The legislature failed to pass an omnibus tax bill during the 2015 legislative session. But what if the Governor’s 2015 tax proposal had been enacted in 2015? Or what if the Senate’s 2015 omnibus tax bill had been enacted? Or the House’s? The analysis below will examine the state general fund budgetary balance under each of these three scenarios, assuming no other changes to current law.
The following analysis approximates the impact of the 2015 Governor’s, House, and Senate tax proposals based on the 2015 tax conference committee fiscal tracking sheet prepared by non-partisan staff of the Minnesota House and Senate, assuming no other changes to current law. That tracking sheet showed the projected revenue impact of these three proposals based upon the best information available when it was published in May 2015. Subsequent developments may have altered the projected revenue impact of these proposals; however, until a revised analysis is prepared, the 2015 tracking sheet remains the best source of information on their effects. The analysis below shows the projected budgetary balance under these proposals relative to the actual current law budgetary balance from the 2016 February forecast.*
Based on the 2015 fiscal tracking sheet, the Governor’s tax proposal would have reduced state general fund revenues by a projected $138 million during the FY 2016-17 biennium if it had been enacted in 2015. This would have reduced the general fund budgetary balance projected in the February 2016 forecast from $900 million to $762 million. In other words, if the Governor’s tax proposal had been enacted in 2015, there would have been room in the state general fund for up to $762 million in additional spending (a 1.8 percent increase above current law) or other uses—such as an additional increase in the state budget reserve—without sending the state general fund into deficit.
The tracking sheet indicates that the Senate tax bill would have reduced state general fund revenue by a projected $471 million, thus reducing the size of the projected February forecast budget surplus to $429 million. If the Senate tax bill had been enacted in 2015, the state general fund would have had sufficient resources for up to $429 million in additional spending (a 1.0 percent increase above current law) or other uses without creating a general fund deficit.
In 2015, the House was more generous than the Governor or Senate in terms of tax relief. The House tax bill would have reduced state general fund revenue by $2,274 million based on the tracking sheet, which would have exhausted the $900 million surplus and created a $1,374 million deficit, assuming no other changes to current law. Of course, other changes would have been made. The tax relief bestowed by the House tax bill would have created the need for some combination of spending cuts, utilization of reserves, and/or accounting shifts (such as the K-12 school funding shift) totaling nearly $1.4 billion in order to balance the state budget in the current biennium.
If we extend this analysis out two more years into the upcoming biennium, the amount of available new resources under the Governor’s tax proposal and the Senate omnibus tax bill would continue to increase, as would the size of the budget hole produced by the House tax bill. Analysis based on the 2015 tracking sheet and the February 2016 forecast indicates that $3.4 billion in spending cuts, utilization of reserves, and/or accounting shifts would have been necessary over the four year period from FY 2016 to FY 2019 to avert a deficit if the House tax bill had been enacted in 2015.† Insofar as the tax reductions in the 2015 House omnibus tax bill would not be fully phased-in by FY 2019, the size of the projected budget hole would probably continue to expand after FY 2019.
While the 2015 legislative session is behind us, all or portions of the tax proposals brought forward by the Governor, House, and Senate could resurface during the 2016 session as state policymakers jockey to enact their divergent visions for Minnesota’s fiscal future.
Click here for a one page summary of the above analysis.
*The revenue impact from the 2015 fiscal tracking sheets used in this analysis are adjusted for provisions of the 2015 tax proposals—such as the disallowance of the Working Family Credit for non-residents—that were enacted. This analysis also assumes that the same increase in the state budget reserve authorized after the release of the November 2015 forecast would have occurred under all scenarios. In reality, the passage in 2015 of any of the three tax proposals considered here would have reduced the size of the November forecast balance and hence reduced (or eliminated) the increase in the budget reserve. (Despite the increase authorized after the November forecast, the budget reserve is still $435 million or 21 percent below the level recommended by non-partisan state fiscal experts.) In short, this analysis assumes a state budget reserve of $1,597 million (the current reserve level established after the November forecast) under all scenarios.
†This analysis is based on the optimistic assumption that most state general fund expenditures are immune to the effects of inflation. This assumption is required under state law, despite the fact that the Minnesota Council of Economic Advisors have consistently recommended including the impact of inflation when projecting state general fund expenditures. If inflation on the expenditure side of the ledger were factored into the FY 2018-19 calculations, the available additional resources under the Governor’s tax proposal and the Senate tax bill would be reduced and the size of the anticipated budget hole under the House tax bill would increase.