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Even With Surplus and Taxes, Revenue Still Down

January 13, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

The November forecast contained good news. Even after paying back the school funding shift, state government will have an $825 million surplus. On top of the tax increases enacted during the 2013 legislative session, the public might think that the State of Minnesota is swimming in dough. In reality, real per capita state general fund revenue remains significantly below its historical zenith and is shrinking as a percentage of the state’s economy.

No doubt, the state’s fiscal condition has improved from the depths of the FY 2010-11 biennium, when real (i.e., inflation-adjusted) per capita state general fund revenue was 17 percent less than it was at the beginning of the century—the result of the Great Recession combined with perennial “no new tax” fiscal policies. Since then, revenues have bounced back considerably, but not nearly enough to recoup the entire real per capita revenue loss that occurred over the course of the preceding decade.

Throughout the first half of the last decade, annual per capita state general fund revenue hovered around $3,800 per capita. (All amounts referenced in the remainder of this article will be presented in constant 2014 dollars.) However, annual revenue plunged by about $400 per capita from FY 2006-07 to FY 2008-09 and by another $260 per capita from in FY 2010-11. During the depths of the Great Recession in the FY 2010-11 biennium, state general fund revenue was $3,138—a full 17 percent less than in FY 2006-07. Fortunately, an influx of federal stimulus dollars from the American Recovery and Reinvestment Act (ARRA) helped to support state expenditures during the revenue nadir of FY 2010-11.

The graph below illustrates actual general fund revenue from FY 2000-01 to FY 2010-11 (the black line), as well as subsequent events effecting actual and projected revenue for FY 2012-13, FY 2014-15, and FY 2016-17 (the red and blue lines). In FY 2012-13 biennium, ARRA dollars were no longer available, but by then the national and state economies had recovered sufficiently to elevate revenues above the trough of FY 2010-11, but still over ten percent less than the average from FY 2000 to FY 2007. The new progressive majorities elected to the Minnesota House and Senate in 2012 thus faced a decision: continue the “no new tax” policies that had led to substantial cuts to education and other critical public assets or to at least partially restore past cuts in these areas through a tax increase.

The red lines represent the budget situation as revealed by the February 2013 forecast—the baseline for state policymakers during the 2013 legislative session. The dashed line represents per capita state general fund revenue if the legislature chose to do nothing—in other words, impose no tax or other revenue increases. Based on the February 2013 forecast, this meant another three percent decline in per capita revenue in FY 2014-15, followed by a modest rebound in FY 2016-17; however, even after this rebound, per capita revenue would remain slightly below the FY 2012-13 level. To the progressive majorities committed to reversing a decade of cuts to important public assets, this was a non-starter.

The solid red line illustrates the course ultimately taken by state policymakers, as understood during the 2013 session. The line represents per capita general fund revenue from the February 2013 forecast adjusted to reflect the effects of the 2013 tax act and other revenue changes enacted last spring. At the time, per capita state revenue was projected to increase by 3.5 percent from FY 2012-13 to FY 2014-15 and by another 1.9 percent in FY 2016-17. Based on these projections, state revenue would be $3,536 in FY 2016-17—5.5 percent above the FY 2012-13 level, but still 9.0 below the historical peak of FY 2004-05.

Unbeknownst to state policymakers during the 2013 session was the subsequent improvement in state finances that would occur over the next six months. The November 2013 forecast (represented by the blue line) revealed a 1.6 percent increase in per capita general fund revenue for FY 2012-13, a 2.0 percent increase for FY 2014-15, and a 3.7 percent increase for FY 2016-17 relative to 2013 end-of-session estimates for the same time period. All in all, per capita revenue for the FY 2016-17 biennium is projected to be 7.6 percent above the recently completed FY 2012-13 biennium. Approximately two-thirds of this growth is due to the tax and other revenue increases enacted in 2013, while about one-third is due to improved revenue collections revealed in the November 2013 forecast.

Regarding the general fund revenue increases projected for FY 2014-15 and FY 2016-17, it is important to note that:

  • Projected per capita revenue for FY 2016-17 is still nearly six percent less than it was during the FY 2004-05 peak. Only about one-half of the revenue loss from FY 2004-05 to FY 2012-13 is projected to have been recovered by FY 2016-17.
  • The projected growth in revenue from FY 2012-13 to FY 2016-17 is significantly less than the projected growth in Minnesota Gross Domestic Product. In other words, state revenue is projected to shrink as a percentage of the state’s economy.
  • Even if the November forecast is 100% accurate, the level of revenue projected for FY 2014-15 and FY 2016-17 will probably not materialize due to anticipated tax cuts. Governor Dayton has already proposed reducing taxes through an aggressive federal conformity package and by repealing three business-to-business sales taxes enacted in 2013. These two measures alone would use up just over half of the $825 million surplus anticipated for the current biennium.

Conservatives tend to go apoplectic any time state revenue increases. However, real per capita general fund revenue will remain significantly less than it was a decade ago and will decline relative to the size of the state’s economy, even before factoring in tax cuts likely to be approved by Dayton and the legislature. In 2013, the state policymakers succeeded in restoring critical investments in education, infrastructure, work force training, healthcare, and other public assets without growing state revenue beyond what the Minnesota economy can bear.

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