Maybe the Minnesota state budget situation as measured by monthly tax collections is a case of, “been up so long it looks like down to us.”
The monthly report for September posted Thursday by Minnesota Management and Budget that covers the first three months of the fiscal year that began July 1 shows collections were $234 million or 3.2% more than the state expected in its last official forecast in February. That’s real money in the bank.
Feel free to add to that figure the $494 million in collections above forecast (1.7% above forecast) that came into the state government between February and the end of the 2024 fiscal year on June 30. Keep in mind that the two-year state budget is $71 billion.
While that is real money, it is tiny compared to the massive and record-setting tax collections and revenue surpluses that were common from 2020 to 2023.
Still, it reflects news that is good for state government, the governor and the Legislature … just not too good.
- Tax collections that are higher than expected are way better than tax collections that are lower than expected.
- Tax collections that are close to what was forecast might not get breathless headlines but they are a good kind of boring.
- The state economy, at least as it is reflected in what the state taxes, continues to be in good shape.
- The 2025 Legislature will not have a big surplus to divvy up but it won’t have a deficit to manage either.
Anthony Becker, the new state economist hired from St. Olaf College in June, said the report reflected a healthy revenue picture. And he said Thursday he is pleased that the amount coming in closely matches what MMB projected would be coming in. Individual income tax collections are higher than what was forecast, the sales tax is lower than forecast and corporate tax collections are about equal to projections. All, however, are within a few percentage points of what was projected nine months ago.
“My ideal would be to hit all the main categories dead on,” he said. “We want to give the governor and the Legislature the best information possible. We’re really very close.
“To be within 3.2% away from actual is pretty good,” he said.
The document released Thursday is the latest in a string of reports that have been just sort of meh. That is, they are up somewhat from what state economists and budget writers expected but nowhere near the wild ride that began with the COVID-19 pandemic and continued through the first half of 2023.
Tax collections, and better-than-expected economic performance despite the pandemic, fueled higher projections until the state had a $19 billion surplus at a time when its two-year spending was $52 billion. Every forecast set a new record and a giddy DFL-controlled Legislature was happy to figure out what to do with the money.
How wild? In 2020, Minnesota’s fiscal situation lurched from a $1.51 billion surplus before the pandemic was declared, to a $2.42 billion deficit two months later, to a $641 million surplus by year’s end.
Those numbers seemed like rounding error compared to what was to come, starting with a $7.75 billion projected surplus in November of 2021, $9.25 billion in February of 2022, $17.6 billion in November of 2022 and $19 billion in February of this year, though that number was officially set at $17.5 billion only because inflationary increases in spending were automatically taken out, not because of any slowing in tax collections.
But the most recent forecast in February showed a surplus of just $3.7 billion, something that caused Gov. Tim Walz and legislative leaders to preach caution in spending and tax cuts last session.
Sen. Ann Rest has been in the Minnesota Legislature since 1985 and is currently the chair of the Senate Taxes Committee. Tax collections reports such as what was posted Thursday are “good but not remarkable.”
“Boring is good, definitely,” she said. Budget and tax chairs don’t use monthly collections to craft budgets. That is the work of the official MMB forecasts that come out in December and February. But each month’s report is a piece of information that shows trends.
“Although we don’t rely on it, it does prepare you for a no-surprise budget forecast,” the New Hope DFLer said. “With numbers like this we’re not going to see a huge budget shortfall in December and we’re probably also not going to see a many-billions-of-dollars surplus.”
Rest said the current budget was adopted when the surplus was $17.5 billion, fueled largely by money from the three major federal stimulus and relief packages adopted during the pandemic. The Legislature used some of that money for one-time only costs — something reflected in the fact that while the current two-year budget is $71.5 billion, the projections of what those same spending decisions will cost in the two years starting July 1, 2025, is $66.1 billion.
Rest’s own forecast for next year? “If we’re practical, we will avoid a deficit and we will not raise taxes.”
Thursday’s collections report also included a quarterly update on the national economy by the state’s macroeconomic supplier SPGMI Global. It included more-optimistic expectations for the national economy and, since Minnesota tracks the national economy closely, for the state as well.
“The near-term outlook for U.S. real GDP growth has improved since Minnesota’s Budget and Economic Forecast was prepared in February 2024,” the update said. Real gross domestic product growth forecasts are up from February, something it attributed to interest rate cuts and increases in employee compensation and increased worker productivity.
It is also expecting less unemployment than it thought in February though its estimate of inflation — 2.8% in 2024 and 2% in 2025 — is unchanged.
Becker said economists are more in agreement now that the Federal Reserve will accomplish what is called a soft landing — getting inflation under control without significant increases in unemployment or triggering a recession.
“Most of the economic forecasters have significantly revised upward their estimates of growth, which then pushes down their estimates of unemployment,” he said.
What worries Becker? Wars in the Middle East and Ukraine could lead to higher energy and grain prices. He said the election also produces uncertainty regarding which candidate’s economic and tax policies might be put in place. Individual tax changes passed in 2017 are also set to expire, and how Congress responds will contribute to economic changes.
“The picture for Minnesota is fairly good and solid,” Becker said. The state economy doesn’t rely on one particular business sector, as is the case with the national economy, so is less susceptible to ups and downs.
“If the national economy moves along well, I think we’ll move along well too,” he said.
