If having a record-setting state revenue surplus of $7.75 billion to fight over already posed a challenge to Minnesota politicians, the challenge just got bigger.
A quarterly review and economic update released Monday by Minnesota Management and Budget showed the state tax collections continue to defy best-attempts by forecasters. After correcting for some earlier than expected tax payments, the state’s tax collectors brought in $362 million more than was projected by state economists just two months ago.
While that money can’t be added to that record surplus yet, it shows that tax collections are following a trend begun in the summer of 2020 of coming in higher than expected.
It wasn’t all good news Monday. The quarterly update contained some warnings from the state’s macroeconomic forecast consultant, IHS Markit. That November forecast was based on a rather robust prediction for the national economy that IHS Markit now thinks was too optimistic. As such, the company has somewhat downgraded its expectations for economic growth for the next four years that could be felt when MMB provides its next economic and revenue forecast in February.
According to the state update, IHS Markit is attributing its decision to downgrade economic expectations to the rapid spread of the omicron strain of the coronavirus that will “temporarily depress consumer spending on services early in 2022.”
Another change from the November forecast is that IHS now believes the Federal Reserve will begin increasing interest rates much earlier in 2022 than previously thought.
Any change in the national forecast between the November forecast and the February forecast could reduce MMB’s expectations of future tax collections — the number that both Gov. Tim Walz and legislative budget writers will look at when they update the two-year state budget.
But while the forecast is a projection of what tax collections will be in the future, the numbers reported in December and on Monday show actual cash collected from taxpayers. And about half of the $7.75 billion surplus reported in the November forecast is actually already in the state treasury. The rest is forecast to be collected over the next 18 months of the two-year budget period.
According to MMB, the state had already collected $3.1 billion more than projected when the state’s last budget year ended June 30. Since then, actual tax collections exceeded forecast by $657 million in July, August and September — and another $87 million in October.
The Monday report included some details that only a state economist or corporate treasurer might love. The state actually collected $833 million more than predicted in November and December. But the bulk of that, $471 million, is attributed to when some businesses and individuals sent tax payments to the state. According to MMB, some taxpayers made certain payments in December in order to make that money eligible to be deducted from federal income taxes, early payments might reduce projected monthly tax collections in the spring.
Still, that tax payment timing doesn’t account for all of the higher collection. Only $74 million of the $242 million in higher-than-projected individual income tax collections and $397 of the $510 million higher-than-projected corporate income tax collections are due to the timing of tax-payments. Also unaffected by those payments was $69 million in higher-than-expected sales tax collections in November and December.
In addition to the $7.75 billion surplus, three other numbers remain the same after Monday’s report: The state’s rainy day savings account is still $2.656 billion; the state still has $1.15 billion unspent from the money it got via the American Rescue Plan last spring; and it still owes the federal government $1.2 billion it borrowed to cover jobless benefits during the pandemic recession.
Minnesota is not alone in having large revenue surpluses that can be allocated during upcoming sessions. Most states scrambled to accurately forecast the impacts of the pandemic on the economy — both how deep it sunk in the early months and how quickly it recovered starting in the summer of 2020. In addition, all states and many local governments shared in $350 billion in cash from the American Rescue Plan, much of which can be spent outside of the parameters of the act because it’s allowed to cover for tax revenue lost due to the pandemic.