Minnesota’s February budget forecast reinforces the need for resources to fund the investments Minnesotans count on

Policymakers’ primary task in the upcoming legislative session will be to set a budget for the FY 2020-21 biennium, and today’s February Budget and Economic Forecast released by Minnesota Management and Budget gives an updated measurement of the economic context for those decisions. The forecast shows a $1.1 billion surplus for FY 2020-21 and an $11 million deficit for FY 2022-23.

The numbers from today are lower than what was shown in the November forecast. As we’ve noted before, the United States is in one of the longest economic expansions on record. But economic growth has shown signs of slowing down over the past year, and that’s now starting to cut into how much revenue the state can expect to bring in. What hasn’t changed is the importance of making tax and budget choices that continue building broader prosperity that includes all Minnesotans. (Keep reading to the end for our full take.)

The February forecast compares what the state would be expected to spend on schools, roads, and other public services to how much revenue the state would expect to bring in under existing laws and current economic projections. Some of the top data points from the February Forecast and their implications include:

  1. The forecast projects a $1.1 billion surplus for the upcoming FY 2020-21 biennium. This includes the positive balance for FY 2018-19.
  2. The forecast projects a slightly negative balance in the future. Today’s report shows an $11 million deficit for the FY 2022-23 biennium, which means projected revenues are expected to be just slightly lower than projected expenditures. However…
  3. …The future balances do not take into account what it takes to maintain current levels of state services. Keeping up with inflationary costs for Minnesota’s current commitments would cost an additional $1.1 billion in FY 2020-21 and $2.7 billion in FY 2022-23. In other words, today’s figures are built on the assumption of flat funding for most areas of the budget.
  4. The forecast shows the potential harm of letting the provider tax expire. By FY 2023, the Health Care Access Fund will have a deficit of over $900 million if the provider tax is allowed to expire. This fund primarily goes to affordable health care.
  5. The forecast expects weaker economic growth than projected in the November 2018 forecast. Every forecast includes a best guess at what the national economy will do over the next few years. Today’s report expects the economy to continue growing, but predicts more sluggish national GDP growth, slowing down substantially to 1.4 percent by 2023. gdp-growth-february-forecast
  6. There are a number of sources of uncertainty. Minnesota’s economic consultant, IHS Markit, assigns a 60 percent probability that their baseline economic forecast accurately predicts how the future economy will perform, a 25 percent probability to a more pessimistic scenario, and a 15 percent probability to a more optimistic scenario.
  7. This is one-time good news. The surplus is largely due to temporary, not ongoing, factors. The short-term economic boost from the 2017 federal tax bill will fade, global economic growth is expected to weaken, and a strong U.S. dollar reduces net exports.

Today’s budget numbers underscore the importance of maintaining and strengthening revenues that fund services that Minnesotans count on. Lower national economic growth will put a damper on future state revenues. In addition, Minnesota revenues continue to be eroded by large and growing cuts in the estate tax, tobacco taxes, and business property taxes that were passed in 2017.

Governor Tim Walz’s budget proposal released last week takes several steps toward ensuring the state has reliable funding for the services Minnesotans want and expect. His plan would repeal the scheduled expiration of the health care provider tax, protecting this critical source of funding for affordable health care options that reach more than one million Minnesotans. He also proposes increasing the gas tax – which has lost about one-third of its buying power since 2000 – to help address the state’s transportation needs. The gas tax increase also makes it possible to return certain sales tax revenues that are currently being diverted to transportation back into the General Fund, where they can be used for investments like quality education and health care.

Today’s forecast release is the start of the next phase in developing the state’s two-year budget. Walz will update his budget proposal to reflect these new forecast numbers and stay in balance, and the Minnesota House and Senate now have the numbers they use to start putting together their proposals for the FY 2020-21 budget.

The numbers may have changed, but what Minnesotans are counting on has not: sustainable revenues that fund quality education, health care, child care, roadways, and transit that reach every community across the state.

-Clark Goldenrod

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Governor Walz’s FY 2020-21 budget proposal makes important investments to build prosperity in Minnesota

In his release of his FY 2020-21 budget proposal today, Governor Tim Walz outlined his priorities for “One Minnesota” that would raise funds to invest in health care, child care, education, and transportation to build broader prosperity that reaches every community.

