High tax rates ≠ high revenues
Lower tax rates incentivize economic activity and therefore expand the tax base. High tax rates do the opposite
Last week, Minnesota Management and Budget announced that the state government will run a forecast budget surplus of $1.3 billion. Even before this announcement, politicians in St. Paul were debating what to do with it. As this discussion progresses, it might be useful to keep the following points in mind.
Before I go any further, it is worth noting that this is a forecast surplus; the money isn’t in the bank yet. There is many a slip twixt cup and lip, as they say back home. When you’re driving to the casino, it might be fun to daydream about what you’ll spend your winnings on. You’d be rather a fool if you committed to spending them.
At the end of the 2019 legislative special session, the state government’s budget balance for the fiscal year 2020-21 was forecast to be $242 million. Now, it is up to $1.3 billion, a 450% increase. The US economy is performing well at present, but there are ‘downside risks’, notably from the administration’s misguided trade policies. The state government might do well to be a little circumspect when it comes to money it doesn’t yet have.
1 – This is a one off windfall
One option is for the state government to spend the money. As Minn Post reports,
Some Democrats did have a wishlist for the 2020 surplus, though. Walz said lawmakers could use some of the money to ensure a pair of tribal governments do not have to cover excess payments the Department of Human Services sent to them for addiction treatment drugs. And Sen. Ann Rest, a DFLer from New Hope, said some of the money could be spent on grants for affordable housing.
Others suggested that the surplus could help with racial disparities. Still others pressed for more spending on schools. Indeed, added together the various spending plans probably come to a good deal more than the forecast surplus.
But this is a one off windfall. These funds – assuming they materialize as expected – will not materialize again next year or the year after that, or, at least, the state government should not assume new spending commitments on the basis that they will.
2 – The surplus 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 (it is actually $7 million lower). 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.
Caution here though; the same concerns about hiking spending based on a one off surplus apply to cutting taxes based on one. The difference is that there is some evidence that this surplus was the result of lower taxes. As Minn Post put it,
Laura Kalambokidis, the state’s top economist, said in the short term, the stronger forecast can be attributed in part to rising incomes, falling gas prices, lower interest rates and overall rising household wealth. She noted the Trump administration’s Tax Cuts and Jobs Act “fueled” above average national GDP growth in 2018. “When wealth grows,” Kalambokidis said, “consumers tend to spend more.”
John Phelan is an economist at the Center of the American Experiment.