January Economic Update shows lower revenues, higher economic projections

Last week’s January Revenue and Economic Update gave us some mixed news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that while state revenues for the end of 2016 came in below projections, national economic growth is now expected to be stronger for the next few years.

1. End of year 2016 revenues are below projections. November and December 2016 revenues came in $29 million below projections; that’s 0.8 percent less than projected in the November 2016 Economic Forecast. This is due primarily to lower than expected income tax receipts.

2.  Higher national economic growth projected for 2016 and onward. U.S. economic growth for 2016 was higher than expected, due to growth in consumer and business spending. The new economic growth projections through 2019 consistently surpass the projections from the November forecast. However, the update notes that considerable policy uncertainty remains a risk to the economy and the accuracy of these projections.


3. The national economy is improving. The latest jobs numbers show that the U.S. labor market is getting close to full employment and recent wage gains are strong. Nationally, unemployment is expected to drop in 2018 and 2019.

4. Despite policy uncertainty, forecasters remain confident in projected economic growth. The forecasters assign a 65 percent chance to their baseline forecast. They also give a 20 percent chance for a more pessimistic scenario where the U.S. sees a recession in early 2018, in which various trade relations are compromised and global economies worsen. They assign a 15 percent probability to a more optimistic scenario where productivity growth improves due to business investment encouraged by policy changes and new technologies.

5. We’ll receive updated forecast numbers next monthThe November forecast projected surpluses of $678 million for the remainder of the FY 2016-17 budget cycle and $1.4 billion for FY 2018-19. This week’s update suggests that we are likely to see surpluses again in the February forecast. Some data in the update point to the potential for a larger surplus, and some point to a smaller one. We’ll have to wait to see next month which trends have a larger influence on the overall numbers, as well as how expenditures come into play.

-Clark Biegler

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How’d we do? That’s what we’re hoping you share with us by completing a short online survey about the Minnesota Budget Project.

You rely on the Minnesota Budget Project to provide you with timely, relevant research and analysis, especially on state budget, tax and economic policy issues. We’re seeking your feedback today on what’s most important to you, and how our work helps you do your work more effectively.

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With much appreciation, the Minnesota Budget Project team: Nan Madden, Clark Biegler, Ben Horowitz and Laura Mortenson

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Racial wealth gap is wide and growing larger: 228 year gap for black families, 84 year gap for Latino families

If black family wealth continues to grow at the same pace as the past three decades, it will take more than 200 years for black families in the U.S. to have the same amount of wealth that white families have today. It will take 84 years for Latino families to reach this milestone. That’s the upsetting news from a report by the Corporation for Enterprise Development (CFED) and the Institute for Policy Studies.

racial wealth gap fall 2016-01

We’ve written before about the state of the racial wealth gap and how it’s bad for both families of color and our economy. With growing populations of color, the future economic success of Minnesota and the nation depends on everyone reaching their full economic potential. The report shows that over the past 30 years, the average wealth for white families in the U.S. has grown by 84 percent. By contrast, wealth for Latino families has grown by 69 percent and for black families only 27 percent. In other words, our country’s racial wealth gap has gotten even larger.

The report also demonstrates the enormity of the racial wealth gap and compares the wealth of black and Latino families against the richest people of the Forbes 400. The 100 wealthiest individuals in the U.S. have as much wealth as the entire black population in the United States. Similarly, the wealthiest 186 people have more wealth than the nation’s Latino population.

The report names several factors that impact the ability of black and Latino families to build wealth, including:

  • Higher rates of unemployment. Without jobs, it’s difficult for many black and Latino families to build wealth and attain financial security.
  • Income inequality and sluggish returns on earned income. Latino and black households earn 60 to 75 percent of what white households earn, and Latino and black households are less able to use their earnings to build wealth. This is due in part to the fact that black and Latino workers are less likely to have quality jobs that provide benefits (like health coverage, paid time off, or a retirement plan) that allow workers to save and invest. Instead they must use more of their current income to deal with daily needs and emergencies that come up.
  • Fewer savings to get through an emergency. Over two-thirds of black and Latino households are “asset poor,” meaning they don’t have enough savings to live at the poverty level for three months if they suddenly lost their job. Meanwhile, just over a third of white households are asset poor. It becomes very difficult to build wealth when families must use any resources they have to get through an emergency.
  • Increased reliance on alternative banking avenues. Black and Latino households are more likely to use alternative financial services, like check cashing services or prepaid cards, which often have much higher fees than traditional banks and can eat up a significant portion of a household’s income, leaving less for savings or wealth creation.
  • Lack of retirement savings. Black and Latino households have much less saved for retirement. They are less likely to have access to employee-sponsored retirement plans and also carry high student loan debt, which makes it harder to save for the future.

