File this one in the good news-bad new folder: Minnesota’s tax collections continue to exceed revenue forecasts, something that could add to the state’s still-record surpluses. But for the first time since the brief pandemic recession, and certainly since the Great Recession, the state’s economists are now projecting a recession beginning in the final quarter of 2022.
The U.S. and Minnesota are already in the final quarter of 2022. As in, right now.
The quarterly revenue and economic update is a combination of monthly tax collections and an update of the economic factors that help the state look into the future. Collections are easier because they report money paid by taxpayers and deposited in state accounts.
In the first three months of the current fiscal year that began July 1, collections are up $289 million – or 4.3% – from what was expected when the Minnesota Department of Management and Budget (MMB) crafted its major forecast in February.
All major tax categories were above forecast, MMB reported.
The same report closed the state’s books on fiscal year 2022 that ended June 30. Tax collections for that 12-month period are now reported to be 10.6% more than projected or $2.918 billion more than forecast.
Some of the extra $3.2 billion total in state tax collections will ultimately be returned to taxpayers. The recently adopted pass-through entity tax paid by business partnerships, so-called S-corporations and limited liability companies that are owned by partners. The state allows those businesses to shift tax liability from the owners to the corporation in order to increase deductibility of state and local taxes on federal tax returns.
Some $800 million in taxes have been paid to the state but will ultimately be refunded to those businesses.
Still, the $2.4 billion remaining is on top of a record surplus built since the pandemic recession ended in the summer of 2020.
But what is good news – collections in excess of forecast are a lot better than collections below forecast – was tempered by news from the state’s macro economic consultant, IHS Markit. That consultant “now incorporates a three-quarter recession beginning the fourth quarter of 2022.” That forecast expects U.S. gross domestic product to grow 1.7% this calendar year but decline 0.5% next calendar year.
Those tepid and negative growth estimates compare negatively to what IHS Markit told the state to expect when the February forecast was 3.7% growth this year and 2.7% next year. The reasons? Higher than anticipated inflation and interest rate increases by the Federal Reserve and a resulting tightening in financial markets. In the February forecast, IHS Markit estimated the U.S. inflation rate to be 4.5% this year and 3% next year. It now estimates that inflation, as measured by the headline consumer price index, will be 7.5% this year and 3% next year.
“IHS expects this will be a mild recession by historical standards with a weak recovery beginning in the third quarter of 2023,” the MMB report states. While unemployment remains low, the forecaster now expects it to increase due to the predicted recession.
The national jobless rate was 3.5% in September and IHS Markit projects it to increase to 6% late next year before beginning to decline.
What impact that will have on state tax collections will not be determined until the next official forecast is released in early December. It is that forecast that will indicate whether the pending recession will reduce state tax collections, by how much and whether it will exceed the surplus.
Monthly tax collections are a way of measuring the accuracy of the last official forecast released in February. Collections – money received from taxpayers and deposited in state accounts – have exceeded forecasts each month since February.
State economists also look at collections to gauge whether the economy is souring due to inflation pressures or supply chain challenges. So far, it hasn’t.
When the Minnesota Legislature adjourned without completing a deal to distribute the state surplus, there were two pots of money in play. Left unspent for the current two-year budget period that ends June 30, 2023, was $7.05 billion. The last official forecast of state revenue projected that tax collections would continue to exceed approved spending and the available surplus would be $12.1 billion over the rest of this budget period and the two years spanning the next budget.
As a point of reference, the state general fund budget is $53.3 billion over two years.
All of these numbers, official though they are, will change at the next state economic and revenue forecast completed by MMB. Those numbers, released in early December, will drive the next governor’s budget request and the next Legislature’s early work. But even that forecast will be supplanted next February by an additional forecast that will determine what can actually be spent via a new two-year budget and by tax reductions.
A company based in London forecasting the US economy, with the assumption that a recession will be felt equally everywhere in the country starting this month. Tell you what. If this doesn’t happen as is being suggested, please note this in a future issue. The one most positive take away was that inflation next year is expected to be 3%. Of course, the poor will struggle and those who lose jobs may have issues, but thankfully Minnesota has a health budget surplus that will help with the tough spots, in constrast to a Florida with no state income tax and likely to take a hit on tourists and new residents, while losing people who cannot afford to stay. Frankly, the only reason to mention this one month before an election is political – as it probably advantages Republicans, unless readers pick up the subtle point about the plummeting inflation rate, as pandemic effects finally wear off.
Given that the Federal Reserve is doing everything it can to drive the economy into recession, I think predictions that a recession is where we are headed, has a certain logic to it. Nailing us to a cross of gold has proven a lot more difficult than the bankers thought, but I even I think they will eventually succeed. Then instead of griping about inflation, our politicians can gripe about unemployment.
You heard it here first many months ago.
Don’t spend all the surplus
What goes up must come down
Save the surplus because the State’s budget is more important than the family budget.
What about cutting spending? Does a dem even understand that? Every agency has their hand out for more and more. And big, real increases not even just for inflation.
That $250 million that was stolen would be nice to have back. Hmmm
It wasn’t truly stolen, alot of it ended up back in the DFL hands for campaign contributions. Follow the money.
The problem with cutting spending is that it takes money out of the economy increasing recessionary pressures. Also, with respect to spending by the state, just because the state reduces spending doesn’t mean the amount of spending is reduced. In many cases, others simply pick up the slack. For example, one way to reduce government spending is to reduce what we spend on health care. The result of that might very well be that the reductions are passed on to others to pay. Doctors, nurses, insurance companies, or other entities, public and private, might absorb those cuts in ways that maintain spending and its inflationary effect, whatever it might be.
“Does a dem even understand that? ”
That is, cutting of spending. Here is a basic difference between the two parties, at a very fundamental level. That is, how we differ in our understanding of cuts. Republicans understand cuts in terms of reducing the amount we pay. Democrats understand cuts in terms of services we reduce. Nothing is particularly wrong with either understanding, and I think we all benefit when partisans of each party make an effort to look at “cuts” from the perspective of the other party. That has been made more difficult by the polarization that afflicts our politics today.
What state services do you receive that you no longer wish to receive?
You can’t suggest cutting spending unless you’re willing to cut spending that benefits you.