Walz proposes $2 billion in net additional general fund spending and $1.3 billion in net revenue increases in FY 2020-21. This leaves $789 million of the projected surplus unspent, or “on the bottom line.”

Governor Walz FY 2020-21 Budget Proposal – Net General Fund Impact
E-12 Education $733 million
Health and Human Services $284 million
Public Safety and Judiciary $233 million
Jobs, Economic Development, Housing, Commerce $213 million
Higher Education $158 million
State Government and Veterans $112 million
Property Tax Aids and Credits $77 million
Transportation $77 million
Environment $38 million
Agriculture $8.9 million
Debt Service, Capitol Projects, Other $85 million
New Revenues $1.3 billion

The state’s budget can be a powerful tool to advance racial equity and make opportunities available to every Minnesotan, regardless of who they are or where they live. Not everyone in Minnesota is succeeding in today’s economy. In particular, we know that communities of color often face barriers to economic security, from the lack of public investment in schools or transportation options in their communities, to discrimination in the labor market.

We’ll be looking more closely at the governor’s budget proposal in the coming days, but today touch on some of the pieces that most caught our attention, including initiatives that we think help make Minnesota a place where everyone can thrive.

Taxes

The governor’s tax plan seeks to raise the sustainable revenues needed to build broader prosperity and make tax policy choices that strengthen families and communities.

One of the important tasks for Minnesota policymakers this year is to update Minnesota’s tax code in the wake of the 2017 federal tax bill, which unfortunately provided the largest tax cuts to profitable corporations and high-income people. Walz’s tax conformity proposal takes another approach. For individuals and families, his proposal would update Minnesota’s tax code in ways that maintain many of the deductions and exemptions that were available before the federal tax law’s changes. It also conforms to most federal changes for corporations and businesses. Some of these provisions raise taxes and some cut taxes; in total, tax conformity for businesses raises state revenues.

Walz’s tax proposal also prioritizes working people and their families by expanding the state’s Working Family Credit, a state tax credit that boosts incomes and gets children off to a stronger start. The governor makes the case that an additional reason to expand the Working Family Credit this year is to offset the impact of the gas tax increase on these Minnesotans. The budget would expand the Working Family Credit by about $50 million a year through two policy changes:

  • Providing an expanded tax credit for families with three or more children; 46,700 families would benefit by an average of $227; and
  • Increasing the Working Family Credit by $100 for households headed by a single person and $200 for households headed by a married couple.

Walz’s budget plan also would reverse three tax cuts passed in 2017 that over time have taken a bigger and bigger bite out of state revenues. His proposal would reinstate inflation adjustments for tobacco taxes and the statewide property tax paid by businesses, and freeze the exemption amount for the estate tax at current levels (rather than allowing it to rise further.)

The proposal would increase state aids to cities and counties by about $60 million a year; this would support services in local communities and reduce reliance on local property taxes.

And Walz’s plan would treat homeowners equitably by allowing immigrants who own their homes to gain homestead status. Currently, some Minnesota homeowners pay higher property taxes simply because they file their taxes with an Individual Taxpayer Identification Number (ITIN) instead of a Social Security number.

Health care

The governor’s proposed budget includes many important investments to help Minnesotans stay healthy and afford quality health care.

The health care provider tax is an important source of funding for affordable health care for over one million Minnesotans. However, the provider tax is set to sunset later this year. The governor’s budget proposal repeals the sunset, ensuring that the Minnesotans receiving coverage through Medicaid and MinnesotaCare will have the care they need to stay healthy.

Minnesotans who get health insurance through MNsure would have additional assistance to make health care affordable. Walz’s proposed budget includes premium assistance to bring down the costs for Minnesotans who buy insurance in the individual marketplace, and a state premium tax credit. The governor’s proposal projects that by 2023, over 34,000 Minnesotans currently using MNsure would be able to tap the tax credits, and an additional 13,000 Minnesotans would likely enroll in health insurance using MNsure as a result.

The governor also proposed a major package, called ONEcare MN, aimed at expanding access to high-quality health care on the individual market. This proposal would roll out over several years and includes:

  • A high-quality “platinum-level” plan that offers coverage similar to MinnesotaCare.
  • Ensuring that “gold” and “silver” level health insurance plans are available in every region of the state.
  • Aligning prescription drug benefits to leverage purchasing power and make medicine more affordable.
  • Improving access to affordable dental care for people throughout the state.

