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Smart Use of Surplus? You decide

May 21, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

After a decade balancing recurring budget deficits, this year legislators faced a more pleasant, but equally daunting task. Thanks to the budget balancing accomplishments of the 2013 session and improvement in state’s economy, the 2014 legislature had a projected $1.233 billion surplus for the current (FY 2014-15 biennium).

The following summary of the distribution of the FY 2014-15 surplus is based on the preliminary end-of-session general fund budget tracking sheet projections prepared by Senate Counsel, Research, and Fiscal Analysis and other sources. The chart below shows the distribution of the $1.233 billion surplus for the FY 2014-15 biennium.

What do you think? Use the comment box below to share your thoughts and ask questions.

A total of $550 million of the FY 2014-15 $1.233 billion surplus was returned to taxpayers in the form of tax reductions through two tax acts. The first omnibus tax act of 2014 provided the lion’s share of these reductions: $446.7 million. Just over $200 million in tax cuts were distributed by changing Minnesota’s tax code pertaining to the marriage penalty, the Working Family Credit (WFC), student loan interest deduction, the dependent care credit, business depreciation, and other areas to conform to the federal tax code; these provisions not only provided tax relief, but also simplified tax filing for Minnesota taxpayers.

The first tax act also eliminated three unpopular business-to-business sales taxes that were enacted during the 2013 session, at a cost to the state of $232 million in FY 2014-15 in foregone revenue. In addition to WFC federal conformity, this act also increased the credit, thereby providing additional tax relief to low-income working families.

The second omnibus tax act of 2014 provided $103.3 million in additional tax relief in FY 2014-15, including $45 million in reductions in June accelerated sales tax payments by Minnesota businesses, which were explained in a May 9 Hindsight post.

The second tax act also included a $17 million annual increase in the agricultural homestead credit that will reduce taxes on farm land beginning in the current year and a one-time $25 million increase in the homestead credit refund and the renters’ property tax refund, which will target tax relief to low- and moderate income homeowners and renters. Other major provisions of the second tax act, including an expansion of the local government sales tax exemption (also described in the May 9 post) and a $7.8 million Local Government Aid increase (whittled down from $10.1 million from an earlier tentative agreement) will have little or no impact on general fund finances until FY 2016-17.

Both the first and second tax acts contained some provisions likely to rankle Minnesota progressives. The first act cut the estate tax and eliminated the gift tax, thereby reducing state revenue by $43 million in FY 2014-15 and by about $200 million per biennium by the time the estate tax reductions are fully phased-in. The estate and gift taxes are highly progressive taxes that offset regressivity in other parts of the state tax code; the large cuts to these taxes will have the effect of increasing tax regressivity, although the first tax act in its entirety is likely to reduce overall tax regressivity (at least in the short term) due to other progressive features of the act.

The second tax act contains a one-time $2.8 million tax credit to subsidize private tutoring for students that have been tested for, but not determined to have, a learning disability related to reading. This credit, which is not targeted based on income, clutters the tax code with another special tax break and subsidizes participation in a largely unregulated private market.

In addition to tax reductions, the first tax act increased the state budget reserve by $150 million, increasing total state reserves (including both the budget reserve and the cash flow account) to $1.16 billion. This increase in the state’s reserve marks progress toward the goal of achieving a $2 billion reserve as recommended by the bi-partisan Budget Trend Study Commission and will help the state manage volatility in future state revenue collections. The first tax act also dedicates a portion of future budget surpluses to beefing up the budget reserve.

A portion of the $1.2 billion surplus is also dedicated to spending; most of this spending—$261.9 million—is concentrated in the omnibus supplemental finance bill and includes $103.9 million for health and human services, $54.3 million for E-12 education, $22.3 million for higher education, $35.0 million for judiciary and public safety, $19.8 million for jobs and economic development, $15.3 million for transportation, and $10.6 million for environment, economic development, and agricultural.

Approximately nine-tenths of the $41.9 million “other” category in the above chart is comprised of spending from smaller bills outside of the omnibus supplemental finance bills. In total, new ongoing state spending will comprise about $300 million in FY 2014-15.

The legislature also used $198.7 million of the surplus to pay cash for long-term capital investment projects that ordinarily would have been paid for in the state bonding bill. Conservatives in the legislature balked at the notion of a bonding bill in excess of $850 million and because passage of a bonding bill requires a 60 percent majority in both bodies, they were able to block passage of any bonding bill they deemed too big. As a result, progressive legislative leaders opted to pass an $846 million bonding bill and to pay for nearly $200 million in other capital projects through a separate bill paid for with cash instead of bonding; because this separate bill did not involve bonding, it could be passed with a simple majority and thus did not require conservative support.

