Minnesota’s July Economic Update shows higher revenues, economic growth for now

The recently released July Revenue and Economic Update gave us somewhat good news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that state revenues for the past fiscal year have come in slightly above expectations. It also reports that the national economy is expected to grow this year, but then that growth will taper off over the next few years.

Some of the top takeaways from the Update include:

1. State revenues are coming in above projections. A preliminary look at the state’s revenues for FY 2019, which ended on June 30, shows they came in $636 million above projections; that’s 2.8 percent more than projected in the state’s February 2019 Economic Forecast. The increase is primarily due to higher income taxes received. A complete picture of FY 2019 revenues will be in the October update.

2. Long-term economic growth is still expected to be low. The national economic forecasters have increased their predictions for national GDP growth for 2019, from the 2.4 percent predicted in February to 2.6 percent in the July update. Next year though, they still expect growth to start tapering off, reaching 1.6 percent in 2022. This slowdown is predicted given the context of slowing global growth, the effects of tariffs on businesses, and constrained employment growth from a tight labor market.

july-2019-economic-update-gdp

3. National unemployment rate expected to remain low for now. Nationally, unemployment was 3.7 percent in June, and is expected to drop to as low as 3.5 percent later this summer before drifting back up next year.

4. Forecasters are somewhat confident in their projections. The forecasters are less optimistic about their baseline scenario than in February. They assign a 55 percent chance that their baseline forecast is correct. They also give a 35 percent chance for a more pessimistic scenario in which there’s a recession next year, and assign a 10 percent probability to a more optimistic scenario. This reflects greater uncertainty than in February, when forecasters gave the baseline projection a 60 percent probability and the pessimistic scenario a 25 percent probability.

This week’s Update brings us good short-term news: revenues are up, and the economy is growing at a good pace this year. However, lower economic growth projected in the future and a greater risk of a recession in the next year should give us pause. With potentially gloomy news in the future, policymakers should be focusing on strengthening the state’s budget reserve. However, earlier this year policymakers decided to take almost $500 million out of the state’s rainy day fund in 2021 to help fund the state’s budget. This is an irresponsible budgeting choice that could mean that the state is drawing additional funds from the state’s rainy day fund right when Minnesotans will need those funds the most.

-Clark Goldenrod

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Final education budget makes important investments, but leaves more to do to support all Minnesota students

The final E-12 education and higher education budgets for FY 2020-21 make important strides toward ensuring that more students across the state can get the education they need to succeed in today’s economy. But unfortunately, the final deal failed to incorporate proposals aimed at dismantling barriers faced particularly by Minnesota’s black, brown, and indigenous students.

E-12 education

In the FY 2020-21 budget, policymakers allocated $556 million in net additional funding to E-12 education. The largest piece is a 2.0 percent annual increase in funding for school districts through the basic student formula. That’s an increase of $126 per student in the first year and another $129 the second year. While that’s important, that’s not enough to even keep up with inflation. In their original budget proposals, both Governor Tim Walz and the House included a larger increase of 3.0 percent in the first year.

Policymakers also agreed to maintain the number of slots available for voluntary pre-kindergarten. Without the increase of $41 million included in the budget, the number of pre-schoolers who can participate in FY 2020 and beyond would have been cut by more than half.

Unfortunately, while Walz, the House, and the Senate all identified school safety strategies in their budget proposals, the final E-12 education budget only allocates contingent funding. If the state’s general fund closing balance for FY 2019 exceeds projections by at least $63 million, then up to $30 million of that will go toward safe schools supplemental aid. We are disappointed that policymakers took the unusual approach of contingent funding, rather than finding a sustainable way to fund something they agreed was a priority.

The final budget also includes some targeted strategies to promote racial and geographic equity in educational opportunities, like additional funding for tribal schools and levy equalization to better fund schools in communities with low tax bases. The final education bill also includes $1.5 million in FY 2020-21 for grants to support teachers of color, but this is much less than the $4 million that the governor proposed and the $3 million proposed by the House. A third of public school students are people of color or indigenous, yet in over 80 percent of Minnesota schools, less than 10 percent of the teachers are people of color or indigenous.

Higher education 

In higher education, policymakers allocated $150 million in additional funding for FY 2020-21, including several measures to try to hold down the cost of college. Much of this is done through the State Grant Program, which provides financial aid for students. The bill:

  • Increases the annual living allowance for students to 106 percent of the federal poverty line, which will increase grants for full-time students by as much as $465; and
  • Reduces the required family contribution in order to make college more affordable for lower-income families.