Child care

In his budget, Walz proposes major investments in affordable child care that will help families afford care for their kids while parents work. Under this proposal:

  • 1,000 additional Minnesota families would receive child care assistance (CCAP), which would make a significant dent in the current waiting list.
  • Child care provider rates would better reflect market rates. Adequate provider reimbursements are key to ensuring families have choices when selecting a child care provider, and this is an important step in that direction.

Transportation

The governor’s proposal includes a substantial transportation component. Through this budget, the Department of Transportation expects to address snow and ice maintenance on the roads, repair potholes, inspect and maintain our state’s bridges, and build a safer transportation system. Transit investments include funding for Metro Mobility services, which serve elderly Minnesotans and Minnesotans living with disabilities, as well as for increasing bus rapid transit lines.

Walz proposes a few funding mechanisms for his proposal, the largest of which is increasing the gas tax. Walz proposes raising the tax by 20 cents, and then indexing it to inflation so that it can keep up with the state’s transportation needs. This tax increase also makes it possible for the governor to return certain funding sources that are currently being diverted to transportation back into the General Fund, where they can be used for investments like quality education and health care.

Education

The governor proposes $733 million in additional funding for education. He proposes increasing funding for school districts through the basic student formula by 3.0 percent in FY 2020 and 2.0 percent in FY 2021. That’s an increase of $189 per student the first year and another $130 the second year.

In higher education, he proposes to make college more affordable through an additional $54 million in FY 2020-21 for financial aid through the State Grant Program. As part of this, he 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 of Minnesota’s young people.

The big takeaways

The positive balances projected in the state’s recent forecast present some opportunity for policymakers to build toward shared prosperity. But it’s also clear that the smaller future projected surpluses aren’t enough to make the investments Minnesota needs in its people and communities. Walz’s budget proposes responsible policies to both build prosperity for Minnesotans today and provide stability for Minnesotans in the future.

Stay tuned for our upcoming in-depth dives into some of the governor’s proposals. In the meantime, you can download the governor’s budget materials at Minnesota Management and Budget’s website.

-Clark Goldenrod, Betsy Hammer, Nan Madden

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Apply for a two-year state policy fellowship with the Minnesota Budget Project

To expand the diversity of voices that speak with authority in state policy debates, the Center on Budget and Policy Priorities (CBPP) has developed a State Policy Fellowship that places fellows in two-year, paid positions in influential state-based policy organizations, including the Minnesota Budget Project.

The fellowship program seeks highly motivated candidates – with particular attention to candidates having experience with communities that are underrepresented in state policy debates – with a demonstrated interest in working on public policies that affect low-income communities and have implications for racial equity. A graduate degree in public policy, law, social work, economics, or a similar field is required.

The Minnesota Budget Project policy fellow will have an opportunity to work on advancing policies to make economic opportunity and prosperity available to all Minnesotans, regardless of who they are or where they live. The fellow will develop expertise in state budget issues and tax policies, collaborate with community-based advocates, and produce analyses that advance and build support for policy recommendations.

state-policy-fellowship-2-t

Fellows will also participate in a career development program, including an orientation and two policy conferences in Washington, D.C.

Fellows will earn $50,000 per year, plus the Minnesota Budget Project offers great benefits.

Applications, submitted through the CBPP, are due February 10. More information and the link to apply can be found here.

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Minnesota’s January economic update shows reason for caution

The recently released January Revenue and Economic Update gave us unsettling news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) shows that recent state revenues have come in lower than anticipated. It also reports that the national economy is expected to continue to grow, but that growth will become quite slow. These two factors could be a potential warning that the $1.5 billion state budget surplus projected in the November Forecast may be too optimistic.

Some of the top takeaways from the Update include:

1. State revenues for the most recent quarter came in below projections. The state’s revenues for November and December came in $102 million below projections; that’s 2.7 percent less than projected in the November 2018 Economic Forecast. The decrease is largely due to lower-than-expected income taxes received. When the January revenues are in, MMB will have a better idea whether this is just a timing issue or an indicator of a more significant trend.

