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Larger budget surplus comes with weak economic projections for Minnesota

REUTERS/Bernadett Szabo
Many people will be tempted to say the large surplus reflects a strong economy.

The November Budget and Economic Forecast projects a $1.871 billion surplus for the current FY 2016-17 budget, which is about $1 billion more than was projected last February. State law requires a portion of this surplus to go to repay environmental funds and to increase the budget reserve. This leaves state lawmakers with a surplus of $1.206 billion.

Peter NelsonPeter Nelson

The forecast also projects a $2 billion surplus for the following FY 2018-19 budget. This longer-term outlook suggests the current surplus is not just one-time money, but reflects a more permanent situation where tax revenues exceed spending.

Major factors increasing surplus not tied to state economy

Many people will be tempted to say the large surplus reflects a strong economy. Indeed, in discussing the surplus Gov. Mark Dayton said, “Overall this is very good news for Minnesota in terms of the economy.” The Star Tribune headline put it this way, “Strong state economy brings Minnesota $1.9 billion surplus.”

While any surplus certainly suggests a healthy economy, the major factors driving the larger surplus are not tied to the state’s economic growth. A substantial chunk of the surplus — $416 million — is due to lower than expected spending on Medicaid. The Affordable Care Act expanded Medicaid enrollment substantially, and it appears this new enrollment included a healthier group of people than expected.

A second major factor creating the surplus is higher than expected tax liabilities on 2014 tax returns. The July 2015 Revenue & Economic Update explains that “MMB economists believe the additional revenue is primarily due to larger than expected capital gains realizations and other non-wage income in 2014.” These higher capital gains realizations are almost certainly driven by national and global stock market gains and not by local economic gains.

Surplus appears alongside weakening economic projections

Instead of reflecting a strong economy, the surplus is appearing just as various economic indicators project Minnesota’s economy is weakening relative to the nation. After noting the state’s labor market has performed strongly since the end of the recession, the forecast went on to summarize a number of challenges facing the state economy.

Manufacturing, mining, and agricultural activity in the state has struggled in 2015, as Minnesota producers adjust to lower commodity prices, the strong dollar, and weak global growth. The pace of the state’s housing recovery has been slow in part due to persistently slow household formation, although there are recent signs of improvement. Moreover, Minnesota’s labor force growth remains weak, despite the fast-tightening job market. This is impeding the state’s ability to increase employment.

Wage growth has also been weak for several years. According to the Forecast, MMB economists “believe that without a substantive rebound in productivity growth in the forecast horizon, total wage and salary income is likely to rise slower than expected.”

Finally, the forecast also projects net corporate profits will “fall 2.7 percent in 2015, compared to 4.4 percent growth assumed in February, and that weaker profit growth in 2015 is expected to continue into 2016.”

None of this suggests Minnesota’s economy is headed toward a dismal downturn. What it does show is that Minnesota’s economy is projected to grow a touch slower than the nation as a whole. Between 2015 and 2019, the four key economic indicators used to compare the state to the U.S. — personal income, wage and salary disbursements, non-farm employment and average annual non-farm wages — are all projected to grow slower in Minnesota. For anyone unsatisfied with below average, this presents a problem.

Growth hampered by labor market nearing ‘full potential’

A large part of why growth slows in Minnesota is because there are simply not enough workers to fill the jobs necessary to sustain higher levels of growth. Beyond 2017, according to the forecast, “Minnesota’s labor market settles into full potential, and job growth becomes increasingly constrained to the market supply of labor and demographic trends.”

Two key demographic trends limit labor market growth. First, baby boomers are retiring from the work force. And second, fewer people on net are choosing to move to Minnesota. Between 1991 and 2001—as shown in the table below created by the Minnesota State Demographic Center — Minnesota consistently attracted net population gains from both domestic and international movers. Minnesota continues to gain population from international movers, but has lost population to domestic movers every year since 2002.

My preliminary analysis of new IRS migration data reveal higher-income households represent a substantial portion of this net domestic loss of population to other states. On net, Minnesota lost nearly 9,000 people in tax filing households in 2014 and well over half — 5,253 to be exact — of that loss was from people in households with incomes over $100,000.

The state probably isn’t going to change the retirement equation all that much, but the state does have policy levers to attract and retain workers. As the state demographer explains [PDF], the sizable flows of people to and from Minnesota each year — more than 100,000 in both directions — “present an opportunity to change the migration equation to better benefit our state.”

