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Newest state revenue update affirms substantial resources are available to build an equitable recovery

Clark Goldenrod
Jan 14, 2022
The state of Minnesota’s revenue picture continues to improve, but the national economic recovery is expected to be a little weaker, according to the January Revenue and Economic Update from Minnesota Management and Budget (MMB). 

While state revenues continue to out-perform earlier expectations, we haven’t yet reached a broad-based recovery. Many Minnesotans are still struggling, and the pandemic and recession’s unequal impact won’t be eliminated without further action.  

While it highlights some differences in the details compared to the November Forecast, the Update is consistent with the forecast’s predictions for a significant state budget surplus.  

These resources, combined with federal American Rescue Plan dollars coming to the state, should be used toward transformative change that dismantles the barriers to feeling safe, healthy, and economically secure that too many of our lower-income and Black, Indigenous, and people of color (BIPOC) neighbors continue to face.  

Some of the top takeaways from the Update include: 

1. Nationally, economic growth is expected in 2022 and beyond, but weaker than earlier predicted. Forecasters now predict 4.1 percent GDP growth in 2022, lower than the 4.3 percent predicted in the November forecast. In the near term, this dialing back of economic growth expectations is largely due to the timing of business inventory investments, as well as the spread of the omicron variant of COVID-19. Looking to the future, the Update is based on reduced expectations for labor force participation, which will constrain the nation’s economic growth. 

chart showing expected national gdp growth from january 2022 economic update

2. Recent state revenues came in higher compared to the November forecast. Revenues for November and December 2021 came in $833 million, or 20.2 percent higher than the forecast’s projections. Corporate tax revenues were 106 percent higher than expected in the forecast and are the largest source of this increase. Individual income taxes and general sales taxes came in higher as well. However, MMB estimates that more than half of the higher revenues are likely because of tax payments coming in earlier than usual, rather than reflecting stronger economic fundamentals. These earlier individual income tax and corporate tax payments are the result of businesses responding to recent tax policy changes.  

3. Official unemployment rate is low, but many people are still out of work. In December, the national unemployment rate was 3.9 percent, down from the peak of 14.8 percent in April 2020. This unemployment rate is now 0.4 percentage points above the February 2020 pre-pandemic level. However, 2 million Americans have been unemployed for six months or more; that’s 900,000 more long-term unemployed people than before the pandemic. Furthermore, the official unemployment rate doesn’t reflect the 2.3 million people who have left the labor force during the pandemic and not yet returned. State officials have long talked about the aging of the workforce creating challenges for growth in the state's economy and labor force. This phenomenon has accelerated during the COVID pandemic, as more workers retired early. Additionally, many workers in industries with high interaction with the public have not yet returned to the workforce, likely driven by safety concerns. 

4. Forecasters are only somewhat confident in their projections. The nation’s economic performance continues to be dependent on the severity of the pandemic and the effectiveness of efforts to bring it under control. Forecasters assign a 50 percent chance that their baseline economic scenario is correct. They give a 30 percent chance for a more pessimistic scenario in which the pandemic and supply chain issues have a stronger negative effect. They assign a 20 percent probability to a more optimistic scenario that includes less severe impact of COVID-19.

What does this all suggest for Minnesota’s budget and policy decisions ahead?  

The state’s November forecast projected a historic general fund surplus of $7.7 billion for the current FY 2022-23 biennium and a $6.0 billion structural balance (not including the cost for all spending areas to keep with inflation) for FY 2024-25. While Governor Tim Walz is likely to release his supplemental budget plan later this month based on the November forecast, the February forecast will be the baseline used to inform final tax and budget decisions made this year. With this Update, it seems likely that policymakers will be working with a substantial state surplus. 
 
Additionally, as part of budget negotiations in 2021, state policymakers agreed to wait until the 2022 Legislative Session to determine how to allocate the state’s remaining $1.2 billion in flexible American Rescue Plan funding, $250 million of which they previously agreed should go to frontline workers. Together with the general fund surplus, these dollars present a real opportunity to address those things that keep everyday folks from thriving  

It is imperative for policymakers to recognize that the state’s ledgers showing a positive balance doesn’t mean that all Minnesotans are thriving. Recently, 1 in 10 Minnesota adults raising children said they couldn’t afford to give them enough to eat, 115,000 Minnesotans were behind on rent, and 651,000 were having trouble covering basic household expenses.  

These budget projections don’t mean the state has more dollars than is needed, but rather simply measure projected revenues against the budget decisions made in 2021. It doesn’t take into account what it would cost for most of our current public services to keep up with the cost of inflation or respond to current needs. 

In the 2022 Legislative Session ahead, policymakers should focus on lower-income and BIPOC Minnesotans who struggled disproportionately during this pandemic and under the status quo that predated it. They should take steps to ensure all Minnesotans have health care, child care, paid family and medical leave, affordable housing, a quality education from the earliest years through college and training, clean air and water, and other building blocks of a quality standard of living.  

Policymakers cannot waste this opportunity by instead enacting large tax cuts for those who are already doing very well in today’s economy. 

Our communities deserve to have their needs met, and more of us are heeding the call for a more equitable recovery and economy. State policymakers must intentionally focus on those goals in their budget and policy decisions ahead.