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General Fund Revenue Remains Well Below 2000 Level

August 18, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

True to form, the anti-tax right continues to rail against the tax increases enacted by a progressive legislature and governor in 2013. However, real per capita state general fund revenue is significantly less than it was a decade ago, even after the 2013 tax hikes. In fact, the net increase in state revenue resulting from 2013 and 2014 legislation will be sufficient to replace only one-third of the revenue lost over the course of the preceding decade.

These conclusions are based on an examination of general fund revenue totals compiled by Minnesota Management & Budget (MMB) at the end of the 2014 legislative session, compared to MMB revenue totals from preceding years.* This information reflects the tax increases enacted during the 2013 legislative session and subsequent tax reductions enacted in 2014, which partially offset the 2013 increases. Amounts cited below are expressed in constant (i.e., inflation-adjusted) FY 2014 dollars per capita.

During the first several years of the century (FY 2000-2007), average annual general fund revenues hovered around $3,800 per capita. Due to a combination of the Great Recession and “no new state tax” policies, revenues declined sharply during the FY 2008-09 biennia before bottoming out in FY 2010-11 at $3,136 per capita.

The level of current resources in FY 2010-11 actually understates the size of state government, since much general fund activity during that biennium was paid for with one-time federal recovery dollars. The graph below shows annual per capita state general fund current resources for each biennium from FY 2000-01 through FY 2014-15. (FY 2014-15 revenues are projected.) The dashed line includes one-time federal recovery dollars that were used to supplement general fund spending during the FY 2008-09 and FY 2010-11 biennia in addition ordinary general fund current resources.

In the austere budget imposed by conservatives as the price for ending the 2011 state government shutdown, state general fund current resources rebounded to $3,399 per capita. While this represents a significant increase from the artificially deflated FY 2010-11 current resources, it is represents little change from the FY 2010-11 current resources including federal recovery dollars. In reality, the FY 2012-13 budget that conservatives pushed through over the objections of Governor Dayton continued general fund revenue at about the level of the two preceding biennia (FY 2008-09 and FY 2010-11), after taking federal recovery dollars into account.

During the 2013 session, Dayton and new progressive majorities in the Minnesota House and Senate enacted several tax increases—most prominently, an income tax increase targeted at the top two percent. In response to a budget surplus, taxes were reduced during the 2014 session. The net impact of 2013 and 2014 legislation was to increase projected FY 2014-15 general fund current resources to $3,531 per capita. While this represents a $132 per capita (3.9 percent) increase above FY 2012-13 current resources, it is sufficient to replace only a third of the real per capita decline that occurred since the early years of the century.

Even after the tax increases enacted in 2013 and 2014, annual per capita general fund current resources will remain approximately $400 per capita or ten percent less than they were during the peak biennium of FY 2004-05 and $270 per capita (seven percent) less than the average from FY 2000 to FY 2007.

The increase in state general fund resources was achieved in a way that reduced tax regressivity and increased tax fairness. In fact, most Minnesota taxpayers—especially middle-income families—will see a reduction in taxes as a result of the tax changes enacted in 2013 and 2014. While extremely high income households will see a tax increase, the average rate of state and local taxes that they pay per dollar of income will remain less than that paid by any other income group.

Those who are still miffed about the tax changes enacted in 2013 and 2014 should take consolation from the fact that, despite these tax hikes, Minnesota’s “Price of Government” (i.e., total state and local own-source revenue as a percentage of statewide personal income) is projected to drop to historic lows. This is a clear indication that growth in Minnesota’s public sector will not outpace growth in the state’s economy.

Additional consolation can be taken from the fact that significant public good was accomplished with the reasonable revenue increase that did occur, including:

The bottom line is that on top of the positive good accomplished with the increase in state resources, the tax changes enacted over the last two years will replace only a third of the revenue lost over the last decade, leaving real per capita general fund resources several hundred dollars less than they were at their peak. At the same time, the state’s Price of Government and taxes paid by most Minnesotans are projected to fall. Something to keep mind during this season of right wing tax rants.

*Specifically, this analysis will focus on general fund biennial current resources, which includes all revenue generated within the state general fund over the course of a biennium, excluding balances carried forward from the preceding biennium. Current resources are the basis for determining Minnesota’s structural budget deficit or surplus.

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