Lowering taxes on workers would be a great policy to start. While there will certainly be heated competition to use the surplus in other ways, such a move is well justified to stem the increasing outflow of people and income Minnesota has experienced since the Legislature and governor raised taxes on top earners in 2013. 

Peter Nelson is the director of public policy for the Center of the American Experiment in Minneapolis. He received his B.A. in economics from Wheaton College and a law degree from the University of Minnesota Law School.

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Comments (13)

  1. Submitted by Matt Haas on 12/22/2015 - 07:00 am.

    Hmm

    The phrase “nattering nabobs of negativity” comes to mind, but hey its not as if I was expecting a Christmas miracle here. This is the CAE after all. Good economy? Cut taxes. Bad economy? Cut taxes. Moon falling from orbit, and the dead rising from their graves? Cut taxes.

    • Submitted by Frank Phelan on 12/22/2015 - 09:47 am.

      Monochromatic

      It’s not that CAE sees everything in black and white, that would be an improvement. They only see the one alternative of tax cuts, and when the only tool you have is a hammer…

      Let’s not talk about the dollar amount of the surplus. Let’s talk about the percentage. It’s about a 2.5% surplus, which doesn’t sound nearly as impressive as $1.8B and puts things in a better perspective.

      And if conservatives are concerned about increased spending, they should start with that bearded turn coat Paul Ryan and get their own (US) House in order first. Not only is he living in public housing (I paid for that Speaker’s office!), he even compromised with that liberal devil Nancy Pelosi!

  2. Submitted by Dennis Tester on 12/22/2015 - 08:08 am.

    Let’s error on the side of the people for a change

    Afterall, it’s their money.

    Here’s a novel idea: If the state’s future expenditures exceed its income, then cut spending or raise taxes at that time. Speculation at this point is only costing me money, not the bureaucracy.

    Because contrary to the discredited beliefs of the Keynesians, it’s the spending of taxpayers’ money by the taxpayers themselves that determines the health of the economy.

    • Submitted by RB Holbrook on 12/22/2015 - 03:12 pm.

      “Contrary to the discredited beliefs of the Keynesians . . .”

      I do not think you understand the “discredited beliefs of the Keynesians.”

      A Keynesian stimulus acts to increase demand for goods and services through government spending. Suppose a business–like, for example, a developer of web-based learning systems–receives a contract for a new project. That contract enables it to hire and pay employees, who are in turn able to spend their wages, which creates a ripple effect through the economy. Does it matter to that business if the contract is with a public entity–just to pick a random example, a large, public university–rather than a private business? Of course not. The business does the work and pays its employees the same either way.

      Likewise, public employees. A construction worker on a highway improvement project is paid just as she would have been had she been working on a private project. The vendors who sell the equipment and supplies get paid the same, and they can spend that money, etc. It’s about creating demand for goods and services.

      If you want a good laugh about discredited economic beliefs, maybe you remember supply-side economics. Can you believe people actually swallowed that fairy tale?

  3. Submitted by rolf westgard on 12/22/2015 - 09:40 am.

    Like the climate

    The economy proceeds in natural cycles. Keep building that reserve.

  4. Submitted by Theo Kozel on 12/22/2015 - 09:59 am.

    Don’t mean to be obtuse

    For those of us for whom it is not always immediately obvious why cutting taxes is the cure for…everything…can Mr. Nelson explain how cutting taxes will resolve the fact that “…two-thirds of Minnesota’s total statewide annual domestic net loss is due to Minnesota students leaving for higher education, and far fewer return in the post-college years”?

    I can think of many ways in which cutting taxes would make this situation worse (i.e.: higher tuitions, underfunded institutions not able to attract quality faculty, therefore not drawing students, etc.), but I really need that magical thinking cap that connects the dots here on how lower taxes would be of benefit.

    • Submitted by Dennis Tester on 12/22/2015 - 12:29 pm.

      The kids don’t come back

      because the want to keep more of their meager paycheck than they otherwise would be able to in Minnesota.

      Retirees leave because at $1072 a month for the average social security check, they want to stretch that as far as they can and it helps when the state bureaucracy isn’t taxing them on that meager income.

    • Submitted by RB Holbrook on 12/23/2015 - 11:20 am.

      How Will Cutting Taxes Help?

      It won’t, and I don’t think there is any serious argument that it would. The factors that drive an in-migration of educated young people tend not to be those characteristics of low tax states.

