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Potential state surplus could trigger reserve and tax changes

Clark Goldenrod
Nov 29, 2021
As leaves change, and the days get colder and shorter, we’re getting ready for our favorite forecast – the state’s budget and economic forecast!  

As a reminder, Minnesota Management and Budget produces two state budget and economic forecasts each year. To do so, they start with a comprehensive look at the state’s current budget commitments and resources. Then based off a current projection of how the economy is expected to perform, state demographics, and other factors, the forecast predicts whether Minnesota can expect a surplus or deficit in its general fund. These forecasts provide baseline information to inform policymakers, advocates, and the public throughout the legislative session.  

Recent reports have consistently been showing state revenues coming in above expectations. If those trends hold, it’s very likely that we’ll see a state budget surplus in the upcoming November forecast. Policymakers will then have important decisions to make about how to use those general fund resources, as well as federal American Rescue Plan dollars, to strengthen our communities.  

But a surplus in the November forecast would trigger some decisions to be implemented before legislators go back to the Capitol for the 2022 Legislative Session. In legislation passed earlier this year, policymakers included two actions that could automatically occur if there’s a state budget surplus: a change in the budget reserve, and a change in when retailers and vendors submit sales tax payments to the state. 

Policymakers have long defined a “baseline” goal for the size of the budget reserve and a process to refill it after it has been used. This ensures that, if the state has drawn on the budget reserve to maintain crucial services during tough times, it then prioritizes rebuilding the reserve once the economy has improved. 

In 2014, policymakers changed the process for refilling the budget reserve. They required that up to one-third of a positive balance in the November forecast go toward building the budget reserve until it reaches the goal amount. They also changed how the goal amount is set, so that it is now recalculated annually by Minnesota Management and Budget based on a projection of how much the state would need to adequately prepare for an economic downturn.  

In 2021, policymakers passed legislation to prioritize getting the budget reserve up to $2.38 billion, which will ensure that the reserve is replenished more quickly. Currently the budget reserve is $1.8 billion, so a significant state budget surplus could allow a transfer of up to $600 million. Additionally, another transfer of up to one-third of the surplus could be used to bring the budget reserve to Minnesota Management and Budget’s current goal of $2.39 billion. Using automatic transfers in the event of a budget surplus is a long-standing practice policymakers have used to reverse actions they have taken during times of shortfalls. For example, following the Great Recession, surplus funds went toward returning payments to schools back to their normal schedule, reversing timing shifts the state had used to address its budget shortfalls.    

The second change that policymakers made contingent on a future budget surplus is regarding June accelerated sales tax payments. After the transfers to the budget reserve have been made, any additional surplus dollars can go to reduce or eliminate the June accelerated sales tax. This is a provision of current law that requires some retailers and vendors to submit some of their sales tax collections for June to the state earlier than is usual for other months. This has the effect of those sales tax revenues falling into an earlier state fiscal year than if they followed the normal schedule. It’s estimated that full elimination of June accelerated sales tax payments would reduce general fund revenues by $270 million in FY 2022-23 and reduce Legacy fund resources by $16 million, but have a much more modest impact in future budget cycles.  

Will there be a large enough surplus to trigger both of these automatic actions? And what other resources may be available to respond to the moment we’re in – recognizing that the state’s ledgers showing a positive balance doesn’t mean that all Minnesotans are thriving? We’ll find out when the November forecast is released on December 7.