State revenue and cash flow steady, but economic worries remain

October 12, 2011

First the good news. The State of Minnesota started out the first quarter of the FY 2012-13 biennium with higher-than-expected revenue. From July through September, the state collected $59 million above estimates, up about two percent from earlier projections, according to the state’s October 2011 Economic Update. Corporate income tax, individual income tax and sales tax receipts all exceeded forecasted levels.

While revenue is up slightly, Minnesota’s cash reserves remain low. Still, state financial experts reported at a legislative hearing last week that they do not expect that it will be necessary to take any administrative actions or turn to short-term borrowing in order to cover our bills during the current fiscal year. (State leaders took out a line of credit in 2010, just in case.)

The national economy continues to be the problem. The October Update reiterated concerns raised earlier this summer:

While most economists expect the U.S. to avoid a recession, real GDP growth over the next six to nine months is expected to be very slow…Forecasters’ major concern is that the tepid growth rate now seen likely through at least mid-2012 leaves the expansion dependent on the absence of extraordinary events and the avoidance of policy errors both in the U.S. and in the Eurozone.

State economist Tom Stinson says Minnesota will likely face a new deficit for the current biennium, MPR reported. When Governor Dayton and the Legislature made FY 2012-13 budget decisions, the national economy was expected to grow at a somewhat respectable pace – 3.2 percent growth in GDP in 2011 and 2.9 percent in 2012. The latest GDP growth estimates have been cut by about half, to 1.7 percent for 2011 and 1.4 percent for 2012. The steep drop in economic growth means a decline in state revenues, which increases the likelihood that a deficit will open up within the current biennium.

Federal and state leaders need to steer a careful course. This subdued level of economic growth assumes Congress will extend the expiring employee payroll tax cut into 2012, a proposal that is part of President Obama’s jobs bill. Stinson said last week that if Congress fails to extend the payroll tax cut, it would further reduce GDP growth expectations by one percent in 2012, resulting in a virtually no-growth scenario nationally.

We’ll know whether the state will face a deficit in the current biennium – and the size – when Minnesota Management and Budget releases the November Forecast. And on January 24, the Minnesota Legislature will reconvene. Given the current fiscal instability, policymakers need to focus on supporting Minnesota families struggling in the slow economy, and investing in the future economic health of the state.

-Scott Russell

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New analysis looks at revenue-raising options

May 3, 2010

The current economic crisis means that more Minnesotans are struggling at the same time that the state has fewer resources to help them. We’ve argued for a balanced approach to solving the state’s budget shortfall, including raising revenues, that will allow the state to maintain investments in education, health care, job training, services for the elderly and people with disabilities – the vital services that help Minnesotans weather these tough times. A balanced approach also best positions the state for when prosperity returns.

We’ve updated our widely-used analysis, Revenue-raising options to help close Minnesota’s budget deficit, which analyzes a number of recent proposals to raise revenues, measuring the fiscal impact of each. It also discusses how a revenue-raising package can be put together that helps solve our budget deficit and makes progress on reversing recent trends that have shifted more of the responsibility for funding government services on to low- and middle-income Minnesotans.

Revenue-raising options does not promote any particular policy proposal, but rather looks at a range of options that have been part of the recent policy debate. Those options are summarized in the table below.

Figure 1. Summary of Revenue-Raising Options: General Fund Revenue Raised

Proposal

FY 2011

FY 2012-13

Create new income tax bracket on high-income households

$170 million

$468 million

Enact a 10 percent income tax surcharge

$688 million

$1.6 billion

Return income tax rates to 1998 levels

$820 million

$1.8 billion

Return top income tax rate to 1998 level

$140 million

$383 million

Eliminate certain business tax preferences

$156 million

$283 million

Enact a corporate tax throwback rule

$15 million

$40 million

Eliminate sales tax exemption on clothing

$258 million

$604 million

Eliminate sales tax exemptions on many consumer services

$372 million

$868 million

Increase alcohol taxes

$121 million

$278 million

The legislature has not yet passed its final budget bills solving the current deficit, and another large budget deficit remains for the next biennium. The court challenge to the 2009 unallotments and uncertainty about additional federal Medicaid dollars for the state are two additional wildcards that could add to the budget shortfall.

While the end of the legislative session is two weeks away, the discussion about a balanced approach will continue, both at the halls of the capitol and in our communities.

-Nan Madden

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