Unfortunately, policymakers missed an opportunity to adjust the State Grant amount for students who aren’t eligible for federal aid. Minnesota Dreamers – young people who came to the country as children and do not have legal status – are ineligible to receive federal Pell Grants. However, the State Grant formula currently calculates financial aid assuming that students receive this federal grant, meaning that Dreamers receive much less state financial aid than their peers. This policy change, found in the governor’s and House’s proposals, would have increased the grant award for these students, making college education more in reach for all of Minnesota’s young people.

The final budget also includes funding increases that go directly to public colleges and universities to improve higher education for students. Over the FY 2020-21 biennium, the University of Minnesota and Minnesota State will receive $44 million and $65 million respectively. In return, the University of Minnesota and Minnesota State are expected to minimize tuition increases for the next two school years.

Policymakers made important investments in education this year, but there’s still more to do to ensure a quality education is available to everyone, including Minnesotans of color and immigrant students.

-Clark Goldenrod

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Raiding the state’s budget reserve today could hurt everyday Minnesotans tomorrow

As part of the final budget agreement, Minnesota’s policymakers decided to take money out of the state’s rainy day fund. This was an irresponsible budgeting choice that could hurt struggling Minnesotans during the next recession.

After years of sound fiscal policy, the state’s budget reserve is at nearly $2.1 billion, and is just shy of the 5 percent of general fund revenues that Minnesota Management and Budget currently recommends. 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 and state revenues plummet, the state can avoid drastic cuts in critical services and continue to serve Minnesotans’ needs. However, the budget agreement would withdraw $491 million in FY 2022-23, weakening the reserve.

Here are a few reasons why this was a bad move:

  • Decisions around using the budget reserve should take into consideration the full economic cycle. The United States has had 10 years of economic growth since the last recession. This is uncommonly long, and along with recent projections of slowing economic growth, it’s likely that the next recession isn’t too far away.
  • When the next recession hits, the needs of Minnesotans will grobudget-reserve-updated-summer-2019-01w – at the same time that the state’s resources will shrink. The state’s current reserve is not yet to the recommended level to address a common-sized economic downturn and is well short of the types of deficits Minnesota has seen in the past. Reducing the budget reserve by almost one-quarter will leave the state less equipped to respond to a recession, potentially meaning services like job training, food assistance, or health care might not be there with Minnesotans and their families need them most.
  • Taking money from the budget reserve is a temporary solution that policymakers used to fund a structural gap. This year’s February economic forecast showed that Minnesota had a surplus for the upcoming FY 2020-21 biennium, but a deficit in FY 2022-23. Policymakers used the budget reserve to fill the gap between the amount of projected revenues and the cost of services. Instead, they should have responsibly raised the revenues needed to sustainably fund services that Minnesotans depend on.

It’s imperative to build a strong budget reserve when the state’s economic outlook is good, and Minnesota has made laudable progress. But that budget reserve will only work if we keep it strong and only use it when it’s needed. Policymakers made a mistake this session in drawing down the budget reserve that could likely result in harmful consequences for everyday Minnesotans in the future.

-Clark Goldenrod

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Final tax plan boosts tax credits for working Minnesotans, but falls short on future stability

The 2019 tax bill agreed to by Governor Tim Walz and the Minnesota Legislature in the recently completed special legislative session includes both important hits and worrisome misses.

The tax bill determines how much the state raises to fund education, health care, and other essential public services, and how we share the responsibility for funding those services. Both of these issues were high priorities this year.

The state needed to update the tax code in response to 2017 federal tax changes – a process called “tax conformity.” We argued that Minnesota policymakers should not replicate the mistakes of the federal bill, but instead should prioritize everyday Minnesotans in the state’s tax policy. And fortunately, the 2019 tax bill includes provisions that put everyday Minnesotans first, including by expanding the Working Family Credit and protecting exemptions and deductions that Minnesotans count on.

Given the state is projected to have only a short-term budget surplus, more revenues are needed to keep the state’s current commitments and fund new investments in our schools, our people, and our communities, especially in the longer term. The tax bill takes the essential step of retaining the health care provider tax, which would have otherwise expired and resulted in the loss of about $700 million a year in funding for affordable health care and community health initiatives.

Elsewhere in the budget, policymakers agreed to important increases in funding for schools and other investments so that more Minnesotans can fully take part in the state’s prosperity. But the tax bill doesn’t help sustainably fund those investments, because it doesn’t raise general fund revenues overall.

Instead, nearly $500 million will be taken out of the state’s budget reserve on July 1, 2021. That’s a temporary solution that uses one-time resources to fund ongoing services, and it weakens Minnesota’s readiness to respond to the next economic downturn.

Here’s a closer look at some of the details in the final tax bill.

