Gov. Tim Walz and legislative leaders were invited to the White House last month to discuss the money they decide to spend over the next two years.
The rest of us are still trying to add it up.
So much has happened in the legislature all spring that I’m starting to get the sense that most people — certainly the public, the media and lobbyists, and even many legislators — are missing the forest because they’re so focused on the trees.
In the month and a half since the legislative session ended, it’s clear that Walz and the Democrats have expanded the size of Minnesota’s government in ways we’ve never seen before.
“This is arguably the largest state government transformation in Minnesota’s history,” Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence, a St. Paul-based tax watchdog, wrote in a summary essay. “Meeting.
I think he could have dropped the word “can say”.
He reviews revenue and spending data for the 1971 “Minnesota Miracle” legislative session. Walz, other Democrats repeatedly compare jobs this year.
In inflation-adjusted dollars, lawmakers raised the state’s per capita spending by $1,475 in 1971. This year, lawmakers raised spending in the state by $3,036 per capita, Huffman wrote.
Lawmakers designed about a third of the latest spending increase as a one-time outlay. But in Minnesota, and in many governments, one-time spending increases have the potential to become permanent.
The question that confuses me is: where does the state get so much money?
The short answer is that Minnesotans deserve it. The state’s income tax, which accounts for half of its income, has risen 22 percent over the past two years. That’s four times what was expected.
To be sure, some sound financial management helps too. During the Mark Dayton and Waltz administrations, the Minnesota government spent slightly less than it took in each year, accruing little surplus.
The rapid pandemic-related recession in 2020 has proven to have done little damage to the state’s finances. It entered the 2022-23 fiscal biennium, which began in July 2021 and ended last month, with a $1.5 billion surplus.
Lawmakers set a budget for 2021 that is expected to bring in $50 billion in state revenue over the biennium.
But an accident happened. The state’s revenue turned out to be $61 billion.
While tax rates stayed the same, incomes increased because Minnesotans earned more. Much of this is non-wage income that people earn by selling investments or businesses.
When you file your state taxes, you do not need to show the source of non-earned income. So the state doesn’t know exactly where the money is coming from, Minnesota economist Laura Kalambokidis told me.
But it’s easy to guess. The stock market has had an amazing year in 2020 and 2021. The S&P 500 is up 17% in 2020, which will boost the state’s 2021 income tax collection. Another 27% rise in 2021 would add to last year’s tax collection.
“It’s not a phenomenon unique to Minnesota. Every state with an income tax saw it in those years,” Kalambokidis said.
Capital gains are obviously volatile. Last year, stock prices fell, which is part of the reason Kalambokidis and her colleagues forecast flat state revenue this year.
But equally astounding, budget forecasters have not revised revenue forecasts for 2024-25 back to where they were two years ago.
That’s partly because Minnesota’s corporate tax levies help create a new, higher income floor. “Corporate tax projections behave more like when the base goes up, we move off the new base. It’s a bit simpler than the income tax,” Kalambokidis said.
Lawmakers are careful not to cut revenue as they set budgets for the next two years. They were left unchanged at $61 billion. That’s why they created some new taxes while giving back $3 billion of the $17 billion tax rebate surplus to some Minnesotans.
Spending over the next two years will be close to $70 billion, but has been covered by the surplus.
The National Budget Office’s February forecast was for a mild recession in 2023. But that hasn’t happened yet. Year-to-date, the S&P 500 has delivered a total return of 17%, which should again boost Minnesotans’ non-wage income.
That could mean the state earns more than expected this year, leading to another surplus, which some lawmakers see as an impetus for more spending.
We’ll find out more when the National Budget Office closes the accounts for the just-concluded biennium in October, and when the next major outlook is released in November.