Minnesota tax revenues 20 percent higher than forecast

In November 2020, Minnesota Management and Budget (MMB) forecasted a $636 million deficit for the 2020-2021 biennium and a $1.2 billion deficit for the 2022-2023 biennium. Things turned around in February. Instead of a deficit, the new forecast predicts a $1.6 billion surplus in the 2022-2023 biennium.

Two months after the forecast, revenues seem to be holding up even better than expected. According to MMB, in February and March, Minnesota collected 20.3 percent more in tax revenue than was forecast in February.

A positive economic outlook

This trend could continue given an optimistic economic outlook.

The outlook for U.S. real GDP growth in 2021 and 2022 has improved since Minnesota’s Budget and Economic Forecast was prepared in February 2021. IHS Markit (IHS), Minnesota’s macroeconomic consultant, now expects annual real GDP to grow 6.2 percent this year and 4.3 next year, compared to 5.7 percent and 4.1 percent in their February forecast. For years 2023-2025, the forecast is now slightly lower than in February, with IHS anticipating growth of 2.2 percent in 2023, 2.3 percent in 2024, and
2.4 percent in 2025.
The improvement in IHS’ 2021 outlook from February to April is the net effect of two new factors. First, debit/credit card spending through mid-March, even prior to the disbursement of the most recent round of stimulus checks, was stronger than expected.

Second, the pace of the national inoculation campaign has been faster than anticipated, and many states are relaxing containment measures. Consequently, IHS raised their projected growth of consumer spending on services other than housing, utilities, and healthcare. This forecast does not include the potential impact of the $2.1 trillion American Jobs Plan unveiled by the Biden Administration in March.

The case for tax hikes was already hard to make when Minnesota had a deficit. With tax revenues coming above forecast, it should become even harder to justify tax hikes.