Tax changes for individuals and families

About 275,000 households will benefit from the bill’s $30 million per year expansion of the Working Family Tax Credit. That means that Minnesota workers and their families across the state will be better able to afford what they need to get to work and succeed on the job, and get their children off to a stronger start in life.

For both workers without dependent children and families with three or more children, the bill increases the amount of tax credit and makes more Minnesotans eligible. Minnesota joins a growing number of states improving their tax credits for workers without dependent children: the maximum amount of credit they can receive is now $279, double the previous amount. Single workers without children will be able to qualify for the credit until their incomes reach $22,673, significantly higher than previously, and married couples without children can qualify with incomes up to $28,513. The bill also includes modest expansions for families with one or two children.

Unfortunately, the tax bill does not include the House’s proposed increases in state property tax refunds for homeowners and renters. In fact, because the bill adopts chained CPI, a slower-growing measure, to make annual inflation adjustments across the tax code, property tax refunds will be worth $1.1 million less in FY 2020-21 and $5.3 million less in FY 2023-23 than if the state kept the existing measure of inflation.

The bill’s tax conformity provisions for individuals and families largely protect the tax exemptions and deductions that Minnesotans counted on before the passage of the federal tax bill (called the TCJA). A majority of Minnesotans take the standard deduction (rather than itemize), and many modest- and middle-income Minnesotans will benefit because the tax bill adopts a higher standard deduction while maintaining the value of dependent exemptions. The bill also maintains many itemized deductions, including some that were eliminated at the federal level by the TCJA.

The bill lowers the income tax rate in the second tax bracket from its current 7.05 percent to 6.8 percent, starting this year. At a cost of $361 million in FY 2020-21, this is by far the largest tax-cutting item in the bill. However, nearly half of all Minnesotans, especially low- and middle-income households, will see no benefit from it, according to the Institute on Taxation and Economic Policy. For example, only about half of Minnesota households with incomes $50,000 to $79,000 will get a tax cut averaging $44 from the rate reduction. In contrast, the vast majority of high-income households will receive a tax cut up to $288.

Tax conformity for businesses

The federal tax bill cut the corporate tax rate by 40 percent and created a new 20 percent tax deduction for many “pass-through” businesses that pay taxes on their profits through the individual income tax, rather than corporate tax. At the same time, the TCJA “broadened the base” by expanding the share of business profits that are taxable. Coming into final tax negotiations, Walz, the House, and the Senate all had tax plans that raised revenues by conforming to some of the TCJA’s base broadeners.

The final tax bill recognizes that it makes sense for Minnesota to recapture a portion of the federal tax cuts businesses received as the state updates the tax code, and raises $649 million in FY 2020-21 from corporations and pass-through businesses from tax conformity. Walz and the House also proposed raising state revenues through provisions that tax corporations’ foreign income, following the TCJA’s lead, but none of these provisions made it into the final tax bill.

Walz and the House had also sought to shore up state revenues by reversing cuts to the estate tax, statewide property tax paid by businesses, and tobacco taxes that were enacted in the 2017 tax bill and that contribute to the revenue shortfall in future years. None of these reversals were included in the final tax bill. In fact, the bill goes in the opposite direction by further cutting the statewide property tax for businesses and cabins by an additional $50 million per year.

Investing in communities and families

The 2019 tax bill boosts funding for local public services, primarily through increases in Local Government Aid to cities, County Program Aid, and equalization aid to some school districts. The bill also seeks to improve the ability of rural school districts to pass school referenda by increasing a related property tax credit for farmers.

Another important provision in the tax bill ends the practice of funding a portion of the state’s Working Family Tax Credit with federal TANF (Temporary Assistance for Needy Families) dollars. Instead, from now on, the Working Family Credit will be paid for out of the general fund, like other tax provisions, and the TANF dollars are put to better use helping pay for a long-overdue increase in the monthly cash grant under MFIP, the state’s welfare-to-work program.

Despite a lot of attention to the issue this session, the final budget does not increase the state’s gas tax or make other major changes to transportation funding sources.

The 2019 tax bill has many positives, including expanding the Working Family Credit, maintaining the provider tax, prioritizing everyday Minnesotans in tax conformity, and boosting funding for local services. In other parts of the budget, progress is made in investing in our schools, public colleges and universities, and family economic security. However, in drawing from the budget reserve, policymakers are making a big gamble that no serious recession will hit in the next three years – a risky move considering the nation’s economic recovery is already quite long by historic standards. And there’s more for policymakers to do to ensure that Minnesota is raising the revenues needed to sustainably fund essential public services out into the future.

