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Tax cuts did not cause Minnesota’s projected deficit

Today saw the release of the Budget and Economic Forecast by Minnesota Management and Budget (MMB).

What did they forecast? 

Whereas, back in June, MMB forecast a surplus for 2018/2019 of $163 million, they now predict a deficit of $188 million (See Figure 1). A negative balance of $586 million is also projected for the 2020-21 biennium.

Figure 1: Forecasts for 2018/2019 budget balance, $ millions

Source: Minnesota Management and Budget

Why have their forecasts deteriorated like this? 

Figure 2 shows why these forecasts have changed. Forecasts of tax revenues have fallen from $45.7 billion in February 2017 to $44.4 billion now. At the same time, forecasts for spending have risen, from $44.7 billion in February 2017 to $46.0 billion now.

Figure 2: Forecasts for 2018/2019 revenues and and spending, $ millions

Source: Minnesota Management and Budget. Excludes Cash & Budget Reserves and Stadium Reserve. 

Why has forecast spending risen? 

As Figure 3 shows, the increase in total forecast spending for 2018/2019 has been driven mainly by increases in All Other (an $854 million increase from forecast to forecast) and E-12 Education (a $607 million increase from forecast to forecast).

Figure 3: Increase-Decrease in 2018/2019 forecast spending from February 2017 to November 2017, $ millions

Source: Minnesota Management and Budget

Why has forecast revenue fallen?

As Figure 4 shows, revenue from a number of taxes is forecast to fall relative to the February 2017 forecast. The main fall is in Individual Income Tax, which is forecast to be $711 million lower in 2018/2019 than it was in February 2017.

Figure 4: Increase-Decrease in 2018/2019 forecast revenues from February 2017 to November 2017, $ millions

Source: Minnesota Management and Budget

Remember, these are forecasts. They depend on the assumptions that go into them. Minnesota’s revenue forecasts are largely based on forecasts of the growth (or otherwise) of the United States’ economy generally. And, in this case, Minnesota’s economic consultants, Markit, have assumed that the national economy will grow more slowly than they forecast in February 2017. This is because they have removed the effects of “federal fiscal stimulus—in the form of individual income and corporate tax rate cuts and increased infrastructure spending—that in their February outlook was expected to support economic growth starting in 2018”. As MMB says, “The removal of assumed fiscal stimulus has helped lower the U.S. economic outlook relative to February”. It follows that if this stimulus is passed – and the GOP’s tax bill is edging its way through Congress – forecasts of economic growth will rise and so will forecasts of tax revenues.

This is nothing to do with tax cuts in Minnesota

A look at Twitter shows that a number of people and organizations believe this deteriorating fiscal outlook to be the result of tax rate cuts at the state level. This is nonsense.

Table 1 shows Minnesota’s income tax rates as of January 1st, 2014, and January 1st, 2017, according to the Tax Foundation. Even assuming that it is true that lower tax rates mean lower tax revenues – and it isn’t – there have been no cuts in income tax rates at the state level which could have caused the forecast fall in revenue.

Table 1: Income tax rates and brackets, 2014 and 2017

Source: The Tax Foundation

The state’s sales tax rate remains unchanged at 6.875%, and so does the corporate tax rate at 9.8%. Quite simply, tax cuts have not happened.

See you in February

MMB’s November forecast can be summed up as “Wait for our February forecast”. By then, the outcome of the GOP’s federal tax bill should be clearer. This could mean a higher US growth forecast. This, in turn, might lead to increased estimates of tax revenue for 2018/2019. Will it be enough to cover the state’s increased spending?

John Phelan is an economist at the Center of the American Experiment. 




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