Minnesota’s 2020-2021 budget surplus is now up to $1.5 billion. What should policymakers do with that?

In December, Minnesota Management and Budget (MMB) announced that the state government will run a forecast budget surplus of $1.3 billion over the 2020-2021 biennium. Today, MMB releases the 2020 February Budget and Economic Forecast and it paints a fiscal outlook which has improved even further: the surplus projected over the 2020-2021 biennium is now forecast to be $1.5 billion, $181 million up on November’s forecast. 

This is down to a small increase to the general fund revenue forecast along with a similar-sized reduction in spending estimates. MMB says:

As in November, the economic outlook is stable but a slowdown remains in the forecast. The small budgetary improvement continues into the next biennium and the structural balance is improved, but budget challenges remain.

The $1.5 billion Question – What should the state government do with this money?

This question will dominate the current legislative session in St. Paul. When considering it, a few things should be borne in mind.

1) This is money the government didn’t think it needed

The state government has set a budget for fiscal year 2020-21, a document saying “this is what we need/want to pay for XYZ”. At the end of the 2019 legislative special session, this was forecast to be $48.4 billion. It is more or less the same now.

If the government, having judged whats its needs/wants will cost now thinks it will take in more than it needs to cover them, why not leave it with or give it back to the hard working Minnesotans its is set to be taken from? I’m sure they have needs/wants of their own which they would like to spend their hard earned money on.

2) This is a one off windfall

Despite the state government already having said what it needs/wants for the biennium in its budget, some policymakers in St. Paul want to spend every last dime of this surplus on more stuff.

But this is a one off windfall. These funds – assuming they materialize as expected – cannot be expected to materialize again next year or the year after that. Because of that, the state government should not assume new ongoing spending commitments on the basis of a one off windfall.

3) Given record tax revenues, tax cuts and more spending are not the same thing

As I asked recently, doesn’t this also apply to tax cuts? If it makes no sense to raise spending on the back of a one-off surplus, does it make any more sense to cut taxes on the back of one?

In Minnesota’s case, I don’t think the two are comparable. As I wrote recently, between 2010 and 2019, adjusted for inflation, state government all funds expenditures rose from $33.3 billion to $42.6 billion in 2019 dollars – an increase of 28%. In real, per capita terms, government all funds expenditures rose from $6,270 in 2010 to $7,548 in 2019 – an increase of 20%.

After these large hikes, there is no real reason for it to increase further in the near future. So, holding spending constant, with continued economic growth* and current tax rates, the forecast surplus will continue to grow. In those circumstances, a tax cut is easily affordable.

*The state’s economic consultants, IHS Markit, calculate tax receipts as a function of economic growth.

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