2. Economic growth is expected to be lower. The national economic forecasters predict weaker national GDP growth for 2019 and beyond. The January update predicts 2.5 percent growth in 2019, down from the 2.7 percent predicted in November. Growth is then expected to slow to 1.4 percent by 2023. The slower growth is due to several factors, including tariffs between the U.S. and China and a strong U.S. dollar.

january-economic-update-gdp

3. The Update does not include the impact of the current federal government shutdown. The economic outlook calculations were done before the shutdown began, and so does not include the impact. However, the state’s economic forecasters expect that this shutdown will place a further drag on national economic growth.

4. National unemployment rate remains low. Nationally, unemployment was 3.9 percent in December, up slightly from November. The Update explains, however, that this slight increase is primarily due to more people who didn’t have a job now feeling confident enough to start looking for one. Since they’re actively looking for jobs but not yet employed, they’re now included in the unemployment numbers.

5. Forecasters are fairly confident in their projections. The forecasters assign a 60 percent chance that their baseline economic forecast is correct. They also give a 25 percent chance for a more pessimistic scenario in which there’s a recession starting next year, and assign a 15 percent probability to a more optimistic scenario.

We’ll get a more complete look at the state’s economic health when the February Forecast comes out later next month. But if we see similar economic growth projections in the February Forecast, that will likely mean lower revenues coming in, and policymakers will have fewer resources to work with as they build the FY 2020-21 budget.

With such slow projected economic growth, the national economy is less resilient, and any sudden shocks to the economy could turn into a recession. It points to the importance of continuing to make investments that support Minnesotans striving to make ends meet. It also underlines why they should protect funding sources for services that Minnesotans count on, including by maintaining the provider tax, a major funding source for affordable health care that will expire on January 1, 2020, if policymakers don’t act.

-Clark Goldenrod

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Investments in healthy people, healthy communities at stake this session with fate of provider tax

Funding for affordable health care for one million Minnesotans is at risk in the 2019 Legislative session because the health care provider tax is set to expire on January 1, 2020. Provider tax revenues are the primary source of funding for the Health Care Access Fund (HCAF), which goes toward investments in Minnesotans’ health and well-being.

The Minnesota Legislature created the provider tax in 1992 to fund a bipartisan health care reform package aimed at more Minnesotans getting health care coverage. The provider tax primarily supports affordable health care through MinnesotaCare and Medicaid, and other public health priorities. But due to a deal struck in 2011 to pass the state budget and end a 19-day state government shutdown, the provider tax will sunset at the end of this year unless policymakers act to maintain it. Allowing the provider tax to expire would result in about a $700 million annual loss in dedicated funding for health care in Minnesota.

Policymakers can’t afford to hit the snooze button this session on extending the provider tax:

  1. One in five Minnesotans have better access to a doctor when they’re sick thanks to Medicaid and MinnesotaCare, which are funded in part by the provider tax. These include working Minnesotans who don’t have affordable insurance through their employers, seniors, and Minnesotans living with disabilities.
  2. The positive balance in the Health Care Access Fund won’t last long without the provider tax. While it’s true that the HCAF currently has a projected surplus of $591 million for FY 2020, that’s largely due to positive balances carried over from previous years. And that balance is being spent down each year as it is used to help fund Minnesotans’ health care needs. The November forecast shows that by FY 2023, the Health Care Access Fund will have a deficit of almost $1 billion if the provider tax is allowed to expire.
  3. Allowing the provider tax to expire would put pressure on the state’s general fund, and this could have serious consequences for other public services that Minnesotans value. Losing close to $700 million annually in funding for the health of Minnesotans could constrain other investments in areas like K-12 education, financial aid for college students, and statewide access to broadband.

In the 2019 Legislative Session, Minnesota policymakers must act to extend the provider tax in order to preserve health care for over one million Minnesotans and keep moving us forward toward becoming a state where good health is available to all.

To learn more about why the provider tax is so important, check out our new analysis.

-Clark Goldenrod

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Good session to you! Let’s make racial equity a key focus this year

It’s that time of year again. The 2019 Legislative Session is beginning, so the Minnesota Budget Project team is getting out our calculators to crunch all the numbers, and our magnifying glasses to read those huge budget spreadsheets in size 8 font.

This year will be a budget year – meaning that policymakers’ primary task will be to craft the state’s next two-year budget. And as they do so, we urge them to make advancing racial equity a primary goal in their decision-making. This will mean deliberately addressing the structural barriers that block Black, Indigenous, and people of color (BIPOC) from thriving in today’s economy.

