Indiana’s corporate tax collections continue to underperform compared to forecast and compared to prior year collections, and it’s company profits that are the reason.

Corporate collections are $38.7 million (15.7 percent) below forecast year-to-date and $8 million (3.7 percent) below fiscal year-to-date collections through the same period, according to the Indiana State Budget Agency’s October revenue report.

Taking into account the fact that “not every dollar of projected revenue is budgeted for expenditures,” the agency’s director, Brian Bailey, said spending management is helping control the revenue misses.

The state’s corporate tax includes revenue collections from corporate gross and adjusted gross income, supplemental net income, financial institutions and utility receipts taxes.

In 2015 fiscal year, the state collected $777.8 million in corporate taxes, which accounted for the fourth highest source of state taxes after sales tax, individual income tax and fuel tax.

Indiana’s corporate tax rate is 6.25 percent, which is being phased down to 4.9 percent by 2022. Bailey said legislators were motivated to phase down the rate in order “to make Indiana an even more competitive state to attract and retain innovators and job creators.”

“This is one of the reasons Indiana’s business tax climate is ranked eighth in the nation by the nonpartisan Tax Foundation,” he said.

The state’s corporate tax collections totaled $17.1 million for October, which is $8.9 million (34.2 percent) below the monthly estimate and $10.1 million (144.6 percent) above revenue in October 2015.

Monthly estimates for corporate tax collections this year have missed the forecast marks by as much as 1,262.2 percent in January and minus 105.4 percent in February. Bailey said a variety of factors make it more difficult to predict revenue from corporate tax compared to individual income and sales tax.

“There are far fewer payers of corporate income tax than individual income tax or sales and use tax,” he said. “The amount of corporate income tax collected ($982 million in fiscal year 2016) is also much smaller than collections for individual income ($5.2 billion) and sales and use tax ($7.2 billion). This makes monthly corporate collections inherently subject to more variability and more challenging to predict.”

The Revenue Forecast Technical Committee is tasked with compiling the state revenue forecast. It is comprised of analysts from the four legislative caucuses, a state budget agency representative and Professor John Mikesell of Indiana University’s School of Public and Environmental Affairs.

“The variables we used to forecast corporate income tax collections for the current fiscal year are U.S. corporate profits in the prior year, Indiana employment in manufacturing and an adjustment for fiscal years after 2004,” Mikesell said.

He said it is not clear why the forecast is not as accurate as the committee expected it to be. It is possible that Indiana is part of a bigger trend.

“Corporate income tax collections are not doing terribly well in many states, possibly because the economy is changing, possibly because corporations are getting better at tax avoidance strategies,” he said. “We don’t know. Trying to get improvement in our forecasting approach is something always on our mind as we prepared the forecasts. However, our greatest concern is with getting the forecast for all revenue as accurate as possible because that is what really matters for maintaining sound state finances. We would like to get all tax sources accurately forecast, although we recognize that we will always be wrong – that is the nature of revenue forecasting. We are always trying to get better.”

The committee is currently in the process of developing a forecasting model for the upcoming biennium.

“It may be roughly the same as we use now and it may be somewhat different,” Mikesell said. “We haven’t decided.”

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