From $1.65 billion surplus to a deficit

It is still early, and it is only a prediction, but a report released Tuesday morning by the state’s Management and Budget Office has us scratching our heads.
In March, that office was predicting a $1.65 billion surplus for our state government. A scant nine months later — not even a year — the Minnesota Management and Budget Office is predicting a $188 million deficit over the next biennium.
The early report was sketchy, but cited uncertainty in federal policy and increased spending as factors in the prediction. The office was expected to release more detailed information later Tuesday, after The Chronicle went to press.
In the 2017 legislative session, during which the March report was released, had Republicans favoring tax cuts and Democrats favoring increased spending on programs such as early childhood education, and salting away some of the surplus into savings. The Republicans ultimately prevailed with a large tax-cut package.
Now the debate is whether that tax-cut package is resulting in the predicted deficit. After all, taxes are a source of revenue for the state, and cuts in taxes result in cuts in revenue.
Republicans argue that tax cuts will stimulate the economy. Businesses will have more money to invest in employees and their products. And the more businesses sell, the greater the increase in revenue through the state sales tax.
The reality is, the Minnesota Management and Budget Office has to base its prediction on known factors, such as the loss of revenue on the budget, as well as the increased spending. It has no means to predict the long-term impact of the tax cuts on the economy. Only time will allow us to know how all of that will play out.
The Management and Budget Office makes its predictions twice a year, and will do so again in March 2018. Governor Mark Dayton has advocated waiting until the March report before the governor’s office, and the Legislature, begin budgeting.
Hopefully, by that time, more will be known about the impact of the tax cuts in Minnesota and how federal tax reforms will impact the economy and our state budget.
In the meantime, it is hoped that there is a better explanation as to how the Minnesota Management and Budget Office arrived at its Tuesday’s predictions. The huge swing from a $1.65 billion surplus to a $188 million deficit has us all scratching our heads and wondering what is going on.