But there are actions that can serve to accelerate progress on closing the wealth gap. The report recommends:

  • Replacing the mortgage interest deduction with tax policies that support homeownership among low-wealth families. The mortgage interest deduction gives larger tax deductions to homeowners with higher incomes and more expensive houses. Instead, the tax code could have targeted provisions that better serve low-income and low-wealth families, which are much more likely to be families of color, and for whom the tax incentive would be more likely to make the difference in becoming homeowners.
  • Strengthening the Earned Income Tax Credit (EITC). The EITC has a proven track record of giving working families a significant boost. By expanding eligibility for workers without dependent children, the EITC could allow more low-income workers to start building up savings. Here in Minnesota, an important part of the 2016 tax bill was to improve our state version of the EITC, the Working Family Credit, for families and workers. Given that a drafting error in the tax bill prevented it from becoming law this year, enacting the Working Family Credit expansion should be a top priority for 2017.
  • Improving access to retirement savings for low-wealth families. Households of color are much less likely to have employer-sponsored retirement plans. The report suggests improving the federal myRA, which can help more families save for retirement.
  • Creating savings accounts for children. Children’s Savings Accounts can be started for very young children and include matching funds so that when the child turns 18, they can use the money for higher education or other asset-building purposes.

Our country’s black and Latino families families can’t wait another century to reach financial security. Policymakers should act now to begin to create an environment in which all families can build wealth and stronger futures.

-Clark Biegler

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Everyday Minnesotans are the focus of Dayton 2017 tax plan

Expanding economic opportunity in Minnesota should be a top priority of the 2017 Legislative Session, and two effective strategies to do so are the Working Family Tax Credit and Child and Dependent Care Tax Credit. These two tax credits are targeted to Minnesotans who, despite working hard, struggle to pay for child care, education and training, reliable transportation and other things they need to succeed in the workplace.

These two credits are centerpieces of the 2017 tax plan that Governor Mark Dayton released today. We’ll see more details when the governor’s comprehensive budget proposal comes out later this month, but it’s clear the plan outlined today focuses on supporting the work efforts of everyday Minnesotans.

Percent of Households Receiving the Working Family Credit

The Working Family Credit expansion seeks to make Minnesota a place where working people can better support themselves and their families. The Working Family Credit reaches all across the state; its impact is especially strong in parts of Greater Minnesota where wages tend to be lower and good jobs are harder to find. Similarly, the Working Family Credit can help boost the wages of people of color, who are more likely to be earning lower wages, and begin to narrow racial income disparities.

Dayton’s Working Family Credit plan boosts the size of the credit that eligible families and workers can receive, makes more Minnesotans eligible for the credit, and allows independent workers ages 21 to 24 to qualify for the credit.

In addition, Dayton continues to prioritize expanding the state’s Child and Dependent Care Credit, which offsets a portion of the considerable costs that Minnesota families pay for child care. The proposal would update the credit, which hasn’t kept up with the rising costs of child care, and allow more working parents to qualify.

The Working Family Credit and Child and Dependent Care Credit were both priorities in the 2016 tax bill. In addition, Dayton’s plan includes other components of the 2016 tax bill, including increased funding to Minnesota cities and counties, and a new tax credit on agricultural land and buildings that proponents say will help rural school districts that currently have difficulty passing local referenda to build or improve school facilities. The plan also includes provisions that Dayton has previously proposed, such as a package of corporate tax changes meant to create a more level playing field among businesses.

Making everyday Minnesotans the priority in our tax and budget decisions addresses the economic insecurity that so many Minnesotans are facing, and the governor has done that today by including strong expansions of the Working Family Credit and Child and Dependent Care Credit in his tax plan.

