Minnesota’s state finances are in surplus but the federal government is sending it billions of dollars anyway

On Wednesday, the United States Congress approved ‘The American Rescue Plan.’ The bill is, purportedly, intended to help people suffering from the economic effects of Covid-19 and federal and state government responses to it. “Help is clearly on the way,” said Sen. Amy Klobuchar, “We’re going to be able to see the light at the end of the tunnel, everyone sees it.”

In fact, very little of the bill has anything at all to do with the pandemic. It includes policies such as an increase in the child tax credit up to $3,600 per child annually and subsidies for Obamacare insurance policies that would phase out only at a household income of more than $580,000. The nonpartisan Committee for a Responsible Budget says that “Only about 1 percent of the entire package goes toward COVID-19 vaccines, and 5 percent is truly focused on public health needs surrounding the pandemic.”

Much of the Covid-19 related spending is poorly targeted. So-called ‘stimulus checks’ of up to $1,400 per person are actually counter-productive when the stated aim of policy is to suppress economic activity in the name of battling Covid-19. For those who are suffering, there are supplementary unemployment benefit payments of $300 a week, extended yet again.

The bill also sends $350 billion in state and local aid to help states, counties, cities, and tribal governments cover expenses and lost revenue due to the pandemic. Minnesota’s share of this includes nearly $2.55 billion for the state and $2.1 billion for cities and counties. 

But what lost revenue are we talking about here? In May last year, the state government’s finances for the biennium 2020-2021 were forecast to be $2.4 billion in deficit. By November, that had flipped to a surplus of $641 million. A surplus of $1.6 billion is forecast for the 2022-2023 biennium.

As Figure 1 shows, revenues did tank hard when Covid-19 hit. In April 2020, Minnesota’s Individual Income Tax receipts were down 60% from those of April 2019. But, by October and November, revenues were actually above the levels of a year earlier, by 4% and 5% respectively.

Figure 1: Change in tax revenues from 2019 to 2020 by period, current dollars

Source: Minnesota Management and Budget

How did we fare so well? As economist Noah Williams explains:

The states largely rely on income and sales taxes, while local governments largely rely on property taxes. Real personal consumption expenditures fell by 3.9 percent in 2020, and accordingly, sales tax revenue was down 3.4 percent in real terms. However, real incomes grew by 5.1 percent in 2020, thanks to transfers like the federal relief checks and enhanced unemployment benefits. In addition, the real-estate market stayed strong in the work-from-home environment. The Case-Shiller home price index was up 9.5 percent year-over-year in November 2020. Accordingly, property-tax revenue grew 2.6 percent in real terms in 2020, after increasing by only 1 percent the previous year.

It may be that yanking away programs like enhanced unemployment benefits would negatively impact spending and, thus, state finances. But there is no argument for billions of dollars of so-called aid direct to the state government. There simply isn’t a yawning gap in Minnesota’s state government finances which the federal government needs to dump billions of dollars into.

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