Minnesota continues to collect taxes at levels higher than expected.
A quarterly revenue and economic update from Minnesota Management and Budget covering July, August and September shows that collections — money in the bank for the state treasury — is $657 million above what was projected during the last official revenue forecast in February.
The MMB report said that collections are up across all categories of state taxes: individual income taxes, sales taxes and the corporate income tax, known as the franchise tax.
The Monday report includes actual tax collections for September, the first month when any negative consequences from a surge of cases from the delta variant of COVID-19 could have been felt. But if any decline in the economy occurred, it didn’t result in lower tax collections. In fact, collections in September were even more robust than in July and August, when collections were $67 million and $124 million higher than projected, respectively.
The state’s fiscal situation is even better than those figures would indicate, however. The collections excess for July, August and September are in addition to what economists call “revenues in excess of forecast,” which were booked when the 2021 fiscal year ended June 30. The 2021 budget period reconciliation — also reported Monday — showed $2.670 billion in collections above what had been predicted in the winter.
Taken together, the extra tax collections for the seven months since the February forecast are $3.3 billion more than state economists predicted. The two-year state budget is $52 billion.
Yet the Monday report also included the first signs that the delta variant is having an effect on economists’ projections for the U.S. economy. While still expected to show solid growth, the economy is now forecast to expand at a slightly slower pace. For example, in February the macroeconomic report prepared by international forecast firm IHS Markit thought the economy would grow 5.7 percent this year and 4.1 percent next year. Now it expects the economy to grow 5.4 percent this year and 4.3 percent the following year. Though seemingly slight, such changes when used to forecast state tax collections over many months can make noticeable differences.
“The downward revision in the near-term economic outlook is the result of two major ‘headwind’ factors,” MMB reported. “First, the rapid spread of the delta strain of the coronavirus has slowed third-quarter growth in consumer spending on services and is expected to continue to inhibit growth through the end of 2021. Second, supply chain disruptions are expected to continue to impede production and inventory investment.”
One positive factor is the expected passage of a federal infrastructure package. While the impact on that spending wouldn’t be felt on the state economy for five years, it would come just as the impacts of the CARES Act and the American Rescue Plan are fading, the report states.
Could affect hero pay negotiations
To say that Minnesota tax collections have been robust might be too modest. Since the last official forecast — the one that guided the Legislature’s adoption of a two-year state budget — collections had already been up by $2.36 billion through August. But after a massive increase in the spring, when income taxes from the 2020 tax year were tallied, monthly increases compared to forecast have been lower.
For example, the June collections report— which covered May — was a massive $2.17 billion above the forecast of just three months previous. Collections in June were lower but still in the positive range of $67 million in July and $124 million higher in August. These are the types of monthly variances that are common, at least before the COVID-19 recession, a historic event that economists had great trouble understanding.
The forecasting roller coaster began with the outbreak of the pandemic last spring, when an emergency forecast showed the state was heading for a deep recession and a 2021 legislative session that would face a mountain of debt.
Two things changed that. First, that early guess at the impact of COVID was too pessimistic, and the state economy and tax collections didn’t fall nearly as far as predicted. Many people remained working and paying income taxes. Second, a trio of massive federal spending bills — passed in April 2020, December 2020 and March of 2021 — poured money into the economy in ways that propped up consumer spending and sales tax collections.
By November, the state’s projected deficit turned into a surplus. That surplus grew with a February forecast, and tax collections have made even that rosy forecast look gloomy. Finally, the latest federal round of stimulus gave $2.88 billion directly to the state, with billions more going to specific programs, schools, universities and local governments. The state received so much in direct aid that lawmakers and Gov. Tim Walz decided to hold off until January to spend about $1 billion of it.
It is important — at least to budget managers at Minnesota Management and Budget and budget writers in the Legislature — that collections cannot be spent until they become part of an official state revenue forecast. It is those twice-a-year documents, released in February and December, that can legally be used to write budgets. But tax collections inform the state as to the sustainability of the two-year budget adopted and signed in June. And it enables politicians to make statements about what they might due with any surpluses that appear in that upcoming forecast.
Already, DFL lawmakers and Walz are using their estimates of the forecast, based heavily on tax receipts, to call for increasing the size of the so-called hero checks for frontline workers affected by the pandemic. While $250 million was set aside by lawmakers in June, how that money gets distributed — and to which workers — has so-far made a GOP-DFL agreement hard to reach.