-Nan Madden

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Minnesota’s stake in the Affordable Care Act debate: $16.4 billion loss in federal funding and 380,000 more Minnesotans without insurance

Without health insurance, broken legs or difficult diagnoses can lead to shattered finances and force families to choose between their health and their other basic necessities. Minnesota is a national leader when it comes to access to affordable health insurance. We recently learned that fewer than one in five Minnesotans lack health insurance. But all of our progress faces a grave risk as federal policymakers make plans to roll back the gains made possible by the Affordable Care Act (ACA).

Since the full implementation of the ACA began in 2014, the number of uninsured Minnesotans has dropped by 44 percent. Insurers can no longer deny coverage based on someone’s pre-existing conditions. Important protections were put in place to ensure that health care plans don’t discriminate based on gender and offer essential health benefits.

The health care market remains far from perfect, but repealing the ACA would be a step in the wrong direction. If the new Congress passes something like the ACA repeals they’ve considered in the past, there will be drastic consequences for Minnesotans’ ability to find coverage. National analyses conclude that most of the health insurance coverage losses would occur among working families and people without college degrees, and those with chronic conditions or past illnesses are likely to have the hardest time finding affordable health insurance. According to analysis by the Urban Institute, repealing the ACA would:

  • Increase the number of uninsured Minnesotans to 690,000 in 2019 — leaving the state with more than double the number of currently uninsured people, and roughly 250,000 more uninsured people than before the ACA rolled out in full.

Source: Center on Budget and Policy Priorities.

  • Eliminate $16.4 billion in federal dollars to Minnesota between 2019 and 2028 that would have supported efforts to provide affordable health insurance options in the state.
  • Destabilize the individual insurance market, leaving Minnesotans who don’t have employer-provided insurance without good options for coverage. The Minnesotans who need insurance the most would likely be hit the hardest.

No family should have to choose between paying their health insurance premium or their rent. The ACA moved us closer to that goal; policymakers should be focusing on ways to build on that past success. By threatening to remove the protections and undo the gains of the ACA without providing any concrete alternatives, federal policymakers are not simply turning back the clock. They are writing Minnesota a prescription for an even worse health insurance landscape than the one that we left behind years ago.

-Ben Horowitz

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Strong budget reserve is fiscally responsible, essential to support Minnesotans in next economic downturn

In recent years, Minnesota has taken important steps to build up the state’s budget reserve. And thanks to this good work, the state has almost reached its reserve target of $2.1 billion.

But even as we’re building a strong budget reserve, some policymakers have suggested weakening the state’s rainy day fund. This is a mistake. A robust budget reserve is a critical part of adequately preparing for the next economic downturn. In the same way a family saves to withstand an unexpected serious illness or job loss, Minnesota builds this reserve so that when a recession hits, the state can avoid drastic cuts in critical services and continue to serve Minnesotans’ needs.budget-reserve-01

Adequate budget reserves are essential for states because their balanced budget requirements put them in a challenging position in a recession: the needs of their residents grow at exactly the same time as the resources to meet those needs are shrinking.

While the state currently projects a $1.4 billion positive balance for the upcoming FY 2018-19 budget cycle, the story was very different only a few years ago. Just six years ago, the state faced a $6.2 billion deficit for FY 2012-13. That’s three times what we currently have in our budget reserve. Policymakers made painful cuts, including in financial aid for college, nursing homes and other services for seniors, and services for Minnesotans with disabilities, that made it even harder for struggling Minnesotans to weather the recession.

Minnesota had a much smaller budget reserve at that time. The one we’re building today will be able to shield struggling Minnesotans from many cuts. Minnesota Management and Budget currently recommends a reserve that is 4.9 percent of general fund revenues. A reserve of this size would well prepare the state to absorb the shock of 95 percent of future economic downturns. Additionally, a healthy level of reserves will afford state policymakers the time they need to make more responsible tax and budget choices in tough economic times, instead of having to make hasty decisions to balance the budget.

Experts agree that a strong budget reserve makes for responsible budgeting. The state’s Council of Economic Advisers, The Pew Charitable Trusts, and credit ratings agencies all speak to the importance of strong reserves. Maintaining a healthy reserve also helps keep a positive credit rating because it can show the state has strong fiscal management. Rating agencies Standard and Poor’s and Moody’s look for budget reserves of 4 and 5 percent respectively. A strong credit rating means lower costs in maintaining our infrastructure, including building and repairing our roads, bridges, schools and libraries; and preserving our historic places.

