Hoosier lawmakers weren’t shy about spending money in this year’s legislative session, allocating hundreds of millions of dollars to Indiana roadways and approving an additional $42 million for the Regional Cities Program. This new state spending, a rarity in a non-budget year, was accomplished without raising taxes on Indiana residents. Instead, fiscal leaders utilized state budget reserves and proceeds from last year’s tax amnesty program to cover the new expenses.

Legislators can now return to their districts touting economic development opportunities that come with the new appropriations, which is always a good thing in an election year. All 100 seats in the Indiana House and half of the 50 Senate seats are up for re-election this year.

The new spending also sets the stage for a more robust road funding discussion in next year’s budget session, while also allowing for the consideration of significant changes to Indiana’s tax policy.

General Assembly passes short-term road funding plan

Indiana lawmakers passed a short-term road funding plan on the last day of the 2016 Legislative Session, dedicating nearly $1 billion in new money to Hoosier roadways and bridges without raising state taxes. The bill also sets the stage for discussions on a long-term fix to transportation issues in next year’s budget session.

HB 1001 dedicates $228 million in new funding to state infrastructure over the next two years, drawing down some of the state’s $2 billion reserve fund to support the new spending. The bill also authorizes an additional $100 million from the Major Moves trust fund to be spent in 2017 for preserving and reconstructing existing roads and bridges.

Local government units will also receive additional funds for their transportation needs, though not in the form of a simple handout. SEA 67 will return nearly $430 million in local income tax revenue currently held in trust by the state to the locals for infrastructure improvements. Those funds are generally held by the state to guard against a drop in collections during an economic downturn, so there is an element of risk with using these dollars.

Locals will also receive up to $254 million in matching local road funds, so long as they can come up with the matching revenue. To help generate the needed revenue, HB 1001 also authorizes additional vehicle excise tax and wheel tax authority to counties and municipalities.

Finally, the bill establishes a task force of state legislators, administration officials and transportation interests to convene throughout the summer to develop a long-term funding plan for the 2017 budget session.

Elected officials largely applauded the measure, while acknowledging that more work needs to be done to fix Indiana’s aging transportation system. House Speaker Brian Bosma (R- Indianapolis) said that the proposal “sets the tone to search for long term user fee solutions for our roads and bridges after a thorough look over the next eight months at what the need is and what the options are.”

An initial proposal from the House Republican caucus would have increased cigarette and fuel taxes to pay for a more robust road funding plan, but that proposal was met with stiff resistance from Senate leadership and the Governor’s office.

House Minority Leader Scott Pelath also supported the legislation, saying, “Granted, the final bill did not go as far as we would have liked, but this is a common sense start in the direction of a long-term solution.”

Gov. Mike Pence, who initially proposed a $1 billion state transportation plan funded through bonding and reserve spending, signed the bill into law on March 23.

Gov. Pence secures funding for a third Regional Cities award

HB 1001 also contained $42 million in funding for a third region as part of the Pence Administration’s Regional Cities Initiative.

The legislature appropriated funding for two regions last year, but the Indiana Economic Development Corporation ultimately chose three winning regions to receive state funding — northeast Indiana, north central Indiana and southwest Indiana. That selection forced the legislature’s hand this session to appropriate the additional $42 million for the third recipient.

The Regional Cities Initiative is designed to foster collaboration among community leaders by utilizing public dollars along with private investment to improve the overall quality of life in the region. The Pence Administration views this program as a way to retain and attract talented individuals to Indiana. Funding for the program comes from a tax amnesty plan that was passed by the legislature in 2015 and has generated nearly $150 million from individuals and businesses that had outstanding tax liabilities.

Combined income reporting, sales tax on services to be considered next year?

The legislature was able to handle the new spending this year through state reserves and the tax amnesty proceeds, but they have set themselves up for difficult budgetary discussions going forward. With this new spending, they have less of a financial cushion to brace against any economic downturn (though reserves are still in excess of 10% of state spending) and they have also raised expectations for a more robust road funding plan in 2017. That means that new revenues will need to be found somewhere.

You can fully expect items like tobacco tax and fuel tax increases to be on the table, but there may also be additional revenue generators considered next session, including combined income reporting and possibly even a sales tax on service. SEA 323 requires the study of the combined reporting approach to apportioning income, which could have a significant impact on Indiana businesses. The bill also calls for the study of transfer pricing for income tax purposes this summer. In addition, there continues to be quiet discussion of extending the sales tax on services. A bill was drafted this session that would have imposed the state’s sales tax on a number of services, but it was never officially introduced.

Though both ideas are in their infancy and will most assuredly garner an extensive amount of deliberation before being enacted, it is clear that the business community will need to stay engaged throughout the summer and into next session as these major policy shifts are vetted.