I’m shocked, shocked: forecasted budget surplus shrinks

renault

I’m shocked, shocked…

I can’t say I’m surprised that Minnesota’s projected budget surplus fell from $1.2 billion to $900 million for the remainder of the 2015-2017 biennium. The large surpluses we’ve experienced the past few years and the large projected surpluses are caused by the same phenomenon: our state government’s dependence on the income tax.

The individual income tax yields about 32 percent of Minnesota’s revenue, with property taxes at 28 percent and sales taxes third with 21 percent.  Corporate income taxes pull in roughly 4 percent and the remainder comes in through a variety of other taxes and fees.  (Data are from Minnesota Revenue.)

Individual and corporate income taxes are strongly procyclical; that is, when the economy is growing these revenues grow especially fast, and when the economy contracts they fall quickly.  This is why we have big swings in Minnesota’s budget.

And, it’s been clear for the past 6 to 9 months that income growth is relatively slow at both at the national level, generally, and for Minnesota, in particular.  Today’s GDP report, for instance, indicated national growth at a 1 percent rate.  That’s better than the preliminary estimate of 0.7 percent, but it’s still pretty slow and definitely puts a drag on household income, corporate revenue, and tax collections from individual and corporate income taxes.

We should keep all of this in mind when the legislature gathers next month.  Specifically, I’d suggest the following:

  1. The legislature should enact Clark Johnson’s idea to deposit about one-half of the projected surplus into budget reserves. This would bring the funds up to about 5 percent of the budget, a level that would cover the revenue swings caused by changes in income growth.
  2. The governor and legislature should reform the tax code to make revenues less volatile. These ideas usually travel under the phrase “broaden the base and lower the rates.”  That is, broaden the sales tax to a wider range of goods and services and allow the percentage of state revenue from that source to rise.  This would still permit a lower sales tax rate.
  3. The governor and legislature should not commit any of the surplus to expanding ongoing spending programs or tax reductions. This is one-time money and should be treated as such.