      “Cutting taxes” should not be thought of as a reasoned argument. Instead, it helps to regard it as a reflexive response. It’s kind of like blinking when something gets too close to your eye. No thought goes into it, it is just the automatic reaction to simulus.

  5. Submitted by Jay Davis on 12/22/2015 - 10:36 am.

    Where are the non-retirement age people moving to and do we really think they are moving to low-income tax states? BTW, Illinois has low state income tax rates and we know what is happening there.

  6. Submitted by Ray Schoch on 12/22/2015 - 10:54 am.

    Please…

    People who like to call themselves “conservative” frequently invoke “family” values and “family” economics. Let’s go with the latter for a moment: When a family’s income is unexpectedly large, why would presumably sane adults in charge of that family immediately look for ways to *reduce* the family’s income, especially when numerous family needs, some of them pressing, have gone unmet for years because of a lack of that very income?

    “Sorry, Johnny. We can’t pay for the surgery to fix your broken leg because Mommy and Daddy are going to work fewer hours, so we’ll have less money. Your surgery will have to wait until we win the lottery.” The religious faith of “conservatives” in the efficacy of tax reduction as a public policy remedy for virtually every economic, social and political issue remains irrational.

    If net migration in or out is a concern, it’s of some importance for Mr. Nelson to keep in mind that many people move here – or away from here – for reasons that have *nothing* to do with taxes, be they high, low, or indeterminate.

    Beyond that, however, I’m inclined toward Rolf Westgard’s view. There’s plenty of economic history in this country to show that good times and bad times are both part of “The American Experiment.” When times are good, instead of giving away the excess, it makes far more – and far more genuinely conservative – sense to put the money into savings by building up the state’s reserve fund.

    It also makes far more sense to use whatever doesn’t go into the reserve for expenditures that benefit the public over the long term. and especially in those areas where public investment has been delayed or dismissed for lack of funding. Infrastructure that’s been neglected is an obvious choice, but since so much of Minnesota’s prosperity seems to rest on an educated workforce, I’d argue that Governor Dayton’s push for universal preschool would be money well-spent – an investment in the future, which, in more reasonable circles, is typically seen as a “conservative” approach.

  7. Submitted by Frank Phelan on 12/22/2015 - 12:17 pm.

    Cat’s Put Of The Bag

    Westgard & Schoch give the game away. The conservative plan is to cut revenue when times are good while simultaneously keeping reserves low or non-existent. Then when the economy slows down, cut spending (and revenue again.) Lather, rinse, repeat, until government can be drown in a bath tub.

    How about following the economics practiced at my kitchen table? With the modest increase in our revenues, we’re putting some in reserve for a vehicle purchase sometime in the future, and spending some on a modest vacation that has been put off for years.

    I will definitely not be reducing my revenues.

  8. Submitted by Riley Curran on 12/22/2015 - 02:18 pm.

    CAE is part of SPN which is funded by the Koch Brothers, etc

    Every single paragraph until the last one, where he says lowering taxes will totally help stem migration of high wage earners, is paraphrasing official reports and well cited articles.

    Kind of an obvious way to try and substantiate the claim that lower taxes on individuals has a tangible influence on state-to-state migration – it doesn’t, or he would have cited it.

    I don’t know why it doesn’t, but I assume it’s because people enjoy their friends, family’s, and communities more than they care about a percentage difference in taxes.

    Very quick googling on CAE:
    http://www.sourcewatch.org/index.php/Center_of_the_American_Experiment
    https://en.wikipedia.org/wiki/Center_of_the_American_Experiment

  9. Submitted by Todd Hintz on 12/28/2015 - 12:00 pm.

    Attraction

    If you want to attract people to live and work in our state, then we need to make this a desirable place to move to. Some will argue that lower taxes is the way to go. And, to a certain extent, there may be some validity to that argument.

    But a better tact to take would be to make Minnesota a cool place to be, which will trump a 2% swing in taxes any day of the week. Some people will come because they can hunt and fish, some for the arts and restaurants, and some–dare I say it?–for both. That means we need to foster those qualities people look for in life and make sure they’re good high quality elements.

    A few suggestions to consider:
    -Lakes and rivers that are clean.
    -LRT and high speed rail so people can get around town and the region without a car.
    -Theaters, museums, and orchestras that are well-funded.
    -High speed rural internet.

    Give people a reason to come and the tools to thrive once they’re here. Minnesota’s reputation will grow and people will be beating down the door to move here, regardless of what the tax rate is.

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