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.
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.
[image_credit]Minnesota Management and Budge[/image_credit][image_caption]Lower projected balance for FY 2020-21[/image_caption]
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.
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.
[image_credit]Source: U.S. Bureau of Economic Analysis, IHS Economics[/image_credit][image_caption]Near-term U.S. outlook weakened since November[/image_caption]
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.”
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?
[image_credit]MinnPost photo by Peter Callaghan[/image_credit][image_caption]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.[/image_caption]
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.”
Now is not the time to increase spending. The economy appears to be slowing some. Plus the MN budget has grown by 50% or more in the last 8 years. That’s way faster than revenue has grown. Given that we are over due for an economic downturn, it would be prudent an fiscally wise to actually cut spending and shrink the budget somewhat and pay down debt. Get on better financial footing so we don’t end up with a huge deficit when the eventual downturn comes.
Mr. Barnes, yesterday you stated that “MN has doubled its spending in roughly 10 years.” Today, it’s “50% or more in the last 8 years”.
What numbers are you using? Are you using spending as a percentage of inflation adjusted State GDP? If not, just what is your metric?
2010 budget was 30 billion. Walz proposed 49 billion. That’s a 63% increase in 9 years. That is ridiculously unsustainable. Not to mention we still have almost 17 billion in debt plus the State pension system is severely underfunded.
A fiscally sound policy would be a significant cut in total spending to pay down the debt and backstop the pensions before they get completely out of control. That would mean prioritizing where we spend.
Again, I find myself explaining basic economics to conservatives.
First, you need to use inflation adjusted dollars. If you were hired for a job in 2010 at a salary of $50,000, and you are still working for $50,000 today, would you say that you are making the same amount of income? Or would you say you are falling behind every year? Explaining this again and again is getting frustrating.
What’s really important is whether or not the budget is growing at the same RATE as the state’s economy, measured in real (inflation adjusted GDP).
Next, remember the state has a biennial, or two year budget. This is important because GDP figures are typically for just one year.
Also, I see you use the year 2010. That would be the July 1, 2009 – June 30, 2011 budget that was your guy T-Paw’s last budget. This was when he was gearing up for a run for the White House, when he was pandering to the extreme right six ways to Sunday. Given that meant genuflecting to Grover Norquist, he choose to borrow money for the schools, hoping he’d be in DC before the red ink because to obvious to deny.
Given Minnesota’s Grey Tsunami, we can expect that it will cost more to support seniors in their old age, regardless of GDP growth. Good conservatives would do well to recall the Biblical admonition to honor one’s father and mother. Though it seems conservatives only trot out Christianity when it’s convenient, and forget about other times. (Come to think of it, progressives are just as guilty of that, favoring religion in the public square when it comes to Dr. King, but not so much at other times.)
Correction: T-Paw borrowed money FROM the schools, not for the schools.
Inflation over such a short time period is basically meaningless. The 2009-10 budget would be 34.6 billion in 2019 dollars. It’s still just over 4% annual growth in spending vs 1.75% annual gdp growth. That is unsustainable.
Meaningless? Per Frank’s point, a 2% inflation rate, Starting with a $30B budget in 2010, yields a $35.853B budget in 2019. Real financial math. Also to Frank’s point the $30B was a deficit and gimmick contrived budget.
Judging by your other comments throughout this site, I would’ve suspected you to have taken a very different tack on inflation.
But to your point: changes to GDP is derived /after/ inflation is subtracted out. Since inflation has been hovering in the 2-3% range, the size of the US economy has been expanding somewhere around the 5% range. Population growth is also supposed to be adjusted for but due to reasons of varying debate, are not.
Given this a budget increasing by 5% annually would be in the ballpark of a budget maintaining a constant size. 5% CAGR would double the budget around every 14 years (you can use the rule of 72 to easily ball-park this), obviously due to the way compounding works the bulk of the increase is always weighted toward the latter part of the sequence.. This all looks completely in line with the numbers thrown around above without even breaking out a calculator. Thus, as was pointed out above, the budget vs GDP is a much more useful measure of the size of the budget. In fact MN’s tax-take has pretty consistently been ~20%..
Obviously there are intertwining questions such as: “is inflation really only 2%?” (look for articles mentioning the Chapwood Index, or the Shadow Stats SGS for example if you would like to wade through the muck of the shortcomings of hedonic adjustments and chained CPI), or your own line of questioning the sustainability of it all (which I would lay the crux of the question at the feet of the ponzification of the monetary system and related fictionalization of the economy, rather than whether a municipal budget specifically is sustainable). To those I suspect there are no clear answers.
