House budget targets devote 2/3 of surplus to taxes, transportation

The Minnesota House of Representatives’ budget targets tell us how they propose to allocate the state’s projected $329 million surplus for FY 2018-19. The House targets put the bulk of the surplus toward tax reductions and transportation.

The targets are an important milestone in the budgeting process. They set the size of the House’s omnibus budget bills. Last year, policymakers passed the state’s FY 2018-19 two-year budget, so any budget decisions this year would be adjustments to that budget.

House General Fund Targets (net) FY 2018-19
Tax Cuts and Aids to Local Governments $107 million
Transportation $101 million
Education $30 million
Jobs and Energy $15 million
Health and Human Services $10 million
Capital Investment $8.9 million
Public Safety $7.1 million
Higher Education $5 million
Environment and Natural Resources $750,000
Agriculture $250,000
State Government -$7 million
Other Bills $51 million
Net Changes $329 million

Taxes get the largest piece of the projected surplus. The tax bill needs to respond to the federal tax bill passed in December. This was a sweeping and complicated piece of legislation, and since Minnesota’s individual income tax and corporate tax systems use federal tax law as their starting point, Minnesota policymakers have to decide how to respond to those federal changes. We have urged policymakers to honor Minnesota values, including treating taxpayers fairly, continuing to practice fiscal responsibility, and maintaining the revenues to sustainably fund the state’s priorities. Taking targeted action that prioritizes low- and middle-income taxpayers should be the goal.

Transportation is the second largest funding priority for the surplus. Traditionally, transportation has relied more on dedicated funding sources, rather than competing with schools, health care, and other priorities for general fund dollars.

Since the targets allocate most of the projected surplus toward taxes and transportation, they leave little room for investments in other areas of the budget. The House indicated that some investments, like those addressing the opioid crisis and funding for vulnerable adults, could be included in the “Other Bills” category.

The House budget also would accelerate a $75 million transfer to Minnesota’s budget reserve from unused funds that had been dedicated to the Premium Subsidy Account. Every year, Minnesota Management and Budget sets a goal for the budget reserve that would get the state through most recessions. This addition would get our state a little closer to that goal.

The Senate has not released targets, although they have been developing their supplemental budget bill. We’ll be watching closely as the House, Senate, and Governor Mark Dayton put together the final budget in these final weeks of the 2018 Legislative Session.

-Clark Goldenrod

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New report finds Medicaid reporting requirements are a raw deal for workers

Many working adults are at risk of losing their health care under new Medicaid work reporting requirement proposals, according to a new report from the Center on Budget and Policy Priorities.

The report examines the work documentation requirement rule that will be implemented in Kentucky this year, which requires non-disabled adults on Medicaid to document 80 hours of work, volunteering, or job training each month in order to receive health care. If people are unable to provide the required documentation, they will lose their health coverage.

The report found that 46 percent of lowmedicaid-and-workers-48-percent-t-income workers who would be impacted by Kentucky’s new rules would be at risk of losing their health care for one or more months. Even among people who work substantial hours over the course of the year (about 80 hours per month on average), 25 percent would be at risk of losing their health care for one or more months because they would be unable to meet the requirements every single month.

Why is this? Because many of these people work in jobs that have high levels of instability, such as in food service, retail, home health care, or construction. Jobs in these industries frequently have volatile hours or inconsistent scheduling, and no guarantee workers will get to work a consistent number of hours each week. Workers in these types of jobs often don’t have sick time or much say in their work schedules, making it more likely they will lose their jobs if they need to take time to recover from illness, because of gaps in child care, or to deal with a family emergency. Many hardworking people may not be able to meet the 80-hour monthly work requirement through no fault of their own.

While many of the new work rules being implemented, including Kentucky’s, allow workers to fulfill the 80-hour requirement through volunteering or participating in job search programs, this doesn’t solve the problem for many people who are already working. Workers without much control over their schedules or who have to be available to work “on call” will have a difficult time lining up a volunteer position or slot in a job training program on short notice. So while the flexibility is laudable, it does not address the underlying challenges that many low-wage workers face in today’s labor market.

While proponents argue that these proposals will create greater incentives to work and will increase labor force participation, these new rules may actually impede people’s ability to work. Disruptions in health care can have serious consequences for people’s health. People working at low wages have above average rates of chronic health conditions. Not being able to see a doctor or treat an illness may exacerbate health issues further, which in turn make it more difficult to work.

