As we expected the February Revenue Forecast, which the 2020-21 State Budget will be based on, is showing a reduction from the November Forecast of $492 million, leaving a projected surplus of $1.052 billion. These figures, though based on projections, are the starting point for all budgetary considerations and as they like to say in legislative parlance based on current law. The point being laws can change.
The current tax collections do not embrace tax conformity with the federal tax laws and this differential continues to generate more money for the state coffers than would result in more changes in alignment. The impact of the federal tax changes on deductions and tax liability is now starting to be fully integrated and resulting revenues from individual income tax between November and February are down $571 million.
The forecast is pessimistic on the national economy anticipating a slow in the growth of GDP due to continued tariffs, a relatively strong dollar and continued decline in the labor force due to Baby Boom retirements. In Minnesota, it is less so, though it recognizes a challenge in the labor market with low unemployment and a continual flow of workers into the retirement pool. There is a reflection of lower than expected wage growth in the 3rd quarter of 2018, meaning the compensation rates for employees are not occurring inline with the high demand for employees in a tight labor market.
As has been a constant statement on the DFL side, there is a need to incorporate inflation as a factor on the spending side of the formula and not just on the revenue side. Republicans criticize this idea because they say it puts governmental spending on an upward trajectory or auto-pilot.
The drop-in state revenue for income tax has resulted in the Republican old saw of the flight of high-income earners leaving the state, which is not a surprise since as Baby Boomers continue to retire and in turn winter in warmer climates with lower income taxes for six months and a day, they change their own tax liability. If the State of Minnesota wants to collect all its due, they should change their tax assessment to a monthly system and collect from the snowbirds when they return.
One of the arguments for income flight out of Minnesota is consistent with state’s who had high deductions for federal income tax, New York, like Minnesota, is experiencing a similar trend because of the changes created in the Republican Tax Bill of 2017.
Now Governor Tim Walz (DFL-MN) will need to put forward an adjusted budget and we will see where the $492 reduction has the most impact. As we follow the debates and discussions about federal tax conformity, tax policy and the various spending bills that emerge, we will have a clearer perspective on what the state budget picture look like.