Explainer: Factors contributing to Minnesota's economic forecastby Elizabeth Dunbar, Minnesota Public Radio
St. Paul, Minn. — Minnesota State Economist Tom Stinson mentioned several factors that contributed to the state's economic forecast. The state's budget shortfall is now estimated at $5.03 billion instead of $6.2 billion. Below are explanations of two factors to watch.
Federal capital gains tax stays constant because of deal reached between Congress and President Barack Obama, giving Minnesota more tax revenue.
This is a complicated situation that needs to be picked apart.
In December, Obama and Congress agreed to extend tax cuts left over from when George W. Bush was president. That deal meant the capital gains tax -- income tax people pay when they profit off of the sale of stock or other investment -- stayed at 15 percent instead of rising to 20 percent.
So let's say you're thinking about cashing in on stock or other investments you own. If the income tax you'll have to pay on the profit you make from cashing in is expected to rise, that might make you cash in early -- before the tax hike kicks in. That's what Stinson said happened -- more people cashed in their investments.
The reason it helped the state is because Minnesotans cashing in their profitable investments had more income, and therefore had to pay more income tax as a result, bringing more revenue to the state. But Stinson said there's uncertainty about how federal capital gains tax rates will affect the state's revenue picture.
"It's nice for Minnesota to get more revenue because of federal action or inaction on tax law, but it's a pretty slim reed to base your future revenues on," he said.
A possible spike in oil prices wasn't factored into the budget forecast.
We've all heard about the civil and political unrest in the Middle East, starting with Egypt. The situation has led to a spike in crude oil prices, and higher prices at the gas pump.
Stinson provided some interesting numbers about how the price of oil affects the economy and the price of gasoline.
- •A $10 increase in the price of a barrel of oil adds 25 cents to the price of a gallon of gasoline.
- •For each penny that the price of a gallon of gas goes up or down, national spending on gasoline increases or decreases by $1 billion.
- •The tax compromise between Obama and Congress ensured that rising oil prices would not have a big impact on economic growth -- unless gas prices rise by a lot.
"As long as oil prices and gasoline prices remain under $4.50, say, the economy's still OK. It's just we have less of a cushion against shocks that might emerge going off into the future," Stinson said.
On the other hand, if uncertainty about the geopolitical situation in the Middle East goes away, we could see a drop in oil prices, Stinson said.