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The billion dollar bummer: Why some Minnesota lawmakers are so conflicted about the state’s not-exactly-small projected budget surplus

What does the new, lower revenue forecast mean going forward? As with most things at the Minnesota Capitol, the answer to that question depends on whether you’ve got an “R” or a “DFL” attached to your name.

Gov. Tim Walz
Gov. Tim Walz said the lowered forecast is no reason to pull back from the philosophy of his budget proposal, though he allowed that he will make adjustments.

When is news that your government has a $1 billion projected surplus bad news? When that excess is down by nearly one-third since the last time you checked.

Such was the odd math and harsh truth of the annual ritual that is the Minnesota Office of Management and Budget’s release Thursday of the February revenue forecast, which legislators will use to draw up plans for nearly $50 billion in two-year spending.

That forecast suggests — and let’s remember it’s only a forecast — that the state will have a little more than a $1 billion surplus into mid-2021. There are many qualifications: that carry forward budget doesn’t include much of the inflationary costs of state programs, and the projections are subject to uncertainties like global politics and trade policies.

Still, having a billion dollars to the good (it’s actually $1,052,000,000) is better than being in the hole. It was just eight years ago when a previous governor and a previous Legislature had to fight through a $5 billion deficit on a much smaller spending base of $32 billion.

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So good news. Or not — since the state woke up Thursday with the $1.5 billion projected surplus from the November revenue forecast and went to sleep with only a $1 billion projected surplus.

After presenting the new numbers and the reasons for the somewhat less-optimistic number, state Management and Budget Commissioner Myron Frans was asked: “Why so glum?”

“I’m not glum,” Frans said after a pause that drew laughter. “I’m just as happy as can be.”

Yet Frans described the new forecast as “a cautionary tale”: “When you take half a billion dollars out of the projections for 2020-21, that’s a concern,” he said. “Those are not the numbers I prefer to see, but they are numbers we can manage and work within. The key here is we’re still in a positive situation but we need to be cautious about how we proceed.”

How we got here

The November forecast began to look overly rosy almost immediately after it was announced, with state tax collections in December and January coming in below what had been projected. Frans and his team attributed the large change to slightly slower estimates of future economic growth offset by slightly slower estimates of the costs of state government programs.

It’s important to note that it’s not that the state is estimated to collect less than it currently does; it’s just that it won’t collect as much as was expected in November. Much of the reduction came in best guesses for what individual and corporate income taxes will bring in to the state. But estimates of sales taxes were also lower.

Lower projected balance for FY 2020-21
Minnesota Management and Budge
Lower projected balance for FY 2020-21
The national economic picture is largely to blame for the forecast, though. “The near-term outlook for U.S. economic growth has weakened since Minnesota’s Budget and Economic Forecast was prepared in November 2018, while the pattern of slowing growth through our planning horizon carries over from the prior forecast,” is how the official forecast described it.

Yet employment growth both nationally and within Minnesota remains strong, so strong that there are more open jobs than available workers. Minnesota has the seventh lowest jobless rate in the county, more than a point below the national figure, and is now at its lowest point in 18 years.

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But job growth is expected to slow because there aren’t enough workers, blamed in part on retiring Baby Boomers. “In this forecast, we see employment growth slowing as employers try to fill open positions from a shrinking supply of available workers,” the forecast says of Minnesota’s labor situation.  “And the tight labor market is being felt across Minnesota. For the first time in the data series, both the Twin Cities and Greater Minnesota have a ratio of less than one unemployed persons to every job vacancy.”

That situation is actually a drag on state revenue collections because more of the state’s growth in wage income is expected to come from higher wages per worker — and less from increases in the total number of people working.

Walz: new numbers validates budget plan

So what does it all mean?

As with most things at the Minnesota Capitol, how you answer that questions depends on whether you’ve got an “R” or a “DFL” attached to your name.

Walz himself said the lowered forecast is no reason to pull back from the philosophy of his budget proposal, though he allowed that he will make adjustments. Instead, he said Thursday, it suggests that he should move ahead with his $49.5 billion budget plan, which includes an increase the gas tax for a major road-building campaign; a hike for some other taxes for transit expansions; a bid to reclaim some general fund money recently sent to transportation projects; and a plan to add in other revenue increases to boost spending on education, colleges, health care, affordable housing, broadband and public assistance. Walz also plans to continue to push forward with his construction spending plan that would total $1.3 billion.