-Nan Madden

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Critical funding for health care preserved but small gains in support for families

The 649-page Health and Human Services budget bill contains multitudes. Overall, the final agreement for the FY 2020-21 budget reached by Governor Tim Walz and the Minnesota Legislature takes essential steps to protect affordable health care and makes some progress toward a broader prosperity that all Minnesotans can share. However, it stops short of making major investments to improve the lives of Minnesotans, and it includes some questionable fiscal mechanisms that undermine sustainable funding for services Minnesotans count on to thrive.

Affordable health care

Importantly, the final budget includes a permanent extension of the health care provider tax, albeit at a lower rate. Revenue raised by the provider tax funds affordable health care for over one million Minnesotans through Medicaid and MinnesotaCare, as well as other investments in healthy communities. Had policymakers not taken action, the provider tax would have sunset at the end of 2019, putting affordable health care at risk. While this important revenue source will continue, policymakers lowered the rate from its current 2 percent to 1.8 percent. The lower rate will mean fewer resources available in the long term to make progress on ensuring affordable health care reaches all Minnesotans.

The HHS budget also extends the Minnesota Premium Security Plan, commonly known as reinsurance, for two more years. Reinsurance is aimed at reducing health care insurance premiums for consumers who buy insurance on the individual market. Additionally, the budget deal lowers by $30 million the amount that the state will spend on health care coverage through managed care.

Affordable child care

Though the governor and the Minnesota House proposed increased state investments in affordable child care, the Senate’s position would have decimated affordable child care. The final agreement essentially includes a status quo budget for affordable child care, with some small but important adjustments to better serve families experiencing homelessness and those who move between counties. These changes will align the state with federal requirements and allow Minnesota to access additional federal funding. Proposals to reduce or eliminate the number of families on the waiting list for affordable child care and to bring provider reimbursement rates up closer to market rate are not included. This is a lost opportunity for Minnesota kids, parents, and employers, and is a priority that policymakers will need to address in the future.

Families and kids

The HHS budget includes an additional $100 per month for families participating in MFIP, Minnesota’s welfare-to-work program. This year’s investment is the first cash grant increase in over 30 years, and represents a sorely overdue improvement for Minnesota families struggling to make ends meet.

Additionally, the HHS budget makes other significant investments for kids and families, including a child welfare training academy, tribal child welfare expansion, affordable health care for kids in foster care, and safe harbor for sexually exploited youth.

Vulnerable adults

The governor signed a package of reforms to protect seniors and vulnerable adults that traveled separately from the HHS budget bill as House File 90 (Schultz) and Senate File 8 (Housley). This bill “will create a licensure framework for assisted living facilities along with other safeguards to protect older and vulnerable adults.” Minnesota had been the only state in the country without these important regulations and protections to ensure the safety of elderly Minnesotans and people with severe disabilities. The final HHS budget also includes funding for adult day care oversight improvements.

Behavioral and mental health

The final budget bill includes investments to make behavioral and mental health services available to more Minnesotans in more parts of the state. These include funding for certified community behavioral health clinics, school-linked mental health grants, shelter-linked youth mental health grants, mobile crisis services, and comprehensive suicide prevention. The HHS budget also implements a new method to deliver substance abuse disorder services more effectively, while also saving $16 million in FY 2020-21.

Minnesotans living with disabilities

The final HHS bill includes language to increase the eligibility standards for people with disabilities, so that more Minnesotans will be able to receive these vital services. This results in nearly $23 million in additional funding for affordable health care for Minnesotans in the FY 2022-23 biennium and beyond. It also includes funding to streamline home and community based services, and investments to help ensure fair pay for workers who provide direct support for people living with disabilities.

Hopeful and risky budgeting practices

The HHS budget bill creates a Blue Ribbon Commission on Health and Human Services tasked with finding $100 million in savings. Details of how the Commission will do its work and where it will find such massive savings are not spelled out in the bill; we will be closely monitoring any proposals that reduce access to affordable health care and other services that enable Minnesotans to live with dignity and thrive.

The final budget agreement counts $6 million in savings as a result of “program integrity” measures, meaning that state agencies will increase efforts to find errors and fraud. While it is paramount that public dollars be spent appropriately, counting on savings that may not materialize could present a risk to the balanced budget. We should be wary of efforts that create additional bureaucratic hurdles that simply result in eligible Minnesotans losing access to important services.

The HHS budget bill shifts $270 million in Medical Assistance spending from the state’s general fund to the Health Care Access Fund, or HCAF. This is simply an accounting shift that aligns the spending with a source of the funding while keeping funding levels consistent so that Minnesotans who rely on Medical Assistance are not harmed.

