Some predict rosy tax forecast

11/30/2005

Revenue growth this year likely to repeat

BY PATRICK SWEENEY
Pioneer Press

After four years of budget deficits that led to painful spending cuts in aid to cities and health care programs, Minnesota’s state government may emerge with a budget surplus today.

The Minnesota Finance Department will release a new forecast for state tax collections and spending over the next 19 months. While officials would not divulge the figures Tuesday, a series of higher-than-expected tax collections this year indicates the forecast will project a significant surplus.

“We’re anticipating and hoping for good news tomorrow,” Gov. Tim Pawlenty told reporters Tuesday. Pawlenty said he had no inside knowledge of the forecast, but he said: “Things look quite good for Minnesota.”

Since July 1, the beginning of the current fiscal year, Minnesota’s three biggest taxes — the personal income tax, corporate income tax and sales tax — have been $134 million above the previous forecast. That’s up about 4 percent.

With the national economy still expanding, part of that growth in tax collections is likely to be repeated throughout the state budget cycle that runs until mid-2007.

In addition, the growth in tax receipts since July came on top of income taxes collected in the spring that were about $165 million more than anticipated. The income tax growth is money the state can expect to maintain in both 2006 and 2007.

The good news about increased tax collections is partially offset by an expectation the state will have to pay out about $300 million in unbudgeted corporate tax refunds because of a court decision in June that gives tax breaks to some companies that have foreign subsidiaries.

State economist Tom Stinson, the man who prepared the revenue estimates the Finance Department will release, said there have been no major changes in predictions for national economic growth, one of the biggest variables in the state’s forecasts, since the current budget was adopted in July.

“That means, other things being equal, there isn’t going to be much difference in revenues,” Stinson said.

If there is a surplus, Pawlenty and lawmakers will face intense pressure next year to boost state spending. But current law requires any projected surplus must first be used to pay back about $800 million the state borrowed from school districts in 2003.

Minnesota is one of many states now enjoying relatively flush economic times after a string of deep deficits that began in 2001. In Minnesota, the worst of the deficits was a $4.2 billion shortfall that legislators fixed in 2003 by draining reserves, borrowing, cutting spending and raising fees.

States like Minnesota that rely heavily on income taxes suffered deeply during the national recession and the slow recovery that followed it. Now, with investors cashing in on capital gains and executives receiving bonuses they missed out on a few years ago, state income taxes are soaring across the country, according to Nicholas Jenny, a senior policy analyst for the Nelson A. Rockefeller Institute of Government in Albany, N.Y.

“We’re definitely getting into the good times for the states,” said Jenny. “The income tax is great in times like this.”

From April through June of this year, Minnesota income tax revenue increased about 17 percent compared with the same period a year ago, according to Stinson. But much of that increase was anticipated and already is built into the budget, he said.