are wrong now.

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