Overall, the final HHS budget agreement is a mixed bag for Minnesotans. Some important strides were made on affordable health care, support for families working towards economic security, protecting elderly and disabled adults, and increased access to behavioral and mental health services for Minnesotans around the state. However, important investments were left on the table. The state failed to make progress on addressing Minnesota families’ need for affordable child care, access to prescription drugs, and expanding paid leave. And, the budget includes assumptions about millions of dollars in savings and gimmicks. That introduces uncomfortable risks for Minnesotans who count on essential services being available and solvent when they need them.

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Global budget deal reached Sunday; more work needed to pass final budget

On Sunday evening after weeks of negotiations, legislative leaders and Governor Tim Walz announced a global budget deal. This deal is a compromise in many ways between their original proposals. While there are many details of the final budget to be worked out, we hope that the final budget will build shared prosperity for Minnesotans, regardless of who they are or where they live. Here’s what has been reported so far.

Global Budget Agreement (General Fund net changes) FY 2020-21 FY 2022-23
E-12 Education $540 million $716 million
Higher Education $150 million $150 million
Public Safety $125 million $150 million
Transportation $93 million $1.4 million
State Government $63 million $61 million
Agriculture, Housing, Broadband $60 million $14 million
Vulnerable Adults $31 million $24 million
Capital Investment, Debt Service $27 million $49 million
Environment $14 million $7.9 million
Economic Development $10 million -$5.9 million
Health and Human Services -$358 million -$557 million
Other Bills $4.5 million $4.3 million
Taxes $0 $0
Total  $760 million $615 million

The final budget agreement allocates over half of the $1.1 billion projected surplus for FY 2020-21 to E-12 and higher education. As part of their agreement, policymakers will increase funding for school districts through the basic student formula by 2.0 percent in FY 2020 and another 2.0 percent in FY 2021.

We were relieved to see that policymakers agreed to not threaten affordable health care for over one million Minnesotans. The health care provider tax will continue to support funding for Medicaid and MinnesotaCare, although at a slightly lower rate (1.8 percent versus the 2.0 percent currently.)

On the other hand, Health and Human Services faces a negative $358 million general fund target. Not all of this will actually result from cuts to services that Minnesotans count on. The deal includes shifting $270 million in FY 2020-21 and $514 million in FY 2022-23 from the Health Care Access fund, and $142 million from the Premium Security Account.

Policymakers announced that their tax proposal would have a $0 target for both biennia. Leadership indicated that the final tax bill will raise money through federal conformity and use those revenues to provide an equal amount of tax cuts. Two tax cuts specified in the budget agreement are a cut to the 2nd income tax rate and further cuts to the state property tax paid by businesses. Nearly half of all Minnesotans see no benefit from the rate reduction, especially low- and middle-income households, and the largest tax cuts go to higher-income households. As policymakers agree to the details of the tax bill, expanding the Working Family Credit and Renters’ Credit should be included so that more everyday Minnesotans are included.

The final budget deal also does not include an increase to the gas tax to fund state transportation needs. Both the governor and House budget proposals included an increased gas tax to fund overdue improvements for Minnesota’s roads, but the final transportation budget will rely on existing revenues.

A troubling component of the agreement takes money from the state’s budget reserve to balance the budget in the next biennium. A robust budget reserve is a critical part of adequately preparing for the next economic downturn, and after years of sound fiscal policy to build up the reserve, the state’s budget reserve is just shy of Minnesota Management and Budget’s recommendation. 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. However, the budget agreement would withdraw $491 million in FY 2022-23, weakening the reserve.

Conference committees were expected to put together their final budget bills and leadership expressed hope they would be ready in time for a special session to be called on Thursday to pass the final budget. However, only one budget bill had passed by the time the session officially ended on Monday night, so there’s more work to do to fill out the details and pass the budget agreement into law. Stay tuned for the details as they come out.

-Clark Goldenrod

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All tax plans on the table raise revenues: the difference is how much and who benefits

The negotiations to reach a budget deal this session have at times been characterized as a debate between raising taxes or not raising taxes. But in fact, all the plans on the table raise revenues. The real differences are in how much revenues they raise and whether those revenues are spent on building a prosperous future for all Minnesotans.

Budget decisions are being made in the context of a projected state budget surplus that does not continue beyond the next two years, a state economy in which prosperity does not reach all communities and parts of the state, and against the backdrop of a 2017 federal tax bill that provided the largest benefits for profitable corporations and high-income households.

