Long Term Revenue Outlook2008-2033

Tom StinsonJohn PeloquinAugust, 2008

Minnesota Population Growth Rates by Age Cohort, 2005-30

Method

• Economic assumptions from Global Insight’s Spring 2008 Trendlong Scenario

• Used existing models for the income tax and sales tax

• Income tax model adjusted to reflect changes in age structure

• Age growth projections provided by state demographer’s office

• Current revenue forecast used through 2011

5 Year Average GDP Growth Rates from GII Trendlong Scenario

% Change5 Year Compound rate

Population 16 and Over Percent Change By Decade

Projected Labor Force Growth Rates to 2010, 2020, 2030; BLS, GII, and State Demographer

Labor Force Participation Rates Age 16-64; Selected Years, BLS, GII, and Minnesota

Labor Force Participation Rates Age 65+; Selected Years, BLS, GII, Mn

Percent Change in Population Age 65+ by Decade; BLS, GII, Mn

%

Forecasting Income Tax Liability

• HITS model revised to include 30 age classes: 15 working, 15 not working

• Liability estimates required two runs• First run -- used just age growth variables• Second run -- adjusted blow-ups to hit target

for total income in each income type• Minnesota per capita income for each type of

income assumed to grow at the US average rate

Forecasting Sales Tax Liability

• Used growth rates for 20 types of sales• Assumes that Global Insight has incorporated

demographics appropriately in national consumption forecast

• U.S. growth allocated to Minnesota based on income, wages, and employment

• Revenue elasticity of .95 used, consistent with February forecast

• Remote sales growth slows to US average by end of forecast horizon

Forecasting Other Revenues

• Corporate–Based on growth in domestic corporate profits–Profit is a residual (GII uses it to balance the

national income and product accounts)–Profit forecast prepared using Hodrick Prescott

filter• Other–Analysts’ judgment about proper factor to use.

Many grown at CPI growth rate

Other Items

• Income tax estimates prepared on five year intervals

• Sales tax estimates and corporate tax estimates prepared on annual basis

• Most other revenue estimates prepared on five year basis

• Values for intervening years obtained through interpolation

• Historical revenue data from fund balances

5 Year Compound Growth Rates Income Tax

5 Year Compound Growth Rates Sales Tax

5 Year Compound Growth Rates Corporate Tax

5 Year Compound Growth RatesOther Revenues

5 Year Compound Growth Rates Total Revenue

5 Year Compound Growth RatesTotal Revenue and Per Capita Revenue

5 Year Compound Growth Rates Total W/Out MVEST

5 Year Compound Growth Rates Alternative Corporate Tax

5 Year Compound Growth Rates Total With Alternative Corp

5 Year Compound Growth Rates Total W/out P Tax & Tobacco Money

5 Year Compound Growth Rates 2001, 2033Total and Per Capita Revenues

Understanding the State and Local Government Price Deflator

• Measures inflation for goods and services purchased by state and local government– Includes salaries, equipment, energy and

services• Does not measure inflation in government

spending since transfer payments are excluded

5 Year Compound Growth Rates 2001, 2033Real Per Capita Revenues

5 Year Compound Growth Rates 2001, 2033by Type of Revenue

2001 2033Total Revenue 6.77 3.95S/L Implicit Deflator 2.64 2.18Income Tax Revenue 7.42 4.62Sales Tax Revenue 5.56 2.85Corporate Tax Revenue 0.76 4.14Other Revenues 9.19 2.90

Compound Growth Rates 2008-2033Total and Per Capita Revenues

Compound Growth Rates 2008-2033Income Tax

Compound Growth Rates 2008-2033Sales Tax

Compound Growth Rates 2008-2033Corporate Tax

Compound Growth Rates 2008-2033Other Revenues

Cycle Scenario Shows Slightly Slower GDP Growth By 2033

Sensitivity Analysis

Compound Growth 2008-32 -1 Percent -2 Percent BASELINE 3.77 3.77Portfolio 3.73 3.69Pension 3.71 3.66IRA 3.75 3.74Business 3.70 3.65Social Security 3.74 3.72 All 3.54 3.36Capital Gains (+1%, +3%) 3.82 3.96

Sensitivity Analysis

Alternative Compound Growth 2008-33

BASELINE 3.77Wages @ Cycle 3.55Sales @ Cycle 3.67Wages and Sales @ Cycle 3.44Worst Case (2% non wage income) 2.99

Other Alternatives

Compound Growth Rate2008-2033

BASELINE 3.77Social Security Exempt 3.63Pensions Exempt 3.51Pensions and Social Security Exempt

3.35

Working Family Credit Constant Share of Liability

3.73

5 Year Compound Growth RatesTotal Revenues

5 Year Compound Growth Rates 2001, 2033Real Per Capita Revenues