here for PDF format
for participants' responses to this summary.
Summary of Meeting
with Tom Stinson, Minnesota State Economist
Civic Caucus, 8301
Creekside Circle, Bloomington, MN 55437
Friday, October 16,
Johnson, chair; David Broden, Janis Clay, Paul Gilje, Jim Hetland, Dwight
and Lucas Johnson, Dan Loritz, Tim McDonald, Clarence Shallbeter (by
phone), and Bob White
Context of the meeting--This
is another in a number of meetings the Civic Caucus is conducting
concerning information and issues in the upcoming Minnesota state
Welcome and introduction--Verne
and Paul welcomed and introduced Tom Stinson, Minnesota State Economist.
Stinson, who also holds the position of professor of applied economics at
the University of Minnesota, has been State Economist since 1987. In his
role as state economist, Stinson is responsible for preparing revenue
forecasts for the Governor and Legislature. His current research
interests include the impact of Minnesota's changing age structure on the
state's economic and financial outlook. He received his Ph.D. in
economics from the University of Minnesota in 1973.
Comments and discussion--During
Stinson's comments and in discussion with the Civic Caucus the following
points were raised:
1. Stinson's close relationship
with Tom Gillaspy, state demographer--
Demographics and economics are very inter-related and he and Gillaspy,
last week's Civic Caucus invitee, frequently make joint presentations
including at recent legislative retreats.
2. A very sober economic outlook
for the state and the state's budget--Looking
toward the next biennium (July 1, 2011, to June 30, 2013), Stinson said
the current planning estimates show the state's general fund budget more
than $4 billion short of being in balance. That estimate, he said, is
after revenue growth of more than 11 percent is factored in. State
general fund revenues in the 2012-13
biennium are expected to total $34.3 billion.
He noted that revenue forecasts in advance of the current
biennium (July 1, 2009, to June 30, 2011) showed a similar $4 billion
gap. That gap was closed by a variety of adjustments, without raising
taxes. All the easy solutions have been exhausted, he said. There's
little "smoke and mirrors" left to use
in the next biennium.
3. Drop in sales tax receipts--To
illustrate the scope of the state’s revenue slump, Stinson said that sales
tax receipts for the third quarter of 2009 were 13.5 percent less than in
the same quarter a year ago. That means, he said, that businesses dealing
in taxable items experienced at 13.5 percent drop in sales during that
12-month period. Such a drop has not occurred before.
The drop in tax receipts is all the more sobering, he said,
when you realize that it will take a great deal of growth simply to get
state revenues back to where they were when the recession hit.
A member asked Stinson about the potential of making certain
items that are now exempt, such as clothing and grocery food, subject to
the sales tax. The sales tax is more volatile today than in the past, he
said. Stinson suggested the group look again at the findings of the
Minnesota Budget Trends Study Commission, (http://bit.ly/kGNm5) to which
Stinson was a consultant. Key findings of the commission on the sales
highly volatile tax base components with less volatile sources could
reduce the volatility of the overall general fund tax system. However,
such changes would also affect revenue growth rates and the distribution
of the tax burden among taxpayers.
the mix of state taxes, without changing the base for individual taxes or
the overall growth rate of revenues, cannot significantly reduce revenue
volatility without a radical change in tax rates and a dramatic
re-weighting of tax revenue sources to the system.
consumption patterns have reduced Minnesota’s sales tax base.
4. Decline in capital gains
affecting income tax receipts--A
major reason for the current drop in income tax receipts is thought to be
a dramatic decline, year-to-year, in capital gains tax revenue, brought
about by a significant decline in the value of assets such as real estate,
stocks and bonds. Net capital gains are believed to have fallen by 36
percent in tax year 2008 and are forecast to
fall by an additional 45 percent in 2009.
5. Income tax receipts becoming more volatile—For
more than a decade high income workers have received a greater proportion
of their compensation in the form of performance-based options and
bonuses, rather than in base wages. Consequently, with the recession
wiping out much income from such options and bonuses, the drop in income
tax receipts was accentuated.
Another significant factor that will affect future income tax
receipts is the higher number of retirees as baby boomers reach age 65 and
retire. Retirees almost always have lower incomes than when they were
working, so as the proportion of tax payers that are retired increases
income tax receipts grow more slowly than in the past. The number of
boomers reaching age 65 in 2011 will be 30 percent more than the previous
6. Parts of the state's economy affect volatility the most--Stinson
said it's very difficult to pinpoint what parts of the state's economy are
most affected by the recession and, therefore, have greater impact on
volatility of the tax system. Minnesota's economy is very diversified and
no sector has escaped damage. He said that construction was hit worse
than other segments of the economy.
We're not very good at making guesses as to where economic
growth will be concentrated, he said. We thought that investing in
supercomputers was the wave of the future, but we were wrong. We didn't
suggest investing in the internet, and we probably should have.
7. Where Minnesota should invest for purposes of
the discussion of priorities on the economy, a member asked Stinson if
more investment is needed in the medical sciences. Stinson replied that
the major question of investment relates to productivity. Some people
are suspicious about productivity because they think that means making
machines that will put people out of work.
Stinson cited two ways to improve productivity: (1) make
things better, which is what Hutchinson Technologies has done with
computer disk drives. (2) make better things, which has been a hallmark
of 3M and Medtronic.
8. State isn't investing in
research as it should--To
increase prospects for more productivity, Stinson said the state needs to
invest in human capital and research. He cited work by his colleague
Phil Pardey and others (http://bit.ly/38DSEq), which illustrates that
Minnesota ranked 20th among the 50 states in 1972 in academic research and
development(R&D), and by 2004, the state had dropped to 40th. During
the same time period the state dropped from 20th to 43rd in R&D per dollar
of gross state product.
