Continued: Long recession saps Minnesota tax revenues

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Tax revenues for running state government fell faster than expected in the final months of 2008, driven down by a long recession that has created "grim" economic prospects, state forecasters said Monday.

Revenues in November and December were $131 million, or 4.5 percent, below expectations and about 6.7 percent lower than during the same months in 2007.

"We have officially been in a recession for over a year, and many forecasters expect that 2009 will be the worst year for the U.S. economy since World War II," said the Minnesota Management and Budget department. "The Christmas retail season was bleaker than projected, and there is no sign that the deterioration in the housing sector has come to a close."

Minnesota relies on Global Insight Inc. for economic forecasts, and Management and Budget noted that other economists are more optimistic about prospects in the second half of 2009.

The dimmer revenue picture emerges as Minnesota legislators are beginning to grapple with ways to erase a projected $4.8 billion budget deficit for the two years beginning July 1.

Corporate income tax revenue took the biggest hit in the report released Monday, falling $57 million short of expectations, a reflection of the lagging business climate. Individual income taxes were $39 million off predictions. Sales taxes were down $33 million from earlier forecasts.

The sales tax figures don't include taxes collected on December sales, the largest portion of the Christmas shopping season, because they will not be remitted to the state until mid-January. Instead, it includes only taxes paid on purchases in October and November.

Because of uncertainty about Christmas sales and other receipts, "fourth-quarter revenue reports should always be viewed with caution," the economic update said.

As for the impact of the upcoming federal economic stimulus package, Management and Budget said it will likely shorten the recession, "but it is unlikely to have any significant impact on the U.S. economy until early summer."

Meanwhile, the heads of a bipartisan budget panel said Monday that budget problems will endure unless elected officials admit they have a long-term problem and move to correct it.

The fiscal recovery plan laid out by the State Budget Trends Study Commission includes a call to dedicate the next budget surpluses to fattening up the rainy-day savings account.

The Associated Press contributed to this report. Pat Doyle • 651-222-1210