Minnesota’s revenue shortfall offers a sign for concern and a lesson in economics

Late yesterday, the Minnesota Management and Budget announced that our state’s general fund receipts for the financial year 2017 were now estimated to total $20.949 billion – $104 million (0.5%) less than projected in February 2017.

Sales, corporate, and other tax revenues are all set to beat February’s predictions. But income tax receipts are predicted to come in $260 million (2.3%) lower than forecast, more than offsetting this (See table).

Source: Minnesota Management and Budget

Why the shortfall? 

Minnesota Management and Budget offers two explanations.

data from the Quarterly Census on Employment and Wages (QCEW) now suggests that Minnesota wage and salary income grew about one percentage point more slowly in 2016 than we had forecast in February. That is consistent with tax year 2016 net income tax receipts coming in short of forecast. In addition, non-wage income—particularly capital gains—may have grown more slowly in 2016 than we had forecast. The Congressional Budget Office (CBO) has speculated that weak federal income tax payments for 2016 may be due in part to taxpayers shifting payments from 2016 into later years in anticipation of federal tax rate cuts.

A sign for concern and a lesson in economics

The first of these explanations, the slowdown in Minnesotan wage and salary income growth, is a little concerning. As we noted in our report on the state’s economy last year, income growth has lagged the national average in recent years.

The second explanation, that people are deferring income in expectation of tax changes, demonstrates that people respond to economic incentives. Differing tax rates can, as we have reported previously, cause people to move. Indeed, there is even evidence from the United States and Australia indicating that people die at more tax efficient times.

These latest figures offer Minnesotans two things. First, is a reminder not to take the state’s economic performance for granted. Second, a lesson that taxes affect economic activity. Both should be heeded.

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