Lawmakers' claims that tax cuts led to state surplus don't add up

A ballroom stage in front of 1,600 people doesn't seem like a great place to make a guess about an upcoming state budget forecast, but Minnesota House Speaker Kurt Daudt maybe knew something the rest of us didn't.

"We had a $188 million deficit in the November forecast, and I think we're going to see the biggest turnaround in state government in the history of this state … when we get our February forecast and it's a billion-dollar surplus," Daudt said, a couple of weeks back at the Minnesota Chamber of Commerce's annual legislative priorities dinner.

The official February forecast came out last week, and Daudt missed it by almost $700 million. The state's chief financial officer forecast a surplus of $329 million through the end of the current budget period in mid-2019.

When faced with these facts, Daudt chose one response that maybe should have been anticipated — he suggested the administration of Gov. Mark Dayton had to be sandbagging.

There seem to be far better explanations for what happened than that, including how legislators likely had their thinking influenced by a report out around Valentine's Day that showed better-than-expected tax collections for January. Minnesota Management and Budget Commissioner Myron Frans did point out in his memo, though, that these results "should be interpreted with great caution," sort of like a good business CFO reminds the boss that you never re-budget the year based on one booming January.

Yet the best explanation for the billion-dollar surplus guess has to be that Republicans had really wanted to take a victory lap, having engineered modest tax cuts last year that maybe provided a boost to the economy. A forecast of a billion-dollar surplus would have been great when telling that story.

So maybe it's fair to say that Republican legislative leaders guessed wrong on the budget forecast because they came to believe a little too much in their own rhetoric. That's not a partisan failing, by the way. We humans are just like that.

As they spoke toward the TV cameras and microphones, more than a few of the lobbyists and aides in the back of the room seemed to be fiddling with their iPhones, perhaps busily putting out their own thoughts on the numbers.

That this forecast attracts a lot of attention is hardly surprising, with so many policy choices riding on how much taxpayer money there might be to spend. The budget has both revenue and expense, of course, and on the expense side the state caught a break with the federal reauthorization of funding for a children's health insurance program.

The skilled craftsmanship, though, is really needed on the revenue side. Getting that estimate even close to right obviously depends on making savvy estimates of economic measures such as how much cash income Minnesotans can be expected to earn.

And since the November revenue forecast there's just one big difference. That's the December passage of the federal Tax Cuts and Jobs Act, the sweeping tax bill that significantly cut corporate and other business owners' federal income taxes.

"Relative to November, this change has modestly improved the U.S. economic outlook, sped up expected price and interest rate increases and significantly raised the forecast for federal deficits," the report stated.

By revising up the expectation of economic growth, the tax revenue forecast inched up as well. It's important to understand, though, that it wasn't just the stimulative effect of the new federal tax law that got baked into this new forecast. With lots of changes to federal tax law, the state also had to estimate how the new tax law is going to make people do different things than they had planned.

The state made a bunch of adjustments to its tax revenue assumptions as a result, and one that stands out is the addition of $141 million for individual Minnesota income taxes based solely on the expectation that corporate America will continue using its newfound tax savings to fund dividend increases and stock buybacks.

Running up the federal deficit to let companies buy back stock doesn't seem like a winning policy case for anyone running in the fall, which is maybe why the talking points out of Republican legislative leaders including Kurt Daudt and Senate Majority Leader Paul Gazelka were mostly their own economic case for such tax cuts, characterized by the speaker as "putting more money back in Minnesotans' pockets."

There is of course a problem with that conventional thinking, too. The governor and legislative leaders don't have the luxury of the federal officials, who can run deficits as far as the eye can see and pay for them by printing money if they have to. In the short run, a $100 million state tax cut also keeps approximately $100 million out of the pockets of other Minnesotans who would have benefited from the spending that got cut to make the budget balance.

The press contingent saw this claim coming from the Republican leadership, however, and state economist Laura Kalambokidis was asked if state tax cuts enacted last session are what led to the expected surplus. "I can't identify any particular impact from Minnesota's tax action," she responded.

Maybe they know something the rest of us don't.