Indiana closed its most recent fiscal year with a sizable surplus and near-record reserves, prompting renewed debate over how the state should use its strong balance sheet and what it means for local governments and taxpayers.
According to a year-end closeout report discussed by Indiana Fiscal Policy Institute President Stephanie Wells, the state ended the fiscal year with about $1.855 billion left in its main operating account and roughly $4 billion in total reserves. That puts Indiana’s reserves at about 16.5% of expected annual revenues, slightly above the widely recommended 10–15% range that many fiscal analysts consider prudent.
“I think it’s good news,” Wells said, noting that revenues exceeded the expenditures lawmakers had budgeted. “We’re not in a deficit… we’re definitely in a healthy amount of reserves.”
Indiana’s tax structure continues to lean heavily on the sales tax, which Wells described as the state’s “final boss.” Sales tax collections account for roughly 45–50% of state revenue, while the state income tax provides around 30–37%. Indiana is in the process of phasing down its state income tax rate, which increases the state’s dependence on consumption-based revenue.
With reserves running high and expected to grow—forecasts in the closeout report point to $5–5.7 billion or more by 2027, even under conservative revenue assumptions—policy questions are sharpening around what to do next. Options include taxpayer refunds, additional pension funding, particularly for old teacher pension obligations, or new investments in programs important to Hoosiers.
Wells, whose organization does not advocate specific policies, urged caution rather than dramatic moves.
“Things are looking really good. Don’t monkey with it in any way that we’re going to wish you hadn’t done later,” she said. She suggested lawmakers could revisit the earlier state and local tax review task force, which concluded Indiana’s overall tax system is relatively strong but could be fine-tuned.
The state’s robust position has also revived questions about whether surpluses have come “on the backs” of local governments, including schools, cities, and counties. Wells said some state-level budget cuts and reversions did impact programs, and there were separate changes at the local level through Senate Enrolled Act One, but she cautioned against directly linking those local changes to the state surplus.
Her analysis of SEA One indicated that property taxes for the average homeowner still increased, but by less than they would have without the law. Homeowners saw limited relief, she said, while local units of government absorbed significant funding cuts. At the same time, greater reliance on income and sales taxes increases the burden on working families and renters, who pay property taxes indirectly through rent and then face higher income or consumption taxes.
Wells also warned that Indiana’s heavy use of the sales tax—a regressive tax—can disproportionately impact lower-income residents, particularly as discussions emerge about ideas such as expanding the tax to services or using it to replace property taxes.
Local fiscal strains are surfacing in other ways, from increased school referendums to debates over wheel taxes and the broader question of road funding. Wells said local wheel and surtaxes can provide short-term relief for infrastructure needs but are not a long-term solution as fuel efficiency improves and more drivers shift to electric vehicles.
“I don’t think anyone claimed [a wheel tax] was going to fix the problem of transportation funding,” she said, arguing that Indiana must soon undertake a more comprehensive rethink of how it pays for its roads.
