Long Term Revenue Outlook Tom Stinson John Peloquin August, 2008

Minnesota Population Growth Rates by Age Cohort,

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 % Change 5 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 Rates Other Revenues

5 Year Compound Growth Rates Total Revenue

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

5 Year Compound Growth Rates 2001, 2033 by Type of Revenue Total Revenue S/L Implicit Deflator Income Tax Revenue Sales Tax Revenue Corporate Tax Revenue Other Revenues

Compound Growth Rates Total and Per Capita Revenues

Compound Growth Rates Income Tax

Compound Growth Rates Sales Tax

Compound Growth Rates Corporate Tax

Compound Growth Rates Other Revenues

Cycle Scenario Shows Slightly Slower GDP Growth By 2033

Sensitivity Analysis Compound Growth Percent-2 Percent BASELINE3.77 Portfolio Pension IRA Business Social Security All Capital Gains (+1%, +3%)

Sensitivity Analysis AlternativeCompound Growth BASELINE3.77 Cycle3.55 Cycle3.67 Wages and Cycle3.44 Worst Case (2% non wage income)2.99

Other Alternatives Compound Growth Rate BASELINE3.77 Social Security Exempt3.63 Pensions Exempt3.51 Pensions and Social Security Exempt 3.35 Working Family Credit Constant Share of Liability 3.73

5 Year Compound Growth Rates Total Revenues

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