Minnesota’s Senate Democrats said that November’s budget deficits were the result of tax cuts. Will they say the same about the surplus projected now?
In December 2017, Minnesota Management and Budget (MMB) forecast that the state government would run budget deficits of $188 million in 2018-2019 and $586 million in 2020-2021. This was something of a shock. In June 2017, MMB had forecast a budget surplus for 2018-2019 of $163 million.
What had happened between June and November? Minnesota’s Senate Democrats were in no doubt who and what was to blame. On Twitter, they explained “It’s taken Republicans less than a year to turn our $1.2 billion surplus into a deficit – these numbers are directly related to irresponsible tax breaks for corporations, big tobacco, and the wealthy”
It's taken Republicans less than a year to turn our $1.2 billion surplus into a deficit – these numbers are directly related to irresponsible tax breaks for corporations, big tobacco, and the wealthy. #mnleg
— Minnesota Senate DFL (@SenateDFL) December 5, 2017
This tweet hasn’t aged well. On Wednesday, MMB released their updated forecast and now project a budget surplus of $329 million for 2018-19, nearly twice as much as in June 2017, and
So what has happened? As we explained back in December, the deficit forecast in November was nothing to do with none-existent tax cuts. If the Senate Democrats had actually bothered to read the document before taking to Twitter, they would have known this because MMB explained exactly where the deficit came from.
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.
That is exactly what has happened. As MMB writes in the February 2018 forecast,
The revenue forecast for the biennium is up $353 million compared to November estimates. Higher forecasts for all the major tax types contribute to the change. This forecast reflects increased U.S economic growth arising in part from short term stimulus from federal tax law changes. After accounting for recently enacted legislative budget appropriations, spending for the biennium is projected to be $167 million lower than November estimates. Federal reauthorization of appropriations for the Children’s Health Insurance Program (CHIP) is the most significant driver of the lower overall expenditure forecast. The improved budget outlook continues into the FY 2020-21 planning estimates with modest structural balance projected for that biennium.
There are a couple of things to take away from this.
First, as we wrote recently, the state’s own economic consultants work on a model that tax cuts such as those passed in December have a stimulating effect on the economy. Considering how high taxes in Minnesota currently are, that should tell our state policymakers something.
Second, the forecasts are based on assumptions. These may be right, they may be wrong. This projected surplus is just that – projected. Our legislators should not be rubbing their hands with glee and dreaming up ways to spend this windfall.
John Phelan is an economist at Center of the American Experiment.