Governor Tim Walz’s budget proposal and the House tax and budget plan raises revenues needed to meet current commitments and fund investments in broader economic security. Their general fund tax increases are paid largely by those who saw the most benefit from federal tax cuts, and by reversing past state tax cuts that have proven unaffordable. Their tax plans also include tax cuts focused on everyday Minnesotans, including those who aren’t yet taking part in Minnesota’s economic success.

The Senate, on the other hand, raises less general fund revenue overall, and instead of using those revenues to fund essential services, they pay for tax cuts that leave out many Minnesotans. Not raising enough revenue in the Senate’s tax plan translates into falling short in their budget bills. For example, the Senate budget includes only a 0.5 percent per year increase in funding for schools through the general education formula – not enough to even keep up with inflation. In contrast, Walz’s and the House budgets provide a 3 percent increase in FY 2020 and another 2 percent in general education funding in FY 2021.

This blog takes a closer look at how the different tax plans raise general fund revenues and who benefits from proposed tax cuts.

Tax conformity on businesses

The House, Senate, and Walz tax plans all have a substantial focus on “tax conformity,” which is when the state decides how to update the tax code in response to federal law changes. Policymakers need to respond to the 2017 federal tax bill, which goes by the acronym TCJA. The federal tax bill provided large, permanent tax cuts for corporations – including a 40 percent cut in the corporate tax rate – and at the same time, it also “broadened the base” by expanding the share of business profits that are taxable.

All three tax plans raise state revenues by adopting some of these base broadeners. Given that businesses received substantial federal tax cuts, it makes sense at the state level to recapture a portion of the federal tax cuts through conformity. When combined with TCJA conformity items that cut taxes for businesses, Walz’s tax conformity plan raises $945 million from corporations and pass-through businesses in FY 2020-21, the House raises $1.1 billion, and the Senate $458 million.

The fact that the Walz and House tax plans raise much more from business conformity than the Senate is explained by their different approaches to multinational corporations. The TCJA sought to address the issue of untaxed corporate profits held in overseas subsidiaries, and both Walz and the House follow the TCJA’s lead by adopting provisions that tax foreign income. The Senate does not have any provisions to address untaxed profits held overseas or other kinds of foreign income.

Reversing past state tax cuts

Walz and the House also raise revenues by reversing tax cuts made in Minnesota’s 2017 tax bill whose cost is growing over time. The Walz and House tax plans contain similar provisions that reverse or freeze these cuts: by undoing the freeze on the statewide property tax paid by businesses, reinstating inflationary adjustments on tobacco taxes, and freezing the amount of an estate that is exempt from tax at current levels, rather than allowing it to rise further. These provisions raise about $76 million in FY 2020-21 and over $231 million in FY 2022-23.

In contrast, the Senate does not include these reversals and instead would cut the statewide property tax further, reducing taxes on businesses and cabins by $78 million in FY 2020-21 and $100 million in FY 2022-23.

Tax changes for individuals and families

In terms of changes for individuals and families, another key area of contrast between the tax plans is who benefits from proposed tax cuts and who pays more from proposed tax increases. Below are some examples.

On net, the governor’s tax plan would cut income taxes on individuals and families by $136 million in FY 2020-21. His tax plan includes a roughly $50 million per year increase in the Working Family Credit, a tax credit for low- and modest-income workers and families. He would create a long-overdue expanded Working Family Credit for families with three or more children, as well as boost the credit for workers and families that currently qualify for the credit.

The House bill includes $336 million in tax reductions for individuals and families in FY 2020-21. That includes expanding the Working Family Credit by about $41 million a year; their expansion proposal is particularly strong for the two family types that are less well-served by the credit as it is currently structured: workers with no dependent children, and families with three or more children. Modest- and middle-income Minnesotans are among those who would see tax reductions from House provisions creating a higher standard deduction and increasing the size of the first tax bracket. And the House would increase property tax refunds for renters by $22 million and for homeowners by $23 million in FY 2021.

In addition to these tax cuts, the House also includes a targeted tax increase on higher-income households. It raises $381 million in FY 2020-21 and $319 million in FY 2022-23 by assessing an additional 3 percent income tax on net long-term capital gains and dividends over $500,000, on top of the existing income tax rate. These kinds of income are primarily received by high-income households and often subject to a special lower federal tax rate.

The Senate also has a combination some provisions that raise taxes and some that cut them. The Senate is unique among the three tax plans in that it raises significant revenues ($146 million in FY 2020-21) in its conformity plan for individuals and families – primarily from limiting itemized deductions (such as union dues, uniforms, and other work-related expenses) and through adopting chained CPI. Chained CPI is a slower-growing measure of inflation, and adopting it reduces the value of exemptions, credits, and other features of the tax code over time.