The combined tax cuts, spending increases, budget reserve increase, and “cash for bonding” provisions passed during the 2014 session add up to less than the $1.233 billion surplus. The remaining portion of the surplus—$30.5 million—will be carried forward into the next biennium in the form of a positive budgetary balance.

In final analysis, approximately 45 percent of the FY 2014-15 surplus will be distributed in the form of tax reductions, while about 25 percent will be in the form of new ongoing expenditures. This increase in spending is justified in light of the significant decline in real (i.e., inflation-adjusted) per capita general fund spending that occurred over the course of the preceding decade. The remainder of the surplus is divided between a needed increase in the state budget reserve and cash investments in long-term capital projects, with a small portion carried forward into the next biennium.

Returning to a theme heard repeatedly during the “no new tax” era, Minnesota conservatives clamored to “give back” the entire $1.233 billion surplus. The “tax-cut-as-solution-to-every-problem” strategy may have worked well politically for conservatives during the last decade, but it also lead to recurring budget deficits, perennial property tax increases, and real cuts in funding for education and other critical state assets. The balanced approach chosen by progressives during the 2014 session—consisting of a mix of tax cuts, public investments, and an increased state budget reserve—will better serve the interests of the state in the long term.

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  • Cynthia Ahlgren says:

    May 27, 2014 at 12:20 pm

    There is a serious neglect of housing and care for the mentally ill in Minnesota. Many of them are among the homeless and imprisoned, checking in and out of emergency rooms or living with family who are ill-equipped to handle their needs. We should not wait until a disaster strikes to recognize the need. Minnesota should be leading the way toward a better solution.

  • Julie Davis says:

    May 27, 2014 at 1:00 pm

    I think more of the surplus should be to E-12 education and fixing Minnesota’s highways.  The state of our road surfaces since the Pawlenty era is abysmal and should be fixed!

  • Linda Francis says:

    May 27, 2014 at 1:01 pm

    Isn’t it wonderful we have a surplus.  I think there are many catch up projects that need doing.  Jessie Ventura had a
    surplus and gave it back to the people.  I think we received about $200 to $300 dollars.  And ever since then our streets
    and roads have become more and more littered.  It is terrible to drive from St. Paul to Minneapolis and see all the litter.  This place is a pit.  Let’s clean it up and put funds aside in a rainy day fund.  In this financial crisis we have gone/going through isn’t that the advice all the financial folks tell us to do?  Tax relief where needed sure but writing
    me a check, I don’t think so.

  • Frank Haigh says:

    May 27, 2014 at 1:13 pm

    I was disappointed to see such a large giveback when our roads are in terrible shape, especially after this winter.  I’ve always thought Gov. Ventura’s giveback was a huge mistake because we ended up facing a big deficit the following year.  We need road projects now everywhere in the State, but it looks like we’ll have to wait to get them.

  • Ronald Leurquin says:

    May 27, 2014 at 1:19 pm

    It never ceases to amaze me what our elected decide to do with surplus monies.

    Lets start with when taxes are not coming in enough to cover things, its all cut cut cut; never raise taxes.
    what would a family do if income was lost due to any number of reasons?  Would they just cut? Or would they perhaps look for additional forms of income?

    Taxes go up and down all the time, sometimes not much, other times quite dramatically.  Spending and tax breaks rarely ever follow along similarly.  Much of government spending is not really on things that can arbitrarily be cut due to lack of incoming taxes.  Our legislators will never lead by example and cut their own pay and benefits, just expect everyone else to do that, especially the poor that rely on aid programs. 

    Tax breaks and cuts rarely end or put on hold when tax income goes down.  And then all the tax breaks out there rarely have anyone or entity truly paying the ‘rate’ that gets claimed in the media.  Think about yourself and all the tax breaks you can take, or at least may be eligible for depending on your particular circumstances.  Tuition, property taxes, home office deductions, charitable donations, etc.  I know I don’t ultimately pay the rate for my income bracket due to deductions for different things.

    Am glad MN decided to change some things to make filing easier and more in line with Fed taxes.  That part makes life easier for many.  Now that MN has done that, has MN accounted for the change in tax revenue because of it? 

    I’m not against taxes, just wish we could get rid of regressive ones, and figure out how to more appropriately tax non-wage income.  I’m really bothered by investment INCOME being taxed at a lower rate that wage income.  Income should be income in my opinion and all taxed at the same rate.

    I’m still big on a flat tax system, and have never had anyone change my opinion on it.  I would treat all income equally, and then the rate of tax could go down.