9. Productivity gain more
difficult with services?--Responding to a question, Stinson
said being in the service business doesn't change the opportunity to
increase productivity. Just look at changes in telecommunications, he
10. Can productivity be measured
in government?--We don't
measure government productivity very well, because the output from
government is difficult to define. A member commented that in the matter
of vehicle license renewal, there's certainly been a great deal of
productivity gain from renewing online rather than standing in line
waiting at a renewal office.
Change in incomes and high school graduation
rates--In the 1960s, Stinson said, per capita personal income
in Minnesota was 95 percent of the U.S. average, and fewer than one-half
of Minnesota workers had a high school diploma. These were people who
grew up during the Depression and World War II. Today, per capital
personal income in Minnesota is 108 percent of the U.S. average, and 91
percent of the work force has a high school diploma, highest in the
But what is so tragic, he said, is that blacks and Hispanics
are graduating at a 60 percent rate in Minnesota. We cannot permit such a
difference to continue.
Stinson noted that Arthur Rolnick, senior vice president and
director of research of the Federal Reserve Bank of Minneapolis, is a
leading advocate for doing more for early childhood education. With the
great problem facing youth who aren't getting a high school diploma,
Stinson wishes there were a way to do something for the youth who already
are beyond the age for early childhood education.
Continuing his discussion on education, Stinson said that as
population ages it won't be as easy to raise revenue for schools. Stinson
cited Nobel-prize-winning work by Franco Modigliani who demonstrated three
main cycles in people's lives. The first cycle is when you are a net
borrower, borrowing for your needs. The second cycle is when you are
putting away funds for retirement. The third cycle is when you draw down
the amounts you have saved. If population is distributed as a triangle,
with fewer people in each older generation, life cycle considerations do
not affect society’s overall willingness to make public sector investments
in human capital, infrastructure and research. But if there is a large
cohort moving from the net saver phase to retirement, agreement to make
such public sector investments is less likely since that cohort is more
focused on building up retirement assets for use in the near future.
12. Change in support for the
public sector--In the early
1990s, about 17.5 percent of personal income in Minnesota went to support
state and local government, Stinson said. Today that percentage has
dropped to 15.5 percent. Had the percentage remained at 17.5 percent,
another $4.5 billion would have been available for state and local
government in Minnesota annually.
13. No studies on whether
Minnesota retirees have moved to other states because of tax levels--In
response to a question about whether there are statistics on residents of
Minnesota moving to other states to avoid Minnesota taxes, Stinson replied
that there's a lot of anecdotal information but that isn't supported by
data. Tax motivated movers appear to be a very small group of people.
Responding to a question about Minnesota's tax burden relative
to that of other states, Stinson said that our state tax burden is below
that of California and New York but above Wisconsin.
Stinson went on to discuss another aspect of older people and
the income tax. When someone turns 65 and retires, income taxes are
considerably reduced for that person, because of laws offering special
treatment (such as not making all social security income subject to the
income tax and increasing the state and federal exemption for persons over
65). Also, as people age, the mix of items purchased that are subject to
the state sales tax changes, with fewer purchases by older persons subject
to the sales tax. One study revealed the total tax bill falling by 60
percent for a hypothetical working couple with a $70,000 income before
retiring and a $50,000 income afterwards.
14. Advice to candidates for
office--In light of current budgetary shortfalls and likely
reduced growth in the economy in coming years, Stinson advised that
candidates for office should not promise what they can't pay for and that
the Governor and Legislature must first find a way to close the
income-spending gap in the upcoming biennial state budget before talking
about spending increases. The size of the gap is about $4 billion, he
said, which is more than 10 percent of the budget. But it could be even
more if you include (a) inflationary increases in spending, (b) buying
back the property tax recognition shift, and (c) reinstating General
Assistance Medical Care. But no matter what you include in the
calculation, the state has a big hole to fill before it will be possible
to add more spending.
15. Possible redesign of state
services--A member inquired
whether you could redesign the way big service items in the budget, such
as education and long term care, are delivered, so that more quality could
be provided without increasing expenditures. Stinson replied that what
really is needed is to re-examine what state government's role ought to
be. Some state functions should be more appropriately financed by the
federal government, some functions, more by local government and some are
really individual responsibilities. The state-local relationship is more
subject to direct state influence than is the state-federal
16. Possible impact on
transportation--A member noted
that--with state general fund dollars in such short supply for big ticket
items like education and long term care--transportation financing appears
more problematical. Where, for example, would one pay for subsidies for
transit operating expense? Would options be considered, such as requiring
more revenue from property owners who benefit from new roads or transit
Stinson noted that some general fund revenues (sales taxes on
new and used vehicles) were diverted to transportation by a constitutional
amendment in 2006. The gasoline tax would need to be changed to make it
more responsive, Stinson said.
But Stinson went on to say that the aging of the state's
population will likely change the demand for transportation and
infrastructure, but the actual impact of aging on transportation needs has
not yet been thought through, nor has the impact of telecommuting, as that
becomes more prevalent.
17. We're in a fiscal trap--Asked
to sum up his comments for the day, Stinson harkened back to Tom
Gillaspy's comments last week, that the state is in somewhat of a fiscal
trap. To get more economic growth, the state needs to invest more in
research and human capital, but we can't get those additional dollars to
invest without first closing the existing budget gap. Closing the budget
gap will require expenditures that aren't doing any more than holding
things even and, therefore, won't do much for growth.
A member noted that candidates and office-holders of different
parties hold widely differing views and aren't--today--working closely
together to seek compromise.
behalf of the Civic Caucus, Verne thanked Stinson for meeting with us