Minnesota's projected $1.086 billion budget surplus is a sign that the tax and budget solutions of the 2013 legislative session are paying off. By returning the state to its traditional high-road approach, Gov. Mark Dayton and the Legislature have proved that a people-centered budget is good for both the economy and the state's finances.
While this undoubtedly is a positive sign, it is not the final word. The governor will not offer a supplemental budget until after the February 2014 forecast, and a lot can change between now and then. Recent February forecasts have adjusted November forecasts by anywhere from $500 million to $1 billion.
Still, let's assume our surplus remains. Our first priority must be paying back the debts previous legislatures incurred: repaying $246 million to our schools and $15 million to the state's airport fund. What to do with the remaining $825 million, however, deserves more reflection.
First, some context: The tax plan passed in 2013, even with this surplus, restores only about half of what the state lost in the Pawlenty years. It returns the state to the revenue levels of the mid-2000s. That's it.
Second, some analysis: The causes of the surplus tell us quite a bit about what is happening in our economy. Of the $1 billion surplus, about one-quarter is caused by lower-than-expected spending. The other three-quarters, $787 million, is from higher-than-expected revenue. Of this new revenue, 95 percent comes from two sources: individual and corporate income taxes.
The individual income tax estimate was revised up because people in the new fourth tier are expected to make more money. In particular, the forecast estimates robust growth in unearned income — money made from owning investments, not earned through a paycheck. Minnesota Management and Budget writes that "capital gains reported by Minnesota residents in 2012 are now assumed to have grown by 94.6 percent. In [last] February's forecast, growth of 82.6 percent was projected."
Corporate income tax returns were revised up because corporations are also expected to make more money. MMB writes that "assumed growth in Minnesota business income was raised from 5.2 percent to 12.1 percent."
The "sky is falling" predictions of Minnesota's anti-tax lobby have failed to materialize. In October, Minnesota's unemployment rate fell to 4.8 percent, its lowest rate since the recession began in December 2007. This is good, but our job growth remains dangerously unequal. People of color in Minnesota are twice as likely as white Minnesotans to be unemployed. Unemployment among single parents in Minnesota has actually gotten worse since 2012. Our state's projected revenue surplus reflects the boom for some and masks the bust for others.
