The enactment of significant tax increases during the 2013 legislative session, combined with state budget surpluses, has created the impression that Minnesota general fund revenue has grown considerably. This perception is accurate if we measure state revenues today relative to the depths of the Great Recession, but if we adjust for inflation and growth in the state’s population, real per capita general fund revenue is less than it was a decade ago.
The following analysis will examine state general fund current resources, which is a measure of all the revenue going into the general fund over the course of a biennium, excluding the balances carried forward from the previous biennium. Current resources are compared to general fund expenditures in calculating the state’s structural balance, which is used for long-term planning and to gauge the health of general fund finances. Projections of current resources for the current biennium (FY 2016-17) and the next two biennia are derived from the state’s November 2016 forecast.
In the chart below, current resources are converted to per capita amounts (i.e., divided by the state population) and adjusted for inflation based on the implicit price deflator for state and local government purchases, which is the appropriate measure for gauging the impact of inflation on general fund expenditures. (Amounts below will be expressed in constant FY 2017 dollars.) The amounts shown represent annual per capita current resources for both years of each biennium. The chart begins with the fiscal year (FY) 2004-05 biennium, since this is the first biennium in which general education costs were paid for from the state general fund for both years of the biennium.
Real per capita current resources reached a 21st century peak during the 2004-05 biennium at $4,033. Current resources dipped by 1.9 percent from FY 2004-05 to FY 2006-07. With the onset of the Great Recession, per capita current resources plummeted by another 10.5 percent from FY 2006-07 to FY 2008-09 and by an additional 8.6 percent from FY 2008-09 to FY 2010-11. At their 21st century nadir in FY 2010-11, current resources were $3,239 per capita—nearly $800, or 20 percent, less than they were at their 2004-05 peak.
As part of efforts to keep the national economy from going into freefall, the federal government distributed funds to the states through the American Recovery and Reinvestment Act. In Minnesota, these federal stimulus dollars were used to offset state expenditures on K-12 and higher education, medical assistance, other human services, and corrections. By funding functions that would have otherwise been paid for with general fund dollars, these federal dollars were effectively a supplement to general fund current resources. General fund current resources plus federal stimulus dollars—represented by the dashed line in the above chart—came to $3,485 per capita during the FY 2010-11 biennium; including these federal dollars, the effective decline in general fund revenues from FY 2004-05 to FY 2010-11 was $547 per capita, or 13.6 percent.
General fund current resources increased in FY 2012-13 and FY 2014-15 as a result of a recovering economy and new revenues generated through the 2013 tax act. By FY 2014-15, current resources had increased to $3,767 per capita—$529 greater than during the trough year of FY 2010-11 (or $282 per capita greater than the FY 2010-11 level if we include federal stimulus dollars).
Even with the revenue increases from FY 2010-11 to FY 2014-15, general fund current resources were still $266 per capita, or 6.6 percent, less than they were in FY 2004-05. The 2016 November forecast projects revenue growth during the current biennium (FY 2016-17) and the two subsequent biennia; however, assuming these projections are accurate, per capita general fund revenues in FY 2020-21 will still be approximately $130 per capita, or three percent, less than they were in FY 2004-05. It is worth noting that these revenue projections are based on current law and do not take into account any of the tax reduction proposals currently before the legislature.
Real per capita state revenues have indeed increased over the last few years, but not by as much they declined in the years immediately before, during, and after the Great Recession. As a result, real per capita general fund resources are less today than they were a decade ago—and will continue to be less in future biennia (based on November forecast projections) even if there are no tax cuts enacted during the current legislative session.