State Revenues: the Real Story

Minnesota conservatives argue that the state general fund grows bigger and bigger, year in and year out. After adjusting for inflation, however, per capita general fund revenue in Minnesota falls short of levels seen at the beginning of the current century. While the 2013 tax increases have buoyed real per capita general fund revenues, they have not been sufficient to replace the decline that occurred prior to 2013.

In the absence of an inflation adjustment, nearly all forms of income, revenue, and spending increase over time. That nominal increase does not mean, however, that the real purchasing power of these amounts increase. Inflation erodes the buying power of the dollar over time, so that ultimately it takes more dollars to purchase the same amount of goods and services today than it did in the past. For example, while the nominal (i.e., not adjusted for inflation) wage of most workers has increased in recent decades, the real (i.e., adjusted for inflation) wage often has not. For this reason economists typically examine changes in amounts—such as wages, Gross Domestic Product, and public revenue—in inflation-adjusted dollars.

Our analysis here uses state general fund current resources (i.e., total revenues excluding the balance carried forward from the preceding year), adjusted for inflation using the Implicit Price Deflator for State & Local Government Purchases, which is the appropriate index in this context.* We express amounts in constant fiscal year (FY) 2017 dollars—that is to say, in amounts that reflect the purchasing power of the dollar in FY 2017.

Growth in the state’s population increases the ability of the state to generate revenue (due to more workers paying income taxes, more consumers paying sales taxes, etc.) and increases the need for state spending (due to more people using roads, parks, etc.). To adjust for the effects of a growing population, we find it useful to examine changes in state general fund revenues over time on a per capita basis.

In FY 2000, state general fund revenues stood at $3,935 per capita, but fluctuated over the next several years: as low as $3,818 in FY 2002, and as high as $4,153 in FY 2004. During the eight fiscal years preceding the Great Recession (i.e., FY 2000 to FY 2007), state general fund revenue averaged $3,949 per capita.


With the onset of the Great Recession, state revenues plummeted. Real per capita revenue fell from $4,031 in FY 2006 to $3,145 in FY 2010—a whopping 22 percent decline. In order to avoid severe cuts in public services, massive job losses, and an economic free-fall, the federal government distributed stimulus dollars to Minnesota and other states through the American Recovery and Reinvestment Act. Even when we adjust for the infusion of federal funds, real per capita state general fund revenue still fell by approximately 13 percent from FY 2006 to the depths of the recession.

As the economy recovered—and tax rates increased after 2013 legislation—general fund revenues also increased. From FY 2010 (the general fund revenue low point, excluding federal stimulus dollars) to FY 2017 (the most recently completed state fiscal year), real per capita general fund revenues increased from $3,145 to $3,839—an increase of nearly $700 per capita.

However, even with this significant rebound, real per capita state general fund revenues in FY 2017 remain 2.4 percent less than in FY 2000 and 2.8 percent less than the average during the years preceding the Great Recession. To compound matters, real per capita general fund revenue is expected to drop by 0.6 percent from FY 2017 to FY 2021, as the effects of anticipated economic growth are offset by large state tax cuts enacted in 2017, which grow even larger with the passage of time, as we noted here.

A three percent reduction in general fund revenue over the course of approximately two decades would not ordinarily be considered a big deal, but for several factors. Beginning in FY 2003, nearly all general education expenses for Minnesota public schools were shifted off of local property taxes and into the state general fund. The general fund also absorbed the additional costs of state-funded all-day kindergarten and expanded pre-kindergarten. In addition, an aging state population has created increased health and human service spending demands on the general fund. The general fund has strained to pay for these new expenses even as real per capita general fund revenues have declined.

Minnesota conservatives will no doubt continue to wail and gnash their teeth about growth in the state general fund. Such displays of political angst are more spin than substance. In the 21st century, per capita state general fund revenues have declined while demand for what they fund has increased.

 

*The Minnesota Council of Economic Advisors has recommended the use of the Implicit Price Deflator for State & Local Government Purchases (IPD S&L) when adjusting general fund finances for the effects of inflation. The appropriate use of the IPD S&L is described in a 2016 North Star article.