Stinson: Minnesota revenues for next biennium likely to fall short of current forecast

Yesterday afternoon PIM spoke with Minnesota state economist Tom Stinson about the recently released July Economic Update [previous item]. The good news, he says, is that tax refunds and settle-up payments for 2008 are shaping up to be very near the predicted range.

But Stinson also notes that the outlook for FY2010-11 state revenues has grown dimmer since the most recent projections, prepared back in February. "[Income tax] withholding is down $108 million compared to forecast, the sales tax gross is down $10 million, and that’s only offset by about $20 million in corporate estimated payments," he observes. "So we would say that to this point, it looks like there’s going to be less money in 2010-11 than the forecast. But the economic outlook could change between now and when we do the [next] forecast." (The current forecast points to revenues of $14.72 billion in FY10 and $15.98 billion in FY11.)

And what about that reference in the July release to possible revenue reductions owing to Ponzi schemes? Stinson says that was an allusion to the Minnesota impact of both the Bernie Madoff and Tom Petters cases.

PIM: What are the measures you look at most closely in a revenue report for predictive purposes, and what do you glean from those measures this time?

Tom Stinson: We do this four times a year, and most times–on October 10, January 10, and April 10–the two or three items we look at most intensely are one, withholding, two, sales tax gross receipts, and three, corporate estimated tax payments. And withholding is the best measure, because that tells us how wages are doing in the state. It tells us whether our wage forecast is on track or not. The sales tax gross tells us whether our sales tax estimate is on or not. The corporate tells us whether corporate profits are on track [with the forecast] or not.

This one is a little different. And the reason is that settle-up payments for tax year 2008 and the refunds for timely filers for tax year 2008 are included in this [update]. So with this one, we find out not only how good our forecast was for growth in wages and sales and corporate profits, but also we find out whether the estimate we used as a base for starting the growth rate for the income tax was on or not.

Sometimes we can be off several hundred million dollars on final payments and refunds. That means that when we do the forecast in November, we have to start out from a several hundred million dollar lower base. So that could cost you an extra $200 million for tax year 2009 and $200 million for tax year 2010 and half of that again for tax year 2011. It translates into a big multiplicative effect on the forecast.

The good news in this forecast is that we were very close on the tax year 2008 liability. On the front page in the middle paragraph, it says "Combined tax year 2008 settle-up payments, extension payments and refunds fell short of projections by $24 million." What that means is we only have to lower our base by $24 million. Given all the uncertainty there was about capital gains receipts in particular in 2008, we’re just really happy that we were that close.

PIM: On the whole, are you optimistic or skeptical at this point about FY10-11 revenues meeting currently projected levels?

Stinson: Off of this forecast, we would say that there’s going to be less revenue in 2010 and 2011 than we had forecasted. Withholding is down $108 million compared to forecast, the sales tax gross is down $10 million, and that’s only offset by about $20 million in corporate estimated payments. So we would say that to this point, it looks like there’s going to be less money in 2010-11 than the forecast. But the economic outlook could change between now and when we do the [next] forecast.

PIM: The July release notes that "Individual income tax refunds paid in FY 2009 could change materially before closing due to processing of amended returns filed by individuals victimized by Ponzi schemes." Does this stem mainly from the Bernard Madoff case?

Stinson: Well, the Madoff case and the Petters case. I don’t know whether there are any other large ones or not, but the Madoff and Petters cases are the ones we’re concerned with. And by "material" [changes], we’re not talking about $100 million or anything like that. But it could change by $3-$5 million.

PIM: You said that you’d expect ‘10-’11 revenues to be lower…

Stinson: Based on receipts that we have to date, we would expect ‘10 and ‘11 revenues to be a little bit lower.

PIM: Do you have a sense of how big the shortfall might be if current economic forecasts hold?

Stinson: No. I mean, we know we’re down $100 million on withholding, so unless something magically happens, we would expect that withholding deterioration to continue. The sales tax was worse earlier–in February, March, and April–compared to forecast. It healed itself a little bit in the last few months.

Until we do the forecast, we honestly don’t know how things are going to come out.

PIM: The next forecast is scheduled for November. Do you think, given the economic volatility this year, that it would be a good idea to do an intermediate forecast, or no?

Stinson: No, I don’t. The reason is that in August, or actually the end of July, there are going to be large data revisions to the national economic accounts. Those large data revisions will necessitate re-estimating the national economic model by [state economic consultant] Global Insight, and Global Insight doesn’t expect to have a forecast out until mid- to late August.

So if we were to do another forecast, the earliest we would be able to release it is in October. You might as well wait until you have some additional information in October, when you have that first estimate of third-quarter GDP.