It’s imperative to build and maintain a strong budget reserve when the state’s budget outlook is good, and Minnesota has made laudable progress. But with many economists estimating that the next recession might not be too far away, policymakers shouldn’t jeopardize the well-being of struggling Minnesotans and the state’s fiscal health by weakening our rainy day savings.

-Clark Biegler

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Five takeaways from the November Economic Forecast

The Minnesota Budget Project staff is currently at a conference in Washington, D.C., but given our wonky personalities we just had to take a quick look at today’s state Budget and Economic Forecast. Here are our top five takeaways:

  1. The forecast projects a $678 million positive balance for FY 2016-17. This figure is for the remainder of the current budget cycle, which ends on June 30. And it is after one-third of the positive balance is transferred to strengthen the state’s budget reserve.
  2. The November forecast also projects positive balances in the future. Today’s report shows a $1.4 billion positive balance available for the upcoming FY 2018-19 biennium. This figure assumes that the balance for the current biennium will remain for use in FY 2018-19. This forecast also gives us our first glance at the FY 2020-21 biennium, in which the state has a projected $1.5 billion positive balance.
  3. But the future balances do not take into account what it takes to maintain current levels of service. When the impact of inflation on spending is included, the surplus morphs into a much smaller $73 million in FY 2018-19 and into a $1.7 billion deficit in FY 2020-21. This means that to the extent the surplus is used for additional spending or tax cuts, this will come at the expense of keeping up with current commitments.
  4. The forecast expects weaker economic growth than projected earlier this year. The national economy is still expected to grow over the next several years, but now at a slower 1.5 percent in 2016 and hovering just above 2 percent yearly growth from 2017 through 2021.november-2016-forecast-gdp-growth
  5. The forecasters are moderately confident in these projections, but there’s more uncertainty than usual. IHS Markit, Minnesota’s economic consulting firm, assigns a 65 percent probability to their baseline economic forecast, and a 20 percent probability to their more pessimistic scenario where political uncertainty both in the U.S. and abroad weakens the economy and leads to a short recession starting late next year. The forecasters assign a 15 percent probability to a more optimistic scenario where incomes, housing and consumer spending are boosted by higher productivity, which increases national economic growth next year.

In the upcoming 2017 Legislative Session, policymakers will put together a budget for the upcoming biennium. The November Economic Forecast gives Governor Mark Dayton the baseline information he needs to put together his proposed budget for the FY 2018-19 biennium that he will release in January.

As they make tax and budget decisions this session, policymakers should focus on state investments that expand economic security and enable our families, children and seniors to thrive. This includes affordable health care and child care, and targeted tax credits so that Minnesota workers can better support themselves and their families.

Now is not the time to turn our backs on the progress we’ve made for a more sustainable tax system that allows us to invest in our communities. Large and poorly targeted tax cuts don’t spur economic growth – that hasn’t worked out for states like Kansas.

We’ve long called on policymakers to make responsible tax decisions. Caution is more important than ever, given today’s modest long-term revenue numbers. Making large tax cuts now would make it harder to effectively respond to what’s ahead, including an uncertain economy and potential large-scale federal changes to tax policy and funding for states. Our own state history has shown that when taxes are cut too much in surplus years, it makes it more difficult for the state to respond to the needs of our residents in the next economic downturn. Instead, we should invest in a more durable prosperity that reaches all Minnesotans.

-Clark Biegler

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Tax credits for working Minnesotans an important area of common ground

The long election season that just concluded shone a spotlight on the economic insecurity facing many across our state and across the country.

Policymakers must respond with effective and targeted strategies so that Minnesotans can support their families and get their kids off to a better start. In terms of tax strategies, Minnesota policymakers have two such solutions close at hand: the Working Family Tax Credit and the Child and Dependent Care Tax Credit make everyday Minnesotans a priority, and they are part of the unfinished business from the last session. (These credits were included in the 2016 tax bill that passed a divided Legislature with strong bipartisan support; unrelated technical glitches in the bill found after the legislative session was over prevented Governor Mark Dayton from signing it into law.)

The Working Family Credit (WFC) is a tax credit for working people with lower incomes, which helps them meet basic needs and support their families. It is our state’s version of the federal Earned Income Tax Credit, or EITC, which has a proven track record of supporting work, boosting incomes and getting children off to a stronger start in life. It is available to households with earnings from work, and the amount of the credit varies based on the size of the family.