The Senate tax bill also cuts taxes, primarily by lowering the income tax rate in the second tax bracket from its current 7.05 percent to 6.8 percent in 2019 and to 6.67 percent in 2022. But nearly half of all Minnesotans, especially low- and middle-income households, would see no benefit from this rate cut, according to analysis from the Institute on Taxation and Economic Policy. For example, only about half of middle-income Minnesotans (incomes $50,000 – $79,000) would see any benefit, receiving an average $44 tax cut in the first year of the proposal. In contrast, nearly all households with incomes above $259,000 would benefit, and they receive a much higher average tax cut of more than $250.

While in total the Senate tax bill cuts taxes for individuals and families by $301 million in FY 2020-21, that doesn’t mean that everyone benefits. Those who pay more from its approach to conformity won’t necessary benefit from the tax cuts. Lower-income Minnesotans, for example, will pay more in income taxes because of the change to chained CPI, but see no benefit from the Senate income tax rate cut. The House also includes chained CPI, but avoids this outcome because lower-income people are included in tax cuts like Working Family Credit expansion.

Policymakers also face key questions about dedicated funding sources

This blog has focused on the general fund tax changes contained in the omnibus tax bill proposals. Other important questions are whether the state will maintain the provider tax, which is an essential funding source for affordable health care, and raise the gas tax and other dedicated funding sources to boost funding for roads, bridges, and transit.

The harm caused by not maintaining dedicated funding sources is clear. For example, the Senate’s health and human services (HHS) budget allows the health care provider tax to expire, leading to a loss of about $700 million a year in health care funding. Even before the full impact of the loss of the provider tax is felt, the Senate’s HHS budget would cut dental and vision coverage for lower-income Minnesotans.

It’s not a question of whether to raise taxes or not. It’s whether we are raising the revenues needed to invest in our common future, and whether our tax decisions also support the goal of building prosperity that reaches all Minnesotans.

-Nan Madden

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New data tool allows everyone to find local data about impact of health care, provider tax

The Minnesota Department of Human Services (DHS) rolled out powerful new web-based tools chock-full of data about health care. The dashboards are user-friendly and provide visuals like maps and charts, as well as an option to download the raw data. Now everyone can find their inner health care wonk.

The Investments in Health Care dashboard helps illustrate the economic impact of Medicaid and MinnesotaCare, including number of claims, total payments in dollars, number of health care providers, and average payment per provider. The Who Medicaid and MinnesotaCare Serve dashboard includes county-level data about number of enrollees, percentage of enrollees, and type of participant. The dashboards build on DHS’s Medicaid Matters report.

Some statewide takeaways: Medicaid enrollment is about evenly split between the metro area and Greater Minnesota, but Greater Minnesota has a higher portion of residents who use Medicaid (Medical Assistance). Kids, elderly folks, and people with disabilities are the main groups that get affordable health care through Medicaid. And, Medicaid has lower health care spending per enrollee in Minnesota compared to 2012.

In addition to being interesting for the nerds among us, this data provide incredibly useful numbers to help explain why Medicaid and MinnesotaCare are so important. For example, in Anoka County, 17.4 percent of the population uses Medicaid to access health care, while that percentage is much higher in Cass and Wadena counties where it is over 30 percent. The tools also show that in Morrison County, 105 providers received Medicaid reimbursements and countywide Medicaid payments totaling over $51 million. That’s a huge economic impact!

Medicaid and MinnesotaCare are a vital source of affordable health care for more than one million Minnesotans. However, the health care provider tax – which provides about $700 million in revenue to help fund these health care programs and other health care investments – is set to expire at the end of this year. Add your voice and tell your legislators to repeal the sunset on the provider tax and maintain affordable health care in Minnesota.

-Betsy Hammer

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Affordable child care: good for all

At this point in the legislative session, there’s a lot of attention to the negotiations about budget numbers. Those are important, but we can’t lose sight of what the decisions at the Capitol are really about. And that’s how we, through our public investments, build a state where all Minnesotans – regardless of who they are or where they live – can get ahead and provide bright futures for their children.

Our friends with the Kids Can’t Wait coalition have been hearing from our Minnesota neighbors about the importance of child care assistance. We’ve heard from moms for whom child care assistance made the difference in being able to stay in the workforce, go to school, and advance in their careers. We’ve heard how child care assistance made it possible for their kids to learn and grow in child care that supported their developing minds. And we’ve heard from child care providers and other business owners about why it’s so important for Minnesota parents to be able to afford the cost of child care.