Near-term U.S. outlook weakened since November
Source: U.S. Bureau of Economic Analysis, IHS Economics
Near-term U.S. outlook weakened since November
“This forecast validates the approach,” Walz said of the $2 billion increase he’s proposed in overall spending. “We must make investments in economic growth, and my investments in education, jobs and transportation will do just that.”

The DFL governor then predicted what GOP leaders of the Legislature would say after he spoke: “Cut taxes and cut spending on education and those things that actually grow the economy. This trickle-down economic theory — that no matter what the forecast says is what we have to do — is what gets us into these problems.”

And later, he added: “There is one tool in the Republican tool box: cut taxes, cut taxes, cut taxes.”

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Walz also used the labor market figures to make the case that the state needs to be open to immigration both from within the United States and without. And the latest numbers who Minnesota has reversed a decade-long trend and attracted more people from other states than it lost.

Can the state keep attracting people when its taxes are among the highest in the country, and would increase under his plan?

“I’m very cognizant of working families, making sure folks are able to keep as much of the income as they can,” he said. “But for a working family, the ability to have a quality school, the ability to have amenities in our community … we’re going to continue to make the case.”

There is little significant policy differences between Walz and the leaders of the DFL majority in the House, and Speaker Melissa Hortman of Brooklyn Park echoed much of what Walz said Thursday. The state budget would be in deficit in four years without some increased revenue, she said, and she agreed that “it is time to go big” on the bonding bill. In fact, she prefers a $3 billion construction program instead of Walz’s $1.3 billion.

And Minnesota will become more attractive to workers, Hortman said, if it passes policies like paid sick leave, parental leave insurance and better support of child care.

Hortman also said her caucus has the votes to pass a gas tax. Added House Majority Leader Ryan Winkler of Golden Valley: “This is no time for the status quo.”

Republicans: this is not the time to ‘binge-spend’

When Republican did speak, they said Walz got their talking points all wrong: “The two things we can control here are spending and taxes,” said Senate Majority Leader Paul Gazelka, R-Nisswa. Earlier in the session, the Senate GOP majority released budget principles and “nowhere in thee did we talk about a tax decrease, we just talked about protecting the taxpayer,” he noted.

Gazelka said he thinks taxes are too high but that Republicans will not push tax cuts in its plan. But that plan will spend only what the current forecast says is available from current taxes. “If it was my home and I just received a 1 percent cut in my salary, and I came home to my wife to talk about what we were going to do, I would not go out and immediately binge-spend,” he said.

Republican House Minority Leader Kurt Daudt, from Crown, said the decline in tax collections is due to high earners leaving the state because of previous tax increases. “I’m actually surprised this isn’t worse,” Daudt said. “It’s pretty easy to see it’s the high-income earners who are now moving their income out of state. They assured us this wouldn’t happen but the reality is the chickens are coming home to roost and they’re not coming home to roost, unfortunately. They’re taking their nest eggs and roosting in other states.”

Yet the tax increases Daudt referenced were first imposed five years ago, under Gov. Mark Dayton. If high-earners were going to leave, wouldn’t they have done so by now?

Senate Majority Leader Paul Gazelka
MinnPost photo by Peter Callaghan
Senate Majority Leader Paul Gazelka, at a Thursday press conference with Rep. Kurt Daudt and Rep. Anne Neu, said he thinks taxes are too high but that Republicans will not push tax cuts in its plan.
Rep. Pat Garofalo, R-Farmington, said until this tax year they would have been allowed to deduct all state and local taxes from their federal returns. The federal tax reform act of 2017 capped so-called SALT deductions at $10,000.

Still, Sen. Julie Rosen, R-Vernon Center, said the state needs to stay within current revenue. “It’s a little bit sobering,” Rosen, the Senate Finance Committee chair, said of the new forecast. “It’s a rude awakening.”

Rosen also referenced the growth rate of state spending, 2.9 percent, compared to the growth rate of revenue, which is 2.3 percent: “Our spending is outgrowing our revenues and that’s the story of the day.”

Yet Gazelka said he agreed with Walz on one point — that the state needs to encourage immigration. “We all agree that we have a workforce shortage and we have an aging population, and I think we can work together on those issues,” he said. “We do want all legal immigration. We want lots of legal immigration. That’s something we agree on.”

But he added that high taxes are not a way to attract immigrants from other states. “We’re one of the top 5 tax states,” he said. “We’re already in the Top 5. I’m not interested in being in the Bottom 10, but we don’t want to move up from where we are.”