Thank the Federal Reserve’s inflation for Minnesota’s budget surplus

The news that Minnesota’s state government is forecast to run a budget surplus of $17.6 billion in the 2024-2025 biennium prompted some to ask where all that money came from.

On one level we know: the state government is piling up money in tax collections at a much greater rate than forecast. But why is this?

Gov. Walz tweeted:

But this is not true. In the last two quarters for which data is available, Minnesota’s economy actually shrank.

We should also note that lots of other states are also forecasting budget surpluses. Differences in budgeting processes mean that these numbers are not directly comparable with each other, but Wisconsin is forecast to have more than $6.5 billion left over at the end of its 2022-2023 biennium. Iowa is set to end Fiscal Year 2022 with a balance of $1.91 billion in the General Fund, $830 million in reserve funds, and $1.06 billion in the Taxpayer Relief Fund. South Dakota had a surplus of $115.5 million for the 2022 fiscal year. North Dakota is likely to have a $750 million surplus by the time the two-year budget cycle ends in June next year. 

So the phenomenon of state budget surpluses is widespread. To find its cause we must, then, look beyond the states themselves.

And we don’t have to look very far. As I’ve noted before, beginning in early 2020, the Federal Reserve began pumping money into the American economy in the name of keeping down the costs of the borrowing the Federal government was doing to combat COVID-19. As all that new money has passed through the hands of businesses and individuals, a good chunk of it has ended up in the hands of state governments via taxation.

Table 1 gives you some indication of how this has happened. It shows the forecasts for revenues from various taxes for the 2022-23 biennium from February 2020 (the last pre-COVID-19) and November 2022 (the most recent). We see, for example, that Individual Income Tax revenues are now forecast to be 15% higher in 2022-23 than back in February 2020; incidentally, inflation from February 2020 to October 2022 was also 15%. The star performers in terms of beating expectations are Other Resources, Non-Tax Revenues, and the Corporate Franchise Tax, but they do not account for large shares of state revenues, unlike the Individual Income Tax. Indeed, of the increase in forecast Total Revenues for 2022-23 from February 2020 to November 2022, the Individual Income Tax accounts for 49%.

Table 1: Forecast revenues by tax, FY 2022-23

Source: Minnesota Management & Budget

So if you want to know who to thank for the state budget surplus, it’s the same guy you can blame for inflation: Jay Powell.