Latest tax collection report reveals the state of Minnesota is pretty much rolling in cash

Is it possible for a state to have too much money?

Minnesota budget writers still haven’t reached full agreement on a two-year state budget despite having a large budget surplus, unprecedented cash grants from the federal government and state tax collections that are exceeding an already robust forecast.

In May, Gov. Tim Walz and the state’s two top legislative leaders reached a deal for a $52 billion two-year budget, an agreement that used most of Minnesota’s $1.6 billion surplus but also increased the state’s Rainy Day fund and left $1.23 billion of American Rescue Plan Act money unspent for now.

But none of those balances include the news Walz and the Legislature received Thursday, when Minnesota Management and Budget reported that actual tax collections in May were $1.8 billion above the current state forecast released in February. That’s 119 percent higher than expected.

It is important to note that some of the percentage hike is due to the state’s one-month delay in its income tax deadline this year, from April 15 to May 16, which meant April collections were down as a result. But while April income tax collections were down by $651 million from expectations, May’s were up by $1.7 billion.

The most striking line in the Thursday collections report is this: “For fiscal year 2021, year-to-date receipts are now $23.113 billion, $2.170 billion (10.4 percent) more than projected.” 

The Legislature can’t spend that money in the budget currently under discussion — State Economist Laura Kalambokidis calls it “revenues in excess of forecast,” not a surplus — but it suggests that there will be another large revenue surplus when the state balances the books for the 2020-2021 fiscal year. It also is likely that a large projected surplus will appear when the next official spending and revenue forecast is produced, in November.

“It is incredible, unusual, extraordinary,” Kalambokidis said of the year between the start of the pandemic recession and a recovery that is beyond anyone’s projections. 

The oft-repeated explanation is that the economy in the United States and Minnesota didn’t falter as expected last May because so much of the economy kept operating. The jobs that were lost were at the lower ends of the pay scale, while the jobs that stayed often allowed people to work from home. Those positions tended to be higher earners — and higher income taxpayers. In addition, the financial markets recovered quickly, which added wealth to many individuals. Finally, the trillions of dollars in federal spending was spent on things that fuel tax collections.

“That’s a big part of the story,” Kalambokidis said. “Money from the federal government supported both household income and business income and that meant there was more consumer spending, much more consumer spending, than you would have expected in a normal economic downturn.”

Kalambokidis said the higher-than-expected tax collections in May were primarily via the state income tax and is the result of economic activity in 2020. Increases in sales taxes and corporate franchise taxes are tied more directly to what has been happening in 2021. Those too are up over the February forecast, indicating that what was happening with the economy in the second half of 2020 is continuing into this year.

MMB will release another collections report on July 10 that will show whether June collections continue the positive trend. While that report won’t feature the big 2020 income tax payments that May’s did, they will have sales taxes, corporate franchise tax payments and income tax withholding amounts.

“Whatever we see in June is going to more reflect current economic activity rather than last year’s economic activity,” she said. “Those receipts are more correlated with what’s happening now in the economy.”

There continues to be economic suffering due to the recession. Employment has yet to fully recover, and businesses that closed aren’t helped by higher state tax collections. Minnesota Commissioner of Employment and Economic Development Steve Grove said Friday that only 57 percent of the 417,000 jobs lost to the recession have been recovered. There also remains a challenge of getting federal rental assistance money to the landlords of tenants who fell behind in rent payments. But the states continue to receive federal money from the American Rescue Plan, most of which is aimed at those still struggling.

Economists and forecasters don’t usually miss projections by this much. And it reflects the difficulty those same forecasters have had figuring out this recession — both in how much the economy would slow due to pandemic shutdowns and how quickly things would recover.

Nor is it something only happening in Minnesota. States across America are reporting tax collections for higher than even optimistic forecasts predicted last winter. 

“According to Urban Institute data, receipts in the first four months collectively were down $77.8 billion from a year earlier—including steep declines in April and May—then posted consecutive monthly year-over-year gains since July 2020 that totaled $77.9 billion as of February 2021,” the Pew Charitable Trusts said in a report on the recovery of lost revenue by the 50 states.

“There’s been this steady news of one state after another saying their tax receipts are exceeding expectations and the federal government as well,” Kalambokidis said. “Volatility in the economy and the unusual features of this economic downturn are what’s feeding uncertainty in both the economic forecasting and the revenue forecasting.

“There have been larger changes month to month in the U.S. economic forecast than we normally see,” she said.

All this comes just after passage of the American Rescue Plan Act, which sent $350 billion to state and local governments to replace lost revenue during the pandemic recession, money will likely not end up being lost.

Making things even more strange, the way the U.S. Treasury is allowing states and local governments to calculate lost revenue will likely exceed what those governments actually lost. But by classifying ARP money as lost revenue, state and local governments can spend it in ways not envisioned by ARP — in ways unrelated to the pandemic.

Walz, Hortman and Gazelka step in to address ‘sticking points’

So if it’s not about the money — and if the governor, House Speaker Melissa Hortman and Senate Majority Leader Paul Gazelka have agreed on spending targets — why is a 2021-23 budget still unapproved? 

“It’s ideological on certain things,” Walz said Thursday. Spending is agreed to but the policies stuffed inside each of the series of bills that have to pass are not, especially in the area of policing reforms, education priorities and figuring out an offramp from the state’s 14-month-old ban on renter evictions.

“I don’t think that, for whatever reason, folks have come to the conclusion that they’re not going to get everything they want,” Walz said. “There are going to have to be compromises to get there.”

To that end, Walz, Gazelka and Hortman have begun doing what they did in 2019: meet with committee chairs from the DFL House and the GOP Senate to solve the “sticking points,” solutions that could include jettisoning areas of disagreement.

Walz said Thursday he will extend his declaration of a peacetime state of emergency on Monday and will, in turn, convene a special session of the Legislature to provide it an opportunity to rescind that declaration. The prime agenda item, however, is to complete the two year state budget by adopting 13 (or 14 if a state bonding package is included) omnibus spending and policy bills.

The authority to spend money by state agencies expires at midnight June 30, the last day of the two-year budget adopted in the spring of 2019.