The Working Family Credit is effective in reaching many of those Minnesotans who, despite working hard, are struggling to make ends meet, and the expansion proposal would make it work even better.

  • Nearly half of the families and workers who currently get the Working Family Credit live in Greater Minnesota, where wages tend to be lower and job opportunities can be more limited than in the Twin Cities metro area. In several counties in Greater Minnesota, more than 1 out of every 6 tax-filing households receive the Working Family Credit.
  • The Working Family Credit is also effective in reaching Minnesota’s communities of color, who also have had less access to opportunity. About 30 percent of those estimated to be eligible for the WFC are people of color.
  • The expansion would make the credit work better for younger workers and others who aren’t raising children in their homes. It includes reforms inspired by proposals from House Speaker Paul Ryan and President Barack Obama for the federal EITC to have the same kind of pro-work impact on these workers that it has for parents. Workers without dependent children can already qualify for the credit, but currently, these workers face an arbitrary age requirement that they be at least 25 years old, and single Minnesotans working year-round, full-time at $9.00 an hour make too much to qualify.

The Child and Dependent Care Credit also supports struggling working families. It is intended to help families afford child care, but the credit hasn’t kept up with rising costs. This is another credit that has received bipartisan support and ongoing interest; it has been a feature of Dayton’s budget proposals, and expansions have passed the Republican-led House in both 2015 and 2016. Expanding this credit is another good step, along with boosting funding for child care assistance, in making sure Minnesota parents can afford child care and employers can attract the workers they need.

In the 2017 Legislative Session, we are likely to face a tighter state budget situation, and at the same time, too many Minnesota families are struggling. That makes it even more essential to focus on proven and well-targeted strategies to boost the incomes of working Minnesotans. The Working Family Credit and Child and Dependent Care Credit deserve to be top priorities.

-Nan Madden

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Make economic opportunity available to all Minnesotans

Today’s the day thousands of your neighbors pull together to make Minnesota stronger during the annual Give to the Max Day fundraiser.

Our work at the Minnesota Budget Project is grounded in the belief that economic opportunity and prosperity should be available to everyone, regardless of who they are or where they live.gtmd16logoverticalcolorsafe

And our work is more important than ever. We’re fighting to expand the Working Family Tax Credit, which boosts incomes for everyday Minnesotans. And we’re protecting affordable health care and other critical supports for Minnesotans working their way into the middle class.

But we can’t do it alone. With your tax-deductible donation you’ll advance our shared values of economic security for all Minnesotans through policy solutions that enable Minnesota workers to keep our economy strong and growing.

Donate today and your gift could go even further – it will be eligible for the hourly drawings of a $1,000 GiveMN Golden Ticket, and one of the $10,000 Super-Sized GiveMN Golden Tickets.

We bring you the credible and timely analysis you rely on to better advocate for what’s important to you. Donate today for a stronger tomorrow for all.

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Refugees revitalizing Minnesota by contributing to economy and our communities

Refugees come to this country because they face persecution in their homelands, and the United States provides a safe space for them to rebuild their lives. A recent report shows that refugees are also important players in our country’s labor force and economy, and they work to become part of their new communities.

Refugee Integration in the United States, a joint report from the Center for American Progress and the Fiscal Policy Institute looks at how Somali, Burmese, Hmong and Bosnian refugees contribute to the economy when they come to the U.S. seeking a better life. Among the key findings:

  • Refugee men quickly join the workforce once in the United States, and in fact are often working at higher rates than U.S.-born men. Refugee women also join the workforce, and after 10 years are in the labor force at about the same rate as U.S.-born women.
  • Many refugees see substantial wage increases in their first 10 years in the country as they move into better jobs, and a significant number become business owners.
  • Refugees integrate themselves into their communities over time by learning English, buying homes and becoming U.S. citizens. More than three-quarters of Somali, Burmese, Hmong and Bosnian refugees become American citizens after 20 years.

The report also highlights the Twin Cities’ large refugee populations, pointing out that, “These refugee groups have played a significant role in the revitalization of Minneapolis and St. Paul; together with other immigrant groups, they have helped spur the cities’ population rebound after a mid-20th century decline.”

This report is an important reminder that refugees move to this country fleeing dangerous circumstances, and during their resettlement they relatively quickly join in the workforce, learn English and contribute to the communities where they settle.

-Clark Biegler

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