But too many Minnesota families struggle to find and pay for child care. Child care is hard to find: Minnesota has over 222,000 child care spaces, but over 300,000 kids under age 6 who might need a child care spot. Families of color and families living in certain regions of the state have an even more difficult time finding care. And child care is expensive: the average cost for enrolling a Minnesota infant in a child care center is $310 per week, or over $16,000 per year. That’s a real struggle for many families.

More than ever, we can’t afford to have parents leaving the labor market just because they can’t find child care. Minnesota’s unemployment rate is 3.2%; that is historically low, and recently the Department of Employment and Economic Development (DEED) noted that they hear “from many sources that employers are indeed having increasing difficulty finding available workers.”

Investing in the Child Care Assistance Program (CCAP) would support families and employers to keep our economy strong. Child care assistance covers a portion of a family’s child care bill on a sliding scale based on family income. Child care assistance covers kids up to age 12, is available in every county, and covers the hours parents are working. Parents have the freedom to choose a provider that best fits their family’s needs and preferences.

Unfortunately, Minnesota’s investment in child care assistance hasn’t kept up with the needs. Since FY 2003, state funding for child care assistance has dropped by 37 percent (after adjusting for inflation). As a result, about 2,000 families are on waiting lists. And, the state’s reimbursements to child care providers are woefully out of date so that it can be a financial hardship for providers to serve families participating in CCAP. This limits the options for family choices.

Governor Tim Walz and the Minnesota House have proposed investing in child care assistance, including additional funding to reduce the waiting list, updated provider reimbursement rates, and changes to meet federal requirements. These measures would make meaningful steps toward making child care assistance work better for families, kids, and child care providers, and for the state’s economy overall. In contrast, the Senate plan puts care for 30,000 kids at risk by eliminating CCAP with the promise of reinstated but reduced funding levels if the Department of Human Services redesigns the program.

The May 20 end of session is approaching quickly. Policymakers must focus on strategies to make Minnesota a place where all can thrive; child care assistance is a time-tested approach to do so that lets working parents afford child care, children to thrive, and businesses to have a reliable workforce.

Add your voice – contact your legislators and ask them to make funding for affordable child care for Minnesota families a priority in this year’s budget decisions.

-Betsy Hammer

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Provider Tax: why now is the time to repeal the sunset

Minnesota’s health care provider tax raises nearly $680 million annually for affordable health care and investments in healthy communities across the state. This essential funding source will expire at the end of this year unless policymakers take action during this legislative session. The urgency is real: without an extension of this vital funding, the state’s Health Care Access Fund will quickly run out of money – threatening the future of essential health care services in Minnesota.

The provider tax is a major funding source for health care initiatives that reach more than one million Minnesotans. It was instituted in 1992 to expand access to affordable health care. The dollars raised go to the Health Care Access Fund (HCAF), which funds health care through Medicaid and MinnesotaCare for lower-income Minnesotans and investments in healthy communities. Though there are other revenues that feed into the HCAF, the provider tax produces about 80 percent of the HCAF’s revenue.

As part of a deal to end the 2011 state government shutdown, policymakers added a 2019 “sunset” to the provider tax law. As Mary Krinkie, Vice President of Government Relations for the Minnesota Hospital Association, put it: “there’s always a tendency to kick the can down the road, and at that time 2019 seemed a long way away.”

If the provider tax sunsets, revenues will disappear but needs will persist. A look at the projected balance of the HCAF, assuming the provider tax does sunset, shows that the HACF quickly runs out of money needed to fund essential health services.

Projected HCAF Balance (numbers in 000s)
FY 19 FY 20 FY 21 FY 22 FY 23
Balance $670,233 $602,218 $61,213 ($416,149) ($918,959)

Some might be tempted to kick the can down the road again, but Minnesotans’ access to affordable health care is too important to risk, especially as we grapple with challenges like shortages of providers in rural areas, persistent racial inequality in access to health care and health outcomes, and uncertain federal funding. Introducing risk and uncertainty to Minnesotans counting on Medicaid and MinnesotaCare is an unacceptable burden to place on our neighbors. Policymakers must act to extend the provider tax and ensure affordable health care will continue to be available without disruption.

We shouldn’t wait until we get into trouble before finding a solution: we need to repeal the sunset this year, before it expires. There would be substantial administrative hurdles involved if we turned the tax “off,” even for a short period of time, and then tried to go back to it later when alternatives don’t pan out. Allowing the provider tax to continue will ensure a smooth experience for both the providers who remit the tax and the Minnesotans who rely on the services it funds.

The future of affordable health care for one million Minnesotans is at stake. Policymakers must act now to repeal the sunset, and ensure stable and adequate funding to support affordable, equitable health care for Minnesota.

-Betsy Hammer

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