(Primarily white) Minnesotans often brag about Minnesota’s overall economic success, as demonstrated by the state’s low unemployment rate, high median income, and high rates of health coverage. And we’ve done it too. But these statistics often ignore that many Minnesotans of color face systemic barriers that make it harder to get ahead. And a legacy of discriminatory policies in housing, education, and elsewhere mean that people of color in this state face gaps in opportunity.

For example, due to discriminatory housing policies that were put in place over the past century, BIPOC communities are far more likely to live in areas of concentrated poverty where access to building blocks of opportunity, such as good schools and jobs, are limited. This means that BIPOC Minnesotans are more likely than their white counterparts to earn lower incomes, face poor health outcomes, or be subject to over-policing.

Policymakers should commit this session to make serious advances toward racial equity in our state and close these gaps in opportunity, in areas such as:

  • Economic equity. All Minnesotans should have the opportunity to succeed. This could involve investments in public transportation and allowing access to driver’s licenses regardless of immigration status, so that working people can get to their jobs safely and reliably. It could also include improving the state’s Working Family Tax Credit to boost working people’s wages and get children off to a stronger start.
  • Criminal justice. Minnesota needs a more just and equitable system. This could mean restoring voting rights for individuals who were formerly incarcerated, and addressing the debt trap that some face when they’re subjected to fees and fines from things like traffic tickets.
  • Health equity. There’s a lot of work to do to make progress in this area, but it will also be important to make sure that policymakers don’t take a step backward as well. The provider tax, which primarily funds affordable health care through Medicaid and MinnesotaCare, is set to expire at the end of this year. Policymakers will need to take action to maintain the provider tax so that our state continues to support access to health care for over one million Minnesotans.
  • Structural racism. Minnesota needs to address policies, formal practices, and other barriers that continue racial inequities. This could include formalizing practices that require policymakers to consider the impacts on racial equity during the policymaking process.

In 2016, policymakers dedicated $70 million over three years towards a number of policies that would promote racial equity, and Governor Mark Dayton started including equity and inclusion impacts on many items in his budget proposals. But much more work is needed. The time is now to advance racial equity in Minnesota. You can count on us to keep you informed on what progress policymakers are making at the Capitol.

-Clark Goldenrod

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Minnesota’s November budget forecast shows good news for right now, but the future’s looking iffy

Today’s forecasted surplus gives policymakers an opportunity to build toward shared prosperity that reaches Minnesotans across the state, whether in the Twin Cities or Greater Minnesota, or whether black, white, or brown.

Minnesota Management and Budget released the state’s November Budget and Economic Forecast. The November forecast estimates what the state would spend on schools, roads, and other public services under existing laws and current economic projections, and compares it to how much revenue the state would expect to bring in. This forecast is our first full look at Minnesota’s budget landscape since the end of the 2018 Legislative Session, and sets the stage for budget and tax decisions in 2019.

Many budget decisions made over the past eight years put Minnesota in a better financial position: balancing the books, crafting a more equitable tax system, and making investments in those Minnesotans who face the greatest barriers to thriving in today’s economy. Governor-elect Tim Walz and the 2019 Legislature should build on this momentum as they respond to the major fiscal issues of the upcoming session, including the scheduled expiration of the health care provider tax and updating the state’s tax code.

Here are our top takeaways from the forecast:

  1. With a surplus in the current biennium, the state was able to contribute to Minnesota’s budget reserve. One-third of the FY 2018-19 surplus plus other statutory allocations totaling $491 million were automatically transferred to the state’s budget reserve.
  2. The forecast projects a $1.5 billion surplus for the upcoming FY 2020-21 biennium. This includes the positive balance for FY 2018-19. Policymakers’ primary task in the upcoming legislative session will be to set a budget for the FY 2020-21 biennium, which starts on July 1, 2019.
  3. The November forecast also projects a future structural balance. Today’s report shows a $456 million positive balance for the upcoming FY 2022-23 biennium. However…
  4. …The future balances do 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 and $2.9 billion in FY 2022-23. In other words, these projections are built on the assumption of flat funding for most areas of the budget.
  5. The forecast documents start to show the potential impact of letting the provider tax expire. By FY 2023, the Health Care Access Fund will have a deficit of almost $1 billion if the provider tax is allowed to expire.This fund primarily goes to health care for one million Minnesotans.
  6. The forecast expects weaker long-term economic growth than projected in the February 2018 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. But national GDP growth is expected to be more sluggish than earlier anticipated, slowing down substantially to 1.4 percent by 2023.
  7. There are a number of sources of uncertainty. IHS Markit, Minnesota’s economic consultant, assigns a 60 percent probability to their baseline economic forecast, a 25 percent probability to a more pessimistic scenario, and a 15 percent probability to a more optimistic scenario.
  8. This is one-time good news. The surplus is largely due to temporary, not ongoing, factors. The short-term economic boost from the federal tax bill last year begins to fade late next year, and global economic growth is expected to weaken.

What do these numbers mean for the tax and budget choices that policymakers will be facing during the 2019 Legislative Session?

This economic recovery is only weakly boosting living standards for everyday Minnesotans. In the upcoming session, we expect lawmakers to consider policies such as expanding access to earned safe and sick leave and paid family leave, which make a big difference in family economic security and require only a very modest financial investment from the state.

Policymakers also face key questions about how to maintain funding for essential services. They should take action this session to reverse the scheduled expiration of the health care provider tax, which is a critical source of funding for health care for more than one million Minnesotans, as well as investments in healthier communities. Allowing the provider tax to expire would leave a $680 million annual revenue shortfall. Policymakers are also likely to consider increasing the gas tax – which has lost about one-third of its buying power since 2000 – and other ways of meeting the state’s transportation and transit needs.

And, policymakers will again take up the challenge of maintaining Minnesota’s values in our tax code in the wake of a federal tax bill that violates principles of fairness and fiscal responsibility. Last session, although they were not able to agree to a broader tax package, Minnesota policymakers appeared to reach consensus that the state should update our tax code in ways that protected Minnesotans – including families with children, seniors, and people with disabilities – from the tax increases they would see if the state simply conformed to federal tax law changes. Today’s forecast numbers underscore that Minnesota cannot afford to enact additional permanent tax cuts for profitable corporations and the highest-income households, who got the biggest windfalls from the federal tax bill.

Finally, considering the forecast’s warnings about a weaker future economy, now is still a good time to continue to strengthen our state’s budget reserve. After today’s transfer, the current reserve is about 93 percent of the $2.2 billion recommended by Minnesota Management and Budget. Any additional transfers to the reserve will better enable Minnesotans to get through most recessions that might come our way. This is a responsible way to use one-time funding to better ensure Minnesotans get the supports they need to make it through tough times.

-Clark Goldenrod

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Minnesota Ranks High for Tax Fairness in 50-State Study

In an era of income inequality and growing concentration of wealth, a new 50-state study released today analyzes whether state tax systems make income inequality better or worse. The Institute on Taxation and Economic Policy (ITEP) finds that nearly every state fails basic measures of fairness, but Minnesota is among a small number of states where income inequality is reduced by state tax policy.

In their Who Pays? report, ITEP highlights a number of things that Minnesota does right to build a fairer tax system. These include:

  • A graduated personal income tax;
  • Targeted tax credits including the Working Family Credit, Property Tax Refunds for homeowners and renters, and the Child and Dependent Care Credit;
  • Having an estate tax; and
  • Excluding groceries from the sales tax.

In addition to their tax inequality index, ITEP evaluates states on what share of their incomes households of different income levels pay in taxes. It finds that nearly every state has an upside-down tax system in which low- and middle-income families pay a higher share of their incomes in state and local taxes than the wealthy. In other words, their tax systems are regressive.

Minnesota does a lot of things well, and the ITEP report points out ways we can build on this momentum. This would include expanding the Working Family Credit, with particular attention to improving the credit for workers without dependent children, who benefit much less from the credit as it is currently structured.

As policymakers debate whether and how to conform our state’s tax laws to the 2017 federal changes, they should make smart decisions that protect Minnesota’s tax fairness. For example, they should not conform to federal tax changes that would mean smaller state Property Tax Refunds for seniors, people living with disabilities, and families with dependents.

Policymakers should also reject lopsided tax cut proposals that would provide little benefit to struggling families while doing more for high-income households. For example, the 2018 legislative tax proposal included income tax rate reductions that would do nothing for an estimated 1 in 5 Minnesota households with lower incomes. As the ITEP report reminds us, while Minnesotans at all income levels pay roughly similar shares of their incomes in total state and local taxes, income taxes have a smaller impact on low- and moderate-income households. For these Minnesotans, sales taxes and property taxes make up a larger share of their total tax responsibility.wpv6-minnesota-table

ITEP’s report also paints a picture of what happens on the other side of the spectrum, in the “Terrible Ten” states with the most regressive tax systems. In states such as Washington, Texas, Florida, and South Dakota, low- and middle-income residents pay substantially higher shares of their incomes in state and local taxes than the wealthy.

ITEP notes that, in addition to exacerbating income inequality, unfair tax systems are unsustainable. When much of the income growth goes to high-income households, state tax systems that rely more heavily on taxing low- and middle-income residents struggle to raise enough revenue to fund their children’s education, parks and public spaces, infrastructure, and other basic services.

Minnesota has taken another path, one that has paid off for the residents of our state and that other states could follow. As Meg Wiehe, deputy director of ITEP and an author of the study notes, “Inequitable state tax systems don’t have to be a foregone conclusion…Tax policy should be used as a tool to help mitigate income disparities rather than to drive a wider divide.”

-Nan Madden

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October economic update shows higher state revenues, but mixed news on economic growth

The recently released October Revenue and Economic Update gave us mixed news about the state’s economic and budget landscape. The quarterly report from Minnesota Management and Budget (MMB) showed that the state revenues have come in higher than anticipated. It also reports that the national economy is expected to grow in the near term, but then that growth will taper off over the next few years.

Some of the top takeaways from the Update include:

1. State revenues for the most recent quarter came in above projections. The state’s revenues for July to September came in $282 million above projections; that’s 5.9 percent more than projected in the state’s February 2018 Economic Forecast. The increase is a result of a variety of factors, including higher income and corporate taxes received, as well as a higher than expected surplus in a state workers’ compensation fund.

2. State revenues for the past fiscal year came in slightly above projections. The state’s revenues for FY 2018, which ended on June 30, came in $376 million above projections, or 1.7 more than was projected in the February forecast.

3. Long-term economic growth is expected to be lower. The national economic forecasters predict stronger national GDP growth for 2018. The October update predicts 2.9 percent growth in 2018, up from the 2.7 percent predicted in February. In 2019, growth is projected to be 2.8 percent, very similar to the 2.7 percent anticipated in February. However, growth is then expected to slow to 1.6 percent by 2021. The slower growth in 2020 and beyond is due to several factors, including the effects of the new tariffs between the U.S. and China.

october-economic-update-gdp

4. National unemployment rate expected to remain low. Nationally, unemployment was 3.7 percent in September, and is expected to drop to 3.5 percent on average in 2019. Job growth has slowed slightly, with the economy adding around 134,000 jobs in September, compared to the average of 200,000 jobs per month earlier this year. This slowdown is expected to be a temporary effect of Hurricane Florence, which hit the Southeast coast in September.

5. Forecasters are fairly confident in their projections. The forecasters assign a 60 percent chance that their baseline forecast is correct. They also give a 25 percent chance for a more pessimistic scenario in which there’s a recession starting next year, and assign a 15 percent probability to a more optimistic scenario.

The next legislative session starts in just a few months, and policymakers will need to put together the state’s next two-year budget. In early December, we’ll see the state’s November Budget and Economic Forecast, which will give us an updated and more complete picture of what resources will be available as policymakers and the public engage in next year’s budget debate.

After the conclusion of this past legislative session, we estimated that the state could expect a surplus of about $300 million for FY 2020-21. The increased revenues measured in this week’s economic update suggest that number could get larger by the time the November economic forecast comes out. However, the lower expected economic growth in the longer term could also dampen future revenues.

-Clark Goldenrod

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Now is the time to say no to a new rule that would increase hardship for New Americans

A proposed federal rule would make it harder for New Americans on their path to citizenship and folks moving to the country to thrive and to fully contribute to our communities. This proposal doesn’t match our Minnesota values, and it is important to make your voice heard.

Today begins a 60-day public comment period on the rule that would greatly expand how “public charge” is determined in the future, and would ultimately harm families trying to put a roof over their head or buy groceries to feed growing kids.

This rule would judge the value of New Americans by how much money they have, rather than how they live their lives and contribute to their communities.

Federal policymakers need to hear from you that this isn’t the direction we want for our country. See our action alert with directions on how to add your voice.

For more details about the proposed rule and the damage it would do, read our earlier blog.

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