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Minnesota's Revenue Problem

January 22, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Minnesota clearly has a revenue problem. Over the last five years, real (i.e., inflation-adjusted) per capita state tax revenue has been steadily sliding downward. In fiscal year (FY) 2009, it is projected to fall off a cliff.

Real per capita state tax collections increased by a little more than one percent from FY 2003 to FY 2005.  However, since 2005, state tax revenues have steadily declined.  From FY 2005 to FY 2008, taxes fell slightly more than six percent, for a total decline from FY 2003 to FY 2008 of 5.2 percent.

A five percent decline in tax revenue over five years is bad enough.  Much worse is an eight percent decline in a single year.  Yet that is precisely what is expected to happen in FY 2009 based on the state's November 2008 forecast.  Real per capita state general fund tax revenue is expected to be 13 percent less in FY 2009 than it was in FY 2003.  More than half of this decline occurs from FY 2008 to FY 2009.

To be sure, we cannot attribute the entire 13 percent revenue collapse to "no new tax" policies.  The economic crisis is causing public revenues to tank in nearly every state, regardless of fiscal policies.  However, Minnesota's decline from FY 2003 to FY 2008-when the economy was experiencing a so-called "recovery"-can be largely attributed to ideological blinders worn by some state leaders that prevented them from considering tax revenue increases to prevent an erosion of public revenue and investment.

Own-source revenue includes not only tax dollars, but all other revenues collected within the state such as fees, charges, tuition, and investment earnings.  (The only state revenues not included in "own-source revenue" are transfers from the federal government.)  The decline in total own-source revenue since FY 2003 is somewhat less than the decline in tax revenue because of large increases in some non-tax revenues, such as fees and post-secondary tuition.  However, increases in non-tax revenues have not been sufficient to replace the decline in taxes, so total state own-source revenue is projected to decline by nine percent from FY 2003 to FY 2009.

If we've heard it once, we've heard it a thousand times.  Right-wing politicians assert that "we do not have a revenue problem, we have a spending problem."  The information presented above demonstrates the absurdity of this statement.  When state tax revenues plummet by 13 percent over a six year span, you'd better believe we have a revenue problem.

Based on information from the November forecast, it is possible to compare the change in state general fund revenues and expenditures over time.  The graph below shows the decline in real per capita state general fund taxes, "current resources" (i.e., total revenues collected over the course of the year excluding the balance carried forward from the previous year), and spending from FY 2003 to FY 2009.  (The graph below focuses on general fund taxes, whereas the graph above examines total state tax revenue for all funds; for this reason, the tax change percentages in the two graphs do not match precisely.)

From FY 2003 to FY 2008, real per capita state general fund spending declined by nearly nine percent and is expected to decline in FY 2009 by another half percent, for a total decline over the six year period of 9.4 percent.  Given that real per capita state spending has fallen by nearly double digits, it is clear that Minnesota's fiscal crisis is not the result of a "spending problem."

Even though general fund spending has undergone a steep drop since 2003, state revenues have fallen even more rapidly.  Real per capita state tax revenue and total current resources are projected to fall by 13.0 percent and 14.1 percent respectively from FY 2003 to FY 2009.  (To make matters worse, this decline does not take into account the $131 million additional dip in state taxes that has occurred since the November forecast.)  A major cause of Minnesota's deficit problem is a decline in revenue that is even greater than the significant decline in expenditures.

Translation: Minnesota has a revenue problem.  Part of the problem is due to the nation's economic collapse and part is due to Minnesota-grown fiscal policies.  However, whatever the cause, the reality of the revenue problem is undeniable.

To acknowledge that Minnesota has a revenue problem does not mean that policymakers should take spending reductions off the table. Given a humongous $5.5 billion deficit, all options must be considered.  However, given that the crisis is essentially due to a collapse on the revenue side of the state ledger, revenue increases must be part of the overall solution.

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