Work documentation rules will likely lead to a vicious cycle: People with health conditions lose their jobs due to illness and then lose their health care, making it even more difficult to get healthy enough to find a new job.

Minnesota is currently considering a proposal that would impose work documentation requirements similar to Kentucky’s. The Center’s report demonstrates how just one of the many unintended consequences of work rules for Medical Assistance (Minnesota’s Medicaid) will not improve the health of Minnesotans and their families, or address barriers to success in the workforce. Instead, it’s clear that Minnesota workers will get a raw deal if reporting requirements are implemented in our state.

-Sarah Orange

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Tip penalty proposal in Minnesota House threatens economic security

The economic security of workers who receive hourly wages and tips in Minnesota is threatened by House File 4061, which was the subject of a hearing in the House Job Growth and Energy Affordability Policy and Finance Committee earlier this week.

Minnesota is one of seven states that ensures that workers who receive tips earn the same minimum wage as most other workers. The minimum wage for large employers is currently $9.65 per hour and, importantly, increases with inflation each year to help keep up with the cost of living.

House File 4061 would set a separate, lower minimum wage for workers, such as restaurant servers, who receive about $4.00 per hour or more in tips on average in a work week. The minimum wage for these workers would be frozen at the current minimum wage, and would not increase with inflation in future years. This policy is bad news for a few reasons:

  • While the wages for other low-wage workers would increase each year to help keep up with the cost of basic necessities like child care, groceries, and rent, workers receiving tips would be stuck earning 2018-level wages. And the gap between what tipped workers earn and what it takes to make ends meet would grow larger over time.
  • A substantial number of Minnesotans work in tipped positions at some point, and could be harmed by this proposal. According to the JOBS NOW coalition, openings for food preparation and serving jobs are up by 200 percent compared to four years ago.
  • This bill would make it very hard for workers to keep track of how much they should actually be paid by their employers, making workers more susceptible to wage theft. Since earnings could vary weekly between the inflation-adjusted minimum wage and the tip penalty wage, workers who receive tips right around $4 an hour on average would need to diligently track their tips and scrutinize their paychecks to make sure they’re being paid correctly. At the same time, it would also add a layer of complexity for employers to ensure they’re conforming to the law and counting tips and wages accurately.

The minimum wage sets a wage floor, and for tipped workers it provides a certain level of stability. This bill would erode the progress Minnesota workers made in 2014 when policymakers passed a long overdue raise to the state’s minimum wage. That boost to the state’s minimum wage is bringing more than 300,000 Minnesotans closer to economic security, and supports workers who are most often left behind in the state’s economy, including workers of color and women.

But House File 4061 would undo some of this important work. Policymakers should support Minnesota workers and promote economic security, not pass legislation that suppresses wages.

-Clark Goldenrod

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April Economic Update shows revenues on track

The recently released April Revenue and Economic Update gave us good news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that the most recent state revenues have come in on track, and that the national economy is expected to grow at about the same rate as predicted earlier this year.

Some of the top takeaways from the Update include:

1. State revenues are coming in on track with projections. The state’s revenues for February and March came in $6 million above projections; that’s 0.2 percent more than projected in the state’s February 2018 Economic Forecast. The slight increase is primarily due to higher income and sales taxes received. The Update notes that the state will have a fuller picture of total tax year 2017 income tax payments later in April.

2. Economic growth is expected to be roughly on track with the February forecast. The national economic forecasters continue to predict 2.7 percent national GDP growth for 2018. In 2019, growth is projected to be higher than earlier anticipated at 2.9 percent, but then is expected to taper off to 1.7 percent by 2021.

april-economic-update-gdp

3. National unemployment rate expected to remain low, with strong consumer spending expected. Nationally, unemployment has been holding steady at 4.1 percent. That is the lowest it’s been in 17 years. Unemployment is expected to drop to 3.6 percent in 2019, roughly what the February forecast projected.

4. Forecasters are fairly confident in their projectionsThe forecasters assign a 65 percent chance that their baseline forecast is correct. They also give a 20 percent chance for a more pessimistic scenario and assign a 15 percent probability to a more optimistic scenario.

This new update tells us that not much has changed since the February forecast. However, there’s still need for caution this legislative session. As we’ve written before, there’s still considerable uncertainty around the economy and federal funding.

