Time to worry? Minnesota revenues coming in lower than expected

Money coming into state coffers in July was well below government forecasts, continuing a trend that began in April, setting off a fresh debate about the health of the state's economy and budget.

The shortfalls come amid volatility in Washington and the global economy that has some officials concerned about the state's budget situation, despite its $2 billion rainy day fund.

"It underscores the danger of the budget we passed this year," said Sen. Richard Cohen, DFL-St. Paul, citing substantial tax cuts and spending increases.

If the shortfalls continue and equivalent savings are not found in spending, lawmakers and DFL Gov. Mark Dayton might have to reconsider the commitments they made when they agreed on a two-year, $45.5 billion budget in May.

By large bipartisan majorities, lawmakers passed tax cuts worth $650 million during the next two years for Social Security recipients, farmers, first-time home buyers, families with child care costs, small businesses with big property tax bills and college loan debtors, among other groups.

Dayton said the new numbers — revenue was 6.4 percent lower than expected in July — concerned him because of the "excessive" tax cuts passed by the GOP-controlled Legislature that "left us without much of a margin for error."

Susan Closmore, a spokeswoman for House Republicans, shot back that the budget balancing problem was on the spending and not the tax side.

Although the tax cuts are now law, the governor and the Legislature continue to squabble over them in the courts. The Legislature sued Dayton after he vetoed its operating budget, meaning no pay for lawmakers and staffers, in an attempt to force a renegotiation of the tax-cut deal.

The Legislature won the first round in court. The Minnesota Supreme Court will hear an appeal this month.

Despite Dayton's volley against the Legislature, state Management and Budget Commissioner Myron Frans and the Republican chairman of a key budget committee say they are not overly alarmed because there are good explanations for the shortfalls.

"I don't know if I think it's a serious situation at this point, but we're certainly watching it," said Rep. Jim Knoblach, R-St. Cloud, who chairs the House Ways and Means Committee.

Frans said his agency is monitoring the state's books closely, but he also offered explanations to allay fears. Much of the tax collections are from what people earned in 2016, when income estimates were off because the national economy grew slower than expected, he said.

Frans and other analysts also pointed to investor behavior. Expecting a big tax cut from Washington, investors may be delaying taking profits to see if they will get a tax cut. That in turn has lowered revenue here and in other states, and for the U.S. Treasury as well.

The budget office has not updated the spending side of the equation. In recent years, with the economy humming along, fewer Minnesotans signed up for public programs than expected, saving the state money. The same thing could happen this year, which could lessen the impact of the revenue shortfalls.

The budget office will offer a more comprehensive update on revenue and spending in its next major forecast, to be released in early December.

J. Patrick Coolican • 651-925-5042