What I have personally found refreshing about Walz thus far has been his honesty in his budget proposals..
Another thing to consider is that there is a huge backlog of infrastructure projects that we need to address for MN businesses to compete. Farmers gotta get those crops to us city folk!
Sometimes homeowners need to replace the roof and the furnace in the same year. (A large institutional budget is not analogous to a family budget, but conservatives like to think it is, so I’ll go with.)
In other words, if Paul Gazelka got a 1% cut in pay, I doubt he’d tell his wife, “Honey, I know the roof is leaking but it will have to wait for next year.” Now Daudt, I wouldn’t be surprised a bit if he budgeted that way. But Gazelka seems the sharper of the two.
That might be the most amusing argument I’ve heard in a while. So there are really only two economic trends in the Ultra Conservative Universe. First, when the economy is doing poorly and it’s no time to raise taxes. Second, when the economy is humming along but disaster is just around the bend and thus, it’s no time to raise taxes.
Taxation is a drag on the economy. Govt is always inefficient with its spending and creates chaos in the markets by skewing them. That’s why we get bubbles that burst causing recessions and depressions. So it’s never a good time to raise taxes.
Keynesian Economics has been a proven failure time and again for decades now. The wise thing to do now is cut spending so that you have the revenue to pay what you owe (18 to 108 billion in shortages for the State pension system depending on who you choose to believe).
Taxation is a drag on the economy? Surely you oppose tariffs, which are taxes on consumers.
Tariffs are used to level the playing field. When 1 nation has fewer labor/environmental etc laws than another, the only way to fix that is to use tariffs. Otherwise business will move to the cheaper labor nation and the nation with more expensive labor will end up losing it’s standard of living. The tariffs would stop China from treating labor like slaves and force them to clean up their environment (or go bankrupt). Seems to me those would both be things you would be for since you guys are always harping about raising the minimum wage and cleaning up the environment. They would also bring jobs back to the US, especially if we eliminated the corporate tax (another tax consumers pay). Manufacturing type jobs pay much better than most service sector jobs (waiters, housekeepers, fast food cooks, retail store clerks etc). Yes, we would have to pay slightly higher prices for the goods we get now but we would also have more jobs that pay higher wages here. That would also help raise wages throughout the economy as businesses compete for labor.
Ah, so we CAN tax our way to prosperity. Interesting!
Tariffs are not the same as regular income to the government, let alone state government. If taxing people makes everyone wealthy, why haven’t we just done it in the first place? Oh, yeah. Because everyone knows it never has worked so it never will work.
As for many of the rich leaving the state, yes it helps to have the actual proof. But when it is known to be happening in California and New York (and Gov Cuomo hilariously blames Trump for his tax income steep drop). They are leaving. It is only a matter of time.
Besides, inflation does make a difference but 63% spending growth in 8 years is far, far larger than inflation. And don’t blame T-Paw. He actually kept spending increases down. If he didn’t, the bad deficit would have been atrociously worse because the DFL wanted to hike spending over 20% each biennium he was gov.
If we had a government that wasn’t so addicted to money, we wouldn’t have to worry about the 1% decrease to ‘fix the roof’ because there would have been more than enough to replace the roof plus buy a new car.
No we can’t. If you don’t know the difference between a tariff and an actual tax, I can’t help you.
If one does not understand that a tariff is a tax, one does not understand economics.
Please:provide some support on how taxes are a drag on the economy? Those $ are spent on goods and services and fed right back into the economy. The tax drag on the economy is Military spending, they are basically dead end $ very little stimulative effect. Please also provide some support on how “Supply side” spending makes the economy grow? Appears the US Budget office would disagree: https://www.bloomberg.com/news/articles/2019-03-05/u-s-budget-deficit-widens-77-percent-as-revenue-declines?srnd=premium
Also it appears that per Frank’s point, the Trump tariff program has things going in reverse. https://www.bloomberg.com/news/articles/2019-03-05/trump-set-to-become-100-billion-man-as-u-s-trade-gap-surges?srnd=premium.
Other than just saying words, support: “Keynesian Economics has been a proven failure” Seems some folks at Forbes would disagree with you. https://www.forbes.com/sites/timothysiegel/2011/04/01/the-truth-about-keynesian-economics-it-works/#4779f2c51571
High earners are fleeing the state claims Rep. Daudt. Let’d see your proof.
Funny that Republicans bring up the cap on deductibility of state and local taxes under the Republican “tax reform” plan. From Republicans who have always complained about the same money being taxed twice. That was passed to punish high service states to advantage low service low tax states such as Florida and Texas, who are already getting more federal money than their fair share.
And Republicans preserved all the high end loopholes that allow billionaires like Trump to pay zero federal income tax. Thankfully Paulsen and Lewis, who sold out Minnesota interests in voting for the infunded tax cut for millionaires, were voted out of office, along with many Minnesota House Republicans, whose negative message turned people off.
We are not able to cut our way to continued prosperity, and we don’t need to kowtow to wealthy Republicans who will move to Florida if expected to pay their fair share of taxes.
http://tcbmag.com/news/articles/2016/minnesota-s-great-wealth-migration That should suffice.
You’re advocating for a tax cut on the rich with your SALT issue. Those people were getting a subsidy under the old system and now they actually have to pay their own taxes.
You can never tax your way to prosperity. That path always leads to economic ruin. Propsperity comes from low taxes and low govt spending. Those who earn the money invest and spend it the most wisely.
You can’t cut your way to prosperity. How about the “golden” 1950s, when the individual tax rates were what – 70% at the top? And we built schools and interstates and infrastructure (which is now crumbling) and invested in the space race. And families could live on one income. There is a definite multiplier effect to government spending on projects which benefit all of us.
A couple of corrections and clarifications. The top tax rates in the 50s were never really paid. People used deductions to stay below those brackets as much as possible. The 1950s were prosperous in spite of the high tax brackets.
Secondly, in the 1950s we were still the only major economy in the nation that hadn’t been bombed into rubble. We were helping to rebuild the rest of the world and we had a fresh world’s reserve currency. We also weren’t able to just run up the credit card thereby sapping people’s wealth because of the gold standard.
Actually, you CAN cut your way to prosperity because government spending is extremely wasteful and inefficient. Keeping spending low keeps the government from distorting markets thereby not creating bubbles that eventually burst. See what Harding and Coolidge did from 1920 to 1923 when they pulled us out of a depression every bit as bad as 1929 ended up being. Keeping spending low also leaves a lot more money in the hands of those who earn it (because you don’t need much tax revenue). Those people and businesses know best how to invest and spend that money as they want the best returns for their investments.. something government never does.
A $1 billion surplus suggests that Minnesota is already on an excellent financial footing. No need to spend every last penny, by any means, but the list of things that need financial attention, from state support of schools to broadband for rural areas to road and bridge maintenance to local government aid are all investments that need to be made, especially now, with interest rates that are historically low for those items that require bonding (i.e., debt). I await with anticipation a “conservative” idea that is not focused on cutting taxes or cutting benefits to those that need them.
A sizable part of the reason for the growth in state spending is because – before the Dayton administration inherited a $6 Billion deficit – the state was slowly losing ground to increasing debt, largely, though not entirely, a result of the “no new taxes” mantra practiced by Tim Pawlenty and the GOP.
Rural broadband spending by the State is a waste of money. Cell phone companies and satellite services already have most of the state covered. They are far cheaper than burying cable to remote areas where the costs would never be recouped. Those services may not be as fast as fiber but the cost/benefit is much better. Putting fiber in the ground across vast rural areas is extremely expensive.
Schools already get 25% of the budget… how much more do they need? It’s time they start using it to educate the kids and get rid of all the overhead like Superintendents that make a million + a year with their own personal driver etc.
Transportation is almost 11% of the budget… that’s over 5 billion… time to prioritize that to fixing the roads and bridges. It’s way more than enough to do so. Some things will just have to be cut… light/heavy rail would be good places to start since they are costing us about 200 million a year in shortfalls.
Dayton inherited a deficit that was created by a Democrat run Legislature and a global recession. You gave Obama a pass on the recession for years so you also need to give Pawlenty a pass as well. Pawlenty’s budgets always balanced.. but those budgets weren’t the ones the Legislature actually passed.
The state budget has increased just over 4% annually since Pawlenty left office. That is unsustainable and far more than enough money to fix the things that actually need fixing. You can’t tax and spend your way to prosperity. Things will have to be cut and spending prioritized. Otherwise Walz is going to see a massive deficit when the economy eventually goes into a deep recession again (we are over due).
The only a good time for the state govt to ‘binge-spend’ (borrow) is during a recession but if there ever was a time to invest in roads and transit and increase spending it’s now: during a time of market growth with projected surplus. If not now, when?
Conservatives would say “never”. Seriously.
Sounds like the Republicans among us are yearning for the good ole days of ‘not Pawlenty’ when the public schools were robbed, and the Republican legislature’s ‘fees’ glossed over their tax breaks for the haves.
This article hinted at but didn’t explicitly list main problem. By law budget forecasts include inflation in projected revenues and exclude it in projected spending. DUMB MATH.
Yes, that’s a failing of the media. It is mentioned somewhat, but not often enough. It should really be mentioned every time there is an article about the surplus.
It’s like me assuming I’ll get a raise from the boss this year, but none of my expenses will go up.
Democrats always talk about being concerned for the poor & wanting to help the poor.
So what does the new Dem gov do? He proposes increasing regressive taxes (sales & gas) that hurt poor people the most.
If the dems. were truly concerned about the poor they would increase the license tabs on expensive cars and have a higher sales tax rate for cars that cost over $ 50,000.
They could also have a state wide property tax on all homes valued at over $ 500,000 in addition to the local property taxes. They could use that state wide residential property tax to fund increases spending on education and highways.
It’s kind of comical that the ONLY regressive sales tax Republicans recognize is the gas tax. We actually measure the over-all regressiveness of our tax code in the bi-annual tax incidence studies, it’s called the: “Suits” index. Republican budgets ALWAYS produce the most regressive tax structures. Over-all Dayton managed to produce a more progressive tax structure and Walz’s budget builds on that trend.
I don’t know how an author like Callaghan can write a piece like this without mentioning the well know (among legislators) fact that there actually is little or no REAL surplus, and may well be a deficit.
This “surplus” emerges from one of Pawlenty’s accounting gimmicks wherein inflation is factored into revenue, but not costs. Those of us who were paying attention at the time remember that Republican deployed this gimmick in order to minimize the deficits they were generating during the Pawlenty era. In fact during one of the election cycles Pawlenty actually ran around telling people (falsely) that we had surplus.
Yes, Dayton really did dig out of the deficit hole in his first two years, but when Republicans captured the legislature they spent the next 6 years chipping away at the surplus and digging us back into a deficit, which is where we are now.
As far as fiscal policy is concerned, the magical thinking typically deployed by Republicans who assume that as long as we keep cutting funding; everyone will discipline themselves into being more productive has always been incoherent and irresponsible. The longer wait for the magic to happen, the more degraded our infrastructures become and them more expensive it will be to replace and repair them. Had we simply maintained the systems we had, they would not require replacement NOW. Fiscal incompetence has place us in a position of having to build additional infrastructure that would have been necessary anyways, but on top of THAT we now have to replace components that we failed to maintain. That train left the station years ago so here we are.
We know that the Republican model for a great-again nation is Somalia… but we also know that the Somali model is a disaster we chase our own peril.
At any rate, Walz’s budget isn’t a spending spree, it’s a tourniquet on badly bleeding budgetary wound inflicted by Republicans and their two decade long mission of fiscal malfeasance. This Republican attack on the public welfare in the service of fiscal magic simply has to be repelled with extreme prejudice.
Actually, Democrats bare some of the blame because when they had a chance to put many of these issues to rest in the first two years of Dayton’s term, they chose to leave these issues on the table out of fear of “over-reach”. Yet another catastrophic wound inflicted by the forces of “moderation” and “centrism”. Substitute failed compromise for actual solutions out of fear of over-reach and then lose anyways and leave us with the problems.
The lesson I hope Walz had learned: Next time you’re in a position to fix stuff… fix it, and campaign on having fixed it. Don’t leave it broken so you can campaign on having left it broken. Duh? “Well we could’ve fixed stuff but we didn’t because we were afraid you’d vote someone… if we fixed stuff? Seriously? This is the centrist model of political wisdom? That’s almost as bad as the Somali model.
Solving problems and fixing stuff isn’t “over-reach”, it’s the freaking job. Just do your job. And yes, we afford to fix this stuff, and state of the art infrastructure will obviously grow the economy more efficiently than crumbling infrastructure. Let’s set aside these facile debate games and get on with it.