The news about the state of Minnesota’s revenue keeps getting better for a governor and a Legislature faced with balancing a budget in the midst of a pandemic.
Tax collections for January were $296 million more than state economists had predicted they’d be just 12 weeks ago, while November and December collections were up $167 million from the November forecast. Taken together, the state has collected 3.5 percent more money in current taxes than was expected.
The state’s budget agency, Minnesota Management and Budget, always warns that monthly collection reports are subject to misinterpretation because of the way taxes — especially income taxes — are sent into the state. But three consecutive months of collections above forecast is starting to look like a trend, not a blip.
Whether the state is in an even better economic position than indicated by a pretty strong November forecast will be borne out when the state budget office releases its February forecast, which will happen no later than the last day of the month. It’s that forecast that will be used by the Legislature to adopt the state’s next two-year budget. The state’s fiscal year starts on July 1.
Gov. Tim Walz tipped attendees at a League of Minnesota Cities webinar Wednesday morning that the collection numbers would be good news — that the state’s current surplus would grow and the projected shortfall in the future would “shrink even substantially more.”
“I think a lot of our assumptions and things that went into this budget were predicated on the reality of the time,” Walz said. “That’s what we have to do.”
The year of COVID has produced wild swings in the state’s budget. Last February, when the novel coronavirus was a foreign story, the state had a $1.51 billion surplus on a spending base of around $48 billion over two years. After the virus hit and shutdowns had begun, that surplus became a $2.42 billion deficit. Then, in November, the numbers swung again, and the state projected a $641 million surplus. Some of that was spent in December to provide COVID economic relief, leaving the current projected surplus at $394 million.
With improved tax collections, however, that surplus could grow. And if the numbers are projected to continue into the next two-year budget period, a projected shortfall for that budget would shrink or even disappear. And none of this takes into account whatever President Biden and the Democratic Congress might do with a third round of stimulus. Biden’s current proposal includes large payments to states and local governments to make up for lost tax collections.
Walz called those state-and-local-government supports “a high probability” and said he expects them to be “very highly focused on recovery from COVID, which will mean cities, counties and state governments will be a part of that and that will change those budget numbers.”
Many states — Wisconsin among them — are reporting they haven’t lost as much revenue as feared during the pandemic. Minnesota was well-positioned to weather the recession because of a robust rainy day account.
MMB set the scene for improved numbers last month, when it released a quarterly economic update. That report outlined several reasons why a forecast that had been announced just a few weeks before might not be accurate. One factor was the pace of vaccinations against COVID-19 and the need for additional business restrictions that Walz imposed in December. The other was the impact of the second major congressional stimulus package of $900 billion.
The difference between having that stimulus and not having it was significant. The state’s macroeconomic forecast vendor, IHSMarkit, said the national economy would have fallen in the first three months of 2021 by 2 percent without that stimulus. With it, the economy is projected to grow by 2.4 percent.
That translates into increased economic activity, which the state collects taxes on via income and sales taxes. Federal stimulus investments — including direct payments to residents and expanded jobless benefits — have led to better-than-feared collections and more optimistic forecasts. Another factor is that the pandemic has negatively affected certain parts of the economy more than others, with the biggest hits being suffered by hotels, restaurants and tourism.
That uneven impact has driven Walz’s budget plan, one that attempts to raise taxes on wealthier individuals and businesses while spending more money on small business aid programs, education and some tax decreases for lower-income residents.
During testimony before the Senate Finance Committee on Wednesday, MMB Commissioner James Schowalter expressed the common lament of Minnesota governors — that they have to create a budget off of a November forecast while the Legislature works of updated numbers, from the projections released in February.
Schowalter, who was MMB commissioner under former Gov. Mark Dayton during the Great Recession and returned to the job under Walz last summer, said that while all budgets are a little different than others, “this one is more unique than any of the other ones, and it’s in large part because we’re in the midst of a crisis.
“There are many changes going on around us,” he said. Walz had to craft a plan “while major pieces of information and contexts are moving in real time.”
Once the forecast is updated, Walz will suggest changes to his initial plan. If tax collections are higher than the November forecast, he can lower his tax-hike request, take less out of reserves or increase his spending plan.
On Wednesday, In front of a skeptical committee Wednesday, Schowalter presented Walz’s current 2021-23 budget proposal, which would spend $52.4 billion, use $1.04 billion from the state rainy day account, spend $130 million from the U.S. Bank stadium reserve and increase taxes by $1.66 billion.
It was the tax hikes, more than anything, that drew criticism from Republicans on the committee. Senate Majority Leader Paul Gazelka has already said his caucus would oppose any tax hikes this year. “Right now, COVID cases are significantly down, revenues are up, and we ought to be thanking the taxpayers for their sacrifices, not asking more of them,” Gazelka said in a statement released after the collections report was posted.
Walker Orenstein contributed to this report.