The proposed strategies include some of the most effective ways to support economic growth. The Center on Budget and Policy Priorities reinforces in a recent statement:

We need to boost the economy in the short run by enacting legislation that would, for example, extend unemployment insurance benefits and the temporary cut in payroll taxes beyond their scheduled expiration at the end of this year, provide more assistance to states to temper their need to impose more layoffs and cut more spending to balance their budgets, and create programs that would put people back to work on projects such as renovating and modernizing America’s schools. Such temporary policies would help boost growth and employment now without adding significantly to long-term deficits and debt.

Some of the main components of the bill, and the impact on Minnesota estimated by the Administration, are:

Tax cuts for employers

• Payroll taxes would be cut in half for employers’ first $5 million in wages. In Minnesota, an estimated 120,000 employers would benefit from this cut.
• Employers who increased their payroll (by adding new workers or increasing the wages of current workers) would pay no payroll taxes on up to $50 million of the increased payroll.
• Employers would receive tax credits of $5,600 to $9,600 for hiring unemployed veterans, and a $4,000 tax credit for hiring long-term unemployed workers.

Infrastructure investments

• The bill invests $50 billion in highways, transit, rail and aviation. The highway and transit portion alone would provide an estimated $608 million in Minnesota and support a minimum of approximately 7,900 jobs.
• Layoffs of up to 280,000 teachers nationwide would be prevented. The bill would also support hiring thousands more teachers and keep police and firefighters on the job. Minnesota would receive an estimated $504 million. These funds would support up to 6,900 teacher and first responder jobs.
• At least 35,000 public schools nationwide would benefit from school infrastructure investments. Minnesota’s share totals $275 million and would support up to 3,600 jobs.
• Hundreds of thousands of vacant and foreclosed homes and businesses would be rehabilitated. Minnesota could receive approximately $101 million, and could apply for more through a competitive bidding process.
• Facilities at community colleges would be modernized. Minnesota could receive $88 million.

Pathways back to work

• The Unemployment Insurance (UI) system would be reformed to help the long-term unemployed transition back to work. An estimated 71,000 Minnesotans are among the nation’s long-term unemployed.
• Unemployment Insurance benefits would be extended, preventing at least 13,400 unemployed Minnesotans from losing their benefits during the first six weeks.
• Low-income youth and adults would access work opportunities or obtain job training in growth industries through the Pathways Back to Work Fund. This could place 6,500 Minnesota youth and 1,700 Minnesota adults in new jobs.
• Hiring discrimination against the unemployed would be prohibited.

Tax cuts for workers

• The payroll tax cut passed in December 2010 would be expanded to cut workers’ payroll taxes in half in 2012. A typical Minnesota household with an income of around $56,000 would receive a tax cut of approximately $1,740.

When releasing the Jobs Act, President Obama emphasized that the bill would not add to the federal deficit. He proposes to pay for the bill through tax changes including new limits on itemized deductions for high-income Americans (individuals with incomes above $200,000 a year and families with incomes above $250,000 a year), by closing tax preferences for the oil and gas industries, and by changing the depreciation rules for corporate aircraft.

While it is highly unlikely that Congress will approve the entire bill, discussions have begun on Capitol Hill to determine whether agreement can be reached to pass parts of the bill. The continuing weak economy and high unemployment increase the pressure on the Administration and Congress to act.

-Steve Francisco

Where does the $1.6 billion improvement come from?

• The February forecast shows that the surplus in the current biennium, FY 2010-11, has grown by $264 million since November, mostly because the implementation of early expansion of Medical Assistance will start on March 1, not January 1 as assumed in the November forecast. That $663 million surplus carries forward and helps reduce the deficit in FY 2012-13.
• Revenues for FY 2012-13 have grown by $887 million since the November forecast. Almost all of that growth is the result of projected increases in the income tax and sales tax.
• There is also a very small net decline – $9 million – in state expenditures for FY 2012-13.

The $5.0 billion deficit in the current biennium equals 13 percent of general fund spending. The state also faces a $4.4 billion deficit for FY 2014-15 – or $7.1 billion with inflation – down from $5.1 billion in the November forecast.

The change in the forecast picture is mostly the result of stronger economic growth stemming from tax and unemployment insurance changes made by the federal government last December. According to state economist Tom Stinson, the changes included:

• A two percentage point reduction in workers’ Social Security payroll tax on the first $106,800 of wages. Nationally, this payroll tax reduction will add $120 billion to workers’ take home pay in 2011, the Center on Budget and Policy Priorities finds. It gets money into the economy quickly by putting it in the hands of those most likely to spend it right away, increasing consumer spending.
• A 13-month extension of federal unemployment insurance benefits.
• An extension of 100 percent bonus depreciation for capital purchases made by businesses through the end of 2011 (and a 50 percent depreciation for purchases in 2012).
• Delaying an increase in the federal capital gains tax rate, keeping it at 15 percent through the end of 2012.

Although the federal tax changes are expected to produce strong economic growth, which has a positive impact on the state’s budget situation, that growth is concentrated in 2011. The February forecast now predicts the national economic growth of 3.2 percent in 2011, up from the 2.3 percent predicted in November. However, predictions for economic growth in 2012 remain the same as in the November Forecast -  just 2.9. The state budget may benefit from a quick jolt of money, but then it’s back to normal growth levels, although from a higher base of revenues.

There is still significant uncertainty in the forecast – which could be good or bad for the state’s budget picture. For example:

• More than one-third of the revenue growth in FY 2012-13 is attributable to projected increases in capital gains collections. This revenue source is notoriously volatile. The forecast acknowledges that projecting “a large increase in revenues from a small portion of the tax base significantly increases the risk associated with this forecast.”
• The forecast was completed before the recent unrest in the Middle East heated up and assumes oil will remain below $100 per barrel through 2013. If the turmoil increases, each $10 a barrel increase in oil could push gas up by 25 cents a gallon. If gas prices hit $5.00 a gallon, it could wipe out all of the positive economic effects of the federal tax cuts. However, if tensions decline, gas prices could actually drