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Yes, Minnesota tax collections are up. No, the state shouldn’t go spending the money just yet, say officials

For tax collections, that is. And in a good way: Revenue continues to outpace the state’s official forecast, though it’s the timing of payments — and not an increase in economic activity — that gets the credit. 

State Economist Laura Kalambokidis
State Economist Laura Kalambokidis said her advice to policy makers would be “hold up.”
MinnPost photo by Greta Kaul

Tax collections in Minnesota continue to outpace the state’s last official forecast, up $85 million so far this fiscal year, which began July 1, and are more than $722 million above what state officials predicted in February.

The latest increase in collections compared to prior forecasts came in individual income taxes and sales taxes, which were offset somewhat by less-than-forecast collections from the corporate income tax and other state revenues. 

But state economists don’t think policymakers should start thinking about how to spend the money just yet. The state Office of Management and Budget attributes the increases not as much to improved economic activity during 2019 but in how and when Minnesota state taxpayers sent in their payments. 

“The positive variance is largely due to timing of income tax payments and refunds across the months of (fiscal year) 2020 and not to greater than expected economic activity,” notes the Revenue and Economic Update posted Thursday. “We now believe that we allocated too little of our (fiscal year) 2020 estimated tax forecast to July-November 2019 — generating positive variance — and too much to December.” 

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That will be adjusted when the MMB releases its November Budget and Economic Forecast, one of two major forecasts used by Gov. Tim Walz and the Legislature to write budgets and make taxation decisions.

State Economist Laura Kalambokidis said her advice to policy makers would be “hold up.”

“When you see a positive variance in a month, meaning when receipts came in more than what we forecast, you might think, ‘Oh wow, the economy is growing faster,’” she said. “Or, you might think, ‘Oops, we allocated too little money to that month when actually it’s going to come later in the year.’”

States like Minnesota that levy income taxes of their own are still trying to understand how the 2017 federal tax reform bill impacts when taxpayers make payments. Both the way estimated tax payments are made — and how individual taxpayers calculate monthly withholding — have been changing, Kalambokidis said.

“We’re learning as we go here,” she said. “All the states that have income taxes are in this same boat of trying to figure out how the Tax Cuts and Jobs Act will effect the timing of individual tax payments.”

Taken together, tax collections came in a $722 million, or 3.2 percent above what forecasters predicted in the February forecast. By law, one-third of any surpluses reported in the upcoming November forecast must be transferred into state reserve accounts. The state expects to bring in $48.2 billion in general fund taxes each biennium.

Thursday’s update also contained some positive economic news about the national economy, although on the margins. While the economic outlook for 2019 has weakened slightly since that February forecast, expectations are for growth beyond 2020. 

The state contracts with national economic forecasting service IHS Markit, which downgraded its estimate of economic growth for 2019 from 2.4 percent to 2.3 percent. It also reduced its estimate for 2020 growth from 2.3 percent to 2 percent.

But IHS Markit has also increased projected growth for 2021 from 1.7 percent to 2 percent. And while it does not foresee a recession in its baseline forecast, it does see risks in its pessimistic forecast, and it did increase the possibilities for that pessimistic forecast from 25 percent to 35 percent.

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“The upward revision for 2021 was due to a stronger forecast for consumer spending, which is in turn driven by a higher expected income growth,” the MMB report stated. IHS also believes the national unemployment rate has likely hits its low at 3.5 percent and expects the jobless rate to begin increasing in late 2021.

This is the last quarterly forecast before the big economic and revenue forecast in November that will be used by Gov. Tim Walz and the Legislature to begin crafting any changes to the state budget. The Legislature convenes Feb. 11, 2020.