    As for the surplus, good that we put some aside for the rainy day (tax receipts going down for whatever reason), and some for infrastructure (not enough in my opinion).  Would rather more be put in the rainy day funds and wait a year before we start handing out tax breaks for anything.  let the dust settle on the surplus a bit and re-evaluate rates after a few years of surplus.

    Tax cuts over ‘spending’ just s much as spending is.  I prefer tax and spend over borrow and spend any day.

    OK, enough of my ramblings for one day.

  • Jeff Van Wychen, MN 2020 says:

    May 27, 2014 at 5:44 pm

    At least two respondents mentioned the importance of increasing the rainy day fund, a.k.a. the state budget reserve.  I could not agree more.  Putting surplus dollars into the budget reserve is particularly appropriate when we consider the fact that the surplus is merely a projection of extra revenues that will be available on June 30, 2015—the last day of the current biennium.  As we’ve seen in the past, projections don’t always materialize.  Given the uncertainty of any projection, the safest thing to do is to put surplus dollars into the rainy day fund.  Fortunately, the legislature and governor opted to increase the reserve by $150 million and dedicate a portion of future surpluses to further beefing up the reserve until it reaches the level recommended by the 2010 bi-partisan Budget Trends Study Commission.

    Ronald singles out the need to examine all of the special “tax breaks” strewn throughout the state’s tax code.  “Tax expenditures” is the fancy term used to refer to myriad of special tax exemptions, deductions, subtractions, exclusions, and credits.  Some of these “tax expenditures” are worthwhile, while others are not providing public benefits commensurate to their cost to the state in foregone revenue.  Several legislators, including House Tax Chair Ann Lenczewski, would like to rid the tax system of unnecessary and unproductive tax expenditures.

    Other preferred uses of the surplus (as of 5:30 p.m. on May 27) cited by respondents include increased transportation investment, housing and care for the mentally ill, and E-12 education.  After a decade of disinvestment, it seems as if there is no shortage of funding needs!

  • Mike Lilja says:

    May 27, 2014 at 7:59 pm

    This was completely stupid as no doubt we will be back in the red again next year.  Then we will be having the same same old what should we cut argument as roads worsen, schools suffer more and none of us will miss the couple of bucks we’ll be getting back.

  • Yi Li You says:

    May 28, 2014 at 7:42 am

    It seems no legislators worry about the medical benefits cut from 2010 and 2012.

    From 2010, EMA (emergency medical assistance services were cut off. Those patients who have urgent and chronic medical conditions, like: diabetes, hypertension, hepatitis B, asthma, heart problems, however they are not eligible for regular M.A. due to immigration status, cannot go to regular clinics to treat their medical conditions. Before 2010, they could go to regular clinic to treat these conditions.

    From 2010, many dental benefits were cut off also, like deep cleaning, root canal and other endodontal treatments, and 2 regular dental cleanings per year for all Medicaid, MNcare recipients.

    From 2012, some health plans resume deep cleaning for Msho recipients, but without collecting any copays, like before 2003, while most other health plans still not recover the services.

    Should we resume these cut off medical services and dental coverage with part of the surplus?
    Now with launch of MNsure, many uninsured become insured under MNcare, for those relatively low incomers. These will increase lot of expending for the state. In the meantime, many new MNsure clients, those LPRs who never work in US are still rejected by MNcare while some of them are accepted. We should work out these discrepancies by providing more consistent policies: Accept all LPRs who have no income themselves, mostly seniors into MNcare.

          But collect relative more monthly premium: say: $100; $5.00 office copays, $10 prescription copays; $200 copay for each complete deep cleaning; 30% copay for any endodontal treatment, like root canal treatment, etc. which is better than no coveage at all. We should collect same rate to those EMA recipients.

      For MA recipients, we should consistently collect $3 office copay, $1 ad $3 prescription copays, and $200 copay for each deep cleaning, like before 2003, but cancelled after 2003.

    In this way, uninsured people can have access to health care, but reduce state budget burden also.

    Yi Li You, LSW,

  • Frank says:

    May 28, 2014 at 9:43 am

    Not everyone received a piece of the pie, an example of this is middle aged, not married, does not qualify for homestead credit.
    This is probably a small % of the population but everyone should be treated equally.
    They should of used the formula they used in the late 90"s the sales tax rebate (circuit breaker)

  • Dan Conner says:

    May 30, 2014 at 12:03 pm

    I think the rainy day fund needs to be replenished.  Hopefully, this will iron out the up’s and down’s of revenue.  Then, the remainder should be used to fix roads and highways.  Roads and bridges are in generally poor shape.  It makes little sense to give the tax money back, if there is an opportunity to improve life in MN.