This is the last quarterly revenue update that policymakers will get before the legislative session ends in May. As they work toward the tax and budget decisions they will enact this year, they should be mindful of the considerable uncertainty of these times, and seek to strengthen the state’s ability to sustain support for our schools, families, and communities.

-Clark Goldenrod

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Proposed constitutional amendment would undermine general fund resources and underfund transportation

Many of Minnesota’s priorities – from K-12 education, to financial aid for college students, to broadband access – are paid for through the state’s general fund. However, a bill moving through the Senate would threaten the state’s ability to meet Minnesotans’ needs now and in the future.

Senate File 3837 proposes a constitutional amendment to permanently dedicate certain general fund revenues toward the state’s transportation fund without replacing them with additional revenues. This reduces the amount available to fund other areas of the budget. Transportation is largely funded through dedicated sources, such as the gas tax. As a result, transportation has not traditionally competed with investments like schools, nursing homes, and broadband for the same funding.

Voters would decide during the 2018 general election whether to accept this change. This proposal is a bad idea for three big reasons:

  1. Senate File 3837 would take money out of the state’s general fund, leaving fewer resources for other priorities. The general fund is the state’s largest and most flexible fund; every two years state policymakers determine how to use it to best meet Minnesota’s current needs and invest in the future when they pass the state budget. By permanently taking away general fund dollars, this bill would make it harder to pay for other important priorities. A preliminary estimate shows that Senate File 3837 would take about $200 million annually out of the general fund starting in FY 2020. That’s roughly what it takes to cover the state’s total general fund investment in Jobs, Economic Development, Housing, and Commerce. It’s important to fund our state’s transportation needs, but permanently shifting funding away from other areas of the budget isn’t the right path.
  2. Speaking of funding state transportation needs, this bill would do little to actually fill the need for better transportation funding. In 2012, the Transportation Finance Advisory Committee determined that Minnesota needs $21 billion over 20 years just to maintain the current status of the state’s transportation system. This proposal doesn’t do that, nor does it get us close to funding a world class transportation and transit system needed for a strong economic future.
  3. Senate File 3837 locks down today’s budget choices and limits our ability to address tomorrow’s needs. By putting this language into our state’s constitution, it will tie future policymakers’ hands when they need to adapt to new funding priorities and needs. Reversing this decision and restoring these dollars to our state’s general fund would involve yet another constitutional amendment and ballot question. This bill would needlessly make it more difficult to fund Minnesotans’ priorities like education, health care, economic development, and the environment.

-Clark Goldenrod

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Families with children could pay higher taxes under tax conformity

The complex set of tax changes in the recent federal tax bill creates a set of challenging decisions for states like Minnesota. Because Minnesota’s state income and corporate taxes use federal tax law as their starting points, when federal laws change, Minnesota policymakers need to decide whether to incorporate those changes into our tax system.

As they decide how to respond to the federal tax law, Minnesota policymakers should be guided by principles including fairness and sustainability of the tax system. One element of fairness that is particularly at play this year is how much the tax code takes family size into account. Our current tax system recognizes that a household’s basic expenses grow with each additional family member, and takes that into account when determining how much of a household’s income is taxable. But conforming to the federal tax law could change that.

If Minnesota adopted all of the federal changes that effect our state income taxes, that would raise an estimated $121 million in FY 2019 and more than $200 million per year after that. Tax increases on some Minnesotans would pay for tax cuts for others. Among those likely to face tax increases under conformity are families with children or other dependents.

The Institute on Taxation and Economic Policy modeled the effect in Minnesota of conforming to the federal tax bill’s increased standard deduction, the elimination of personal and dependent exemptions, and changes to itemized deductions. They estimate that 70 percent of families with dependents would see a tax increase as a result of conforming to these provisions, including 53 percent of families with one dependent and 84 percent of families with two dependents.

A primary cause is the federal tax law’s elimination of personal and dependent exemptions. For many families with dependents, the new larger standard deduction is not enough to make up for the lost dependent exemptions. These families will have higher taxable incomes, and likely a state tax increase under conformity. (Some households taking itemized deductions could also see tax increases from the elimination of exemptions, but more factors come into play in determining how they fare under conformity.)

Fortunately, there are policy choices to prevent families with dependents paying more to fund tax cuts for others. One approach is to not conform to the federal changes in deductions and exemptions that causes it. This is what Governor Mark Dayton proposes in his tax plan. The plan would keep the value of exemptions, the standard deduction, and itemized deductions the same as before the federal tax law passed. In addition, his plan would cut taxes on most Minnesotans through a new per-person tax credit and expansion of the Working Family Credit.

A second approach is to largely conform to those federal changes, but also enact targeted policies to offset the impact. This could be creating a state Child Tax Credit, a state dependent exemption, or a combination of both. Legislation taking this approach includes Senate File 2982 and House File 2942.

However, these policies need to be big enough to fully offset the lost exemptions in order for low- and middle-income families with dependents to avoid tax increases. And it is hard to do that if policymakers also try to enact broad income tax rate reductions, as Idaho recently found out.

As the Tax Policy Center’s Richard Auxier writes, Idaho provides a cautionary tale. Idaho is in a somewhat similar situation to Minnesota in that it also has a tax system that incorporates the value of federal deductions and exemptions. Idaho policymakers were told that conforming to the federal tax law would raise an estimated $100 million. They responded earlier this month by passing a $130 Child Tax Credit, but also cutting income and corporate tax rates.

But the Child Tax Credit was too small and left some Idaho families with children with tax increases, even when combined with the income tax rate reductions. For example, a married couple with three children earning $50,000 would pay nearly $200 more under this legislation. Those tax increases paid for tax cuts for others. Idaho policymakers went back to the drawing board, and passed additional legislation to expand the Child Tax Credit to $205. But that’s still short of the $287 that would be needed to fully offset the loss of personal exemptions for all Idaho families.

As Minnesota policymakers respond to the federal tax bill, they would be wise to remember Auxier’s caution: “The new money is a windfall only if you ignore that someone is paying for it with higher taxes. And that someone mostly will be low- and middle-income families.”

-Nan Madden

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Governor Dayton’s proposed supplemental budget makes investments in education, health and human services, economic development, saves for the future

Governor Mark Dayton released his FY 2018-19 supplemental budget proposal today, focused on making strategic investments to support Minnesota’s economic success, prioritizing working Minnesotans in responding to the federal tax bill, and leaving some of the state’s projected surplus unspent “to cushion against risk.”

The supplemental budget describes Dayton’s proposed changes to the two-year state budget passed last year. Dayton proposes $227 million in net additional general fund spending and $20 million in net revenue increases in FY 2018-19, leaving $206 million of the projected surplus unspent, or “on the bottom line.”

dayton-supplemental-budget-table-2018

Here’s our first look:

Education

Dayton’s largest new investments are for the education of Minnesotans at all ages. He recommends $21 million in FY 2019 for the Safe and Secure Schools Act to improve the security of students through building improvements and student supports. He also includes an additional $17 million in FY 2019 for special education. Dayton also proposes $57 million in FY 2020-21 to expand access to pre-kindergarten.

Dayton proposes improvements for Minnesotans pursuing higher education as well. He includes $10 million each to Minnesota State and the University of Minnesota to keep the cost of tuition down. He also includes an important improvement to financial 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 students receive this federal grant, meaning that Dreamers receive much less aid than they need to afford college. The proposal would increase the grant award for these students, making college education more in reach for all Minnesota’s young people.

Health and Human Services

Governor Dayton proposes an additional $2.5 million in FY 2019 and $15 million in FY 2020-21 in child care. These investments are intended to avoid disruptions in child care for families and better prepare children for school. These improvements are essential to making sure parents can join the workforce and kids can grow in stable and nurturing environments.

Dayton also maintains an essential funding source for affordable health care by repealing the sunset of the provider tax. The provider tax provides the majority of the revenues for the Health Care Access Fund but is currently set to expire on December 31, 2019. By ensuring this revenue continues for MinnesotaCare and Medical Assistance, Dayton is taking an important step to ensure low- and moderate-income Minnesotans can continue to get the health care they need.

Affordable health care is also expanded through the MinnesotaCare buy-in option, which would allow Minnesotans who don’t already qualify for MinnesotaCare or Medical Assistance to purchase health insurance through MinnesotaCare. After initial set-up costs of about $171 million, individual premiums are projected to sustain the program into the future.

Other important funding proposals include addressing opioid treatment and addiction, and strengthening consumer protections for seniors and other people living in care facilities.

Taxes

One the major challenges in this legislative session is responding to the recent federal tax bill. As in his past tax proposals, Governor Dayton prioritizes everyday Minnesotans and maintaining the revenues needed to fund essential services.

Dayton’s tax plan would protect seniors, people with disabilities, and families with dependents from seeing a cut in their Property Tax Refunds, which would occur from conforming to the federal tax code.

In addition, Governor Dayton continues his commitment to Minnesota workers and their families through an expansion of the state’s Working Family Credit, helping working families meet their basic needs and get children off to a stronger start. This proposal is similar to the expansions Dayton has proposed in the past, and would provide an average $160 tax cut for 329,000 Minnesota workers and families.

Simply conforming to all the federal tax changes that impact the state is estimated to raise $459 million in individual and corporate taxes in FY 2019 and more in future years. Preliminary analysis by the Institute on Taxation and Economic Policy estimates that about one-third of Minnesota taxfiling households would see a tax increase if Minnesota conformed to the major income tax changes.

Instead, Dayton proposes to keep Minnesota’s tax code as it was before the recent federal changes. It would prevent tax increases by allowing Minnesota families the same standard deductions and personal exemptions as before, and those who itemize would continue to be able to take the same deductions, such as for charitable giving and property taxes. In addition, it creates a new $60 per-person tax credit. Budget documents estimate that more than 1.9 million Minnesota families would receive an average tax cut of $117.

In addition, Dayton’s budget plan would reverse three tax cuts enacted in last year’s tax bill: on tobacco products, the commercial/industrial state property tax, and the estate tax.

Jobs and Economic Development

Governor Dayton continues to prioritize expanding broadband service in underserved areas so that Minnesota’s economic success reaches into every corner of the state. He proposes adding $30 million in additional one-time funding for grants that are expected to expand access to broadband for thousands of Minnesotans.

Preparing for Uncertain Future

The Governor leaves a significant portion of the projected surpluses for FY 2018-19 and FY 2020-21 on the bottom line – $206 million in this biennium and $182 million in the next. The state’s current projected budget surpluses are certainly good news, but they don’t guarantee a positive economic and budget outlook into the future. Forecasters had the tough job of predicting how people and businesses would response to the sweeping federal tax bill. Additionally, our state’s projected surplus could swiftly be cancelled out if federal policymakers follow through with any of several proposals to deeply cut federal funding to the state.

Considering increased uncertainty from federal policy changes, it is crucial for policymakers to set Minnesota up for success. Leaving a significant portion of projected surpluses on the bottom line while making targeted investments to support Minnesotans is a good way to do that.

-Clark Goldenrod, Sarah Orange, Nan Madden

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As rising rents outstrip Minnesotans’ incomes, affordability policies are under threat

A full-time worker needs to earn $18.60 an hour to afford a modest two-bedroom apartment in Minnesota. That’s up from $17.76 in 2016, and is nearly twice the state minimum wage for large employers. The gap between Minnesotans’ wages and prices in the rental market underscore the importance of policies to increase the number of renters that can afford their basic necessities without sacrificing housing stability.

The National Low Income Housing Coalition’s annual Out of Reach report details how much a full-time worker needs to earn in each state in order to spend less than 30 percent of their income on a modest one- or two-bedroom apartment. The Minnesota Housing Partnership takes a deeper dive into the data at the state level, finding that a full-time minimum-wage earner can’t afford a modest one-bedroom apartment in any county in the state.

Minnesota takes a multi-pronged approach to addressing the high cost of rental housing, and in the budget passed last session, policymakers invested an additional $77 million in affordable housing. These reports — along with data showing that about 45 percent of Minnesota renters pay roughly one-third or more of their incomes on rent — demonstrate that we still have a ways to go before every Minnesotan can afford to put a roof over their heads.

The mismatch between earnings and housing costs is found across the state. Over the past decade, the wage a full-time worker needs to earn to make a typical two-bedroom apartment reasonably affordable has increased 20 percent in rural areas of Minnesota. To fit rent comfortably in their budget, a Minnesotan living in a rural area and earning the minimum wage would typically need to work about 58 hours per week. In the Twin Cities metro area, a minimum-wage earner would need to work 88 hours per week to spend less than 30 percent of their rent for a two-bedroom apartment.

Unfortunately and perhaps surprisingly, some important tools to ensure more Minnesotans can afford housing are under threat because of the recent federal tax bill. You may already have heard how the tax bill’s deep cuts in corporate taxes makes the Low-Income Housing Tax Credit less effective and will likely result in a loss of affordable housing.

Minnesota’s renters could be facing another squeeze. The federal tax bill could punch a hole in a tax refund that puts a limit on how much Minnesotans pay in property taxes (one important component of housing costs). The state’s Property Tax Refund is also commonly known as the Circuit Breaker (for homeowners) and the Renters’ Credit. The Renters’ Credit refunds a portion of the property taxes that renters have paid through their rents.

About 328,000 low- and moderate-income Minnesota households across the state received the Renters’ Credit in 2015, all of whom had property taxes considered high for their income level.

But the federal tax bill could cut Property Tax Refunds for renters by $34 million and for homeowners by $50 million per year. That’s because the Property Tax Refund formula allows an exemption for seniors, people with disabilities, and families with dependents that is calculated based on a provision in federal law that has essentially been repealed. Minnesota needs to restore these exemption amounts in our state law to avoid deep cuts in the Property Tax Refund.

The Renters’ Credit remains as important as ever as rental prices increase more quickly than renters’ wages. As Minnesota policymakers think about how to address the state’s affordable housing challenges in 2018, they should support this time-tested tax policy.

-Ben Horowitz and Nan Madden

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Investment in child care is a critical investment in Minnesota’s workforce

Our state’s economy has been vibrant for the past several years, and a significant factor in this success is our strong workforce. But as the labor market has gotten tighter, employers in some industries and parts of the state struggle to find the workers they need. A significant barrier keeping Minnesotans out of the workforce is the lack of affordable child care.

Child care can be one of the largest expenses families with children face. For example, in 2017 the average annual cost of infant care at a child care center in Minnesota was $15,340. These costs are burdensome for many families. But it doesn’t have to be this way. Minnesota already has a mechanism to bring down the cost of child care for working families.

The Child Care Assistance Program, or CCAP, helps parents afford child care while they are at work or looking for a job, and gives children a safe and nurturing environment. Affordable child care helps build the workforce we need today and is a down payment on Minnesota’s future workforce.

Targeted improvements in Child Care Assistance would make the system work better for families and providers. These changes would create stability for children, working parents, and providers and bring Minnesota in line with recent federal changes.

Eliminating barriers and creating stability for families. Minnesota’s Child Care Assistance Program can better serve families with a few simple changes that would have a big impact. Changes that would streamline the system include: eliminating the six-month limit on assistance when a family moves to a county with a child care waiting list, making it easier for families moving off of Minnesota Family Investment Program to retain child care, and adjusting the application and activity requirements for families experiencing homelessness.

Updating out-of-date provider rates. Updating the state’s reimbursement rates to providers would both expand families’ choices of providers and help address the financial challenges facing child care providers. The state’s current payments to providers through CCAP have not kept up with costs of providing care. In 2016, provider rates only covered 29 percent of the prices charged by child care centers and about 22 percent of the prices  in-home providers charged. This is a dramatic decline from 2003, when about 80 percent of providers’ costs were covered by these reimbursements.

The low CCAP reimbursement rates may result in providers refusing to accept CCAP families or accepting CCAP families at a financial loss. Updating the provider rate to cover a greater share of the cost of caring for children will help providers keep their doors open.

Investing in Minnesota’s workforce, particularly during this tight labor market, could help ensure our state’s economy continues to thrive. While Minnesota only has a small surplus to invest this legislative session, prioritizing child care investments would benefit both working families and businesses across our state. We can’t afford to have Minnesotans unable to go to work because they can’t afford child care. The time is right to take steps so that families can build a better future and strengthen Minnesota’s economy.

-Sarah Orange

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February forecast brings welcome news, but uncertainty still reigns

Today the state’s Minnesota Management and Budget released the February Budget and Economic Forecast. The February forecast compares what the state would be expected to spend on schools, roads, and other public services under existing laws and current projections for economic growth, and how much revenue the state would expect to bring in. This forecast will set the stage for making budget and tax decisions in the current legislative session.

Today’s forecast showed a $329 million surplus for FY 2018-19, the current budget cycle, and $313 million for FY 2020-21. These numbers are an improvement over what was shown in the November forecast. Since November, federal policymakers reauthorized funding for the Children’s Health Insurance Program (CHIP) and enacted a major tax bill. And at the state level, policymakers passed funding for the Legislature just this past week. Today’s projections takes into account these recent changes.

Here are our top takeaways:

  1. The forecast projects a $329 million surplus for FY 2018-19. That equals less than one percent of the total two-year budget, which runs through June 30, 2019.
  2. The February forecast also projects a future structural balance. Today’s report shows a $313 million positive balance for the upcoming FY 2020-21 biennium. However…
  3. The future balance does not take into account what it takes to maintain current levels of state services. Keeping up with inflationary costs on Minnesota’s current commitments would cost another $1.2 billion in FY 2020-21. In other words, these projections are built on the assumption of flat funding for many areas of the budget.
  4. The forecast expects stronger short-term economic growth than projected in the November 2017 forecast. Every forecast includes a best guess at what the national economy will do over the next few years, and today’s report expects the economy to continue growing. National GDP growth is expected to be faster: 2.7 percent in both 2018 and 2019, rather than the 2.5 and 2.2 percent expected in November. However, this boost is short lived. By 2021, economic growth is expected to drop below November’s estimates to 1.9 percent. These figures include a modest annual increase 0.1 to 0.3 percentage points through 2021 from the expected economic impact of the federal tax bill.
  5. There are a number of sources of uncertainty. IHS Markit, Minnesota’s economic consultant, assigns a 65 percent probability to their baseline economic forecast, a 20 percent probability to a more pessimistic scenario, and a 15 percent probability to a more optimistic scenario. In addition, this forecast includes projected revenue increases that are anticipated to occur as a result of the federal tax bill; however, predicting how people and businesses will respond to the federal tax bill is tricky and we’re in some uncharted territory. And while federal policymakers have put proposals on the table that would deeply cut federal funding to the state, the forecast does not assume any changes to the federal budget that have not yet been enacted.
  6. This is one-time good news. It’s important to note that the surplus is largely due to temporary, not ongoing, factors. The federal tax bill is expected to bring short-term economic growth, but that impact is expected to be followed by slower economic growth in future years.

What do these numbers mean for the tax and budget choices that policymakers will be facing during the 2018 Legislative Session?

Governor Mark Dayton’s supplemental budget proposal for FY 2018-19 is expected to be released mid-March, and the Legislature will make choices this session about how to respond to both the news in the state forecast and the federal tax bill passed last year. Since policymakers passed the state budget for the FY 2018-19 biennium last year, any budget and tax changes passed this year will be supplemental to what’s already in law.

Policymakers must keep in mind that underlying the positive forecast figures is a higher than usual uncertainty, and they must avoid using temporary boosts in state revenues to fund ongoing commitments. Failing to heed these cautions could create funding shortfalls in the future and weaken the state’s ability to respond to potential cuts in federal funding or an economic downturn.

These principles are especially important to bring into the task of responding to the federal tax bill. This sweeping and complicated piece of legislation traveled quickly through Congress and passed days before Christmas, which means tax policy experts and the public are still working to understand the implications. Because Minnesota’s individual income tax and corporate tax systems use federal tax law as their starting point, Minnesota policymakers have to decide whether to follow those new federal changes.

Their response should be grounded in Minnesota values, including treating all taxpayers fairly and the importance of fiscal responsibility and maintaining the revenues needed to sustainably fund the state’s priorities. Initial analysis shows that fully conforming to the federal tax bill would raise revenues from both the individual income tax and corporate taxes. But the impact would vary – some Minnesotans would face tax increases, such as families with dependents and people receiving property tax refunds, while others would see tax cuts. Taking targeted action to avoid raising taxes on low- and middle-income taxpayers should be a priority. Minnesota also can’t afford to enact large additional state tax cuts for those who will be receiving the largest federal tax cuts: profitable corporations and the highest-income households. Doing so would reverse the state’s progress toward a tax system that is more equitable to Minnesotans of all income levels.

Given the high level of uncertainty – about the economy and future federal funding – now is a good time to strengthen our state’s budget reserve. In fact, if this surplus had occurred in November, under state law about $117 million would have gone into the reserve. That addition would bring the reserve to 79 percent of the level recommended by Minnesota Management and Budget to be able to get through most recessions that might come our way.

In a time of great uncertainty, policymakers have an opportunity to work toward making our state a place where everyone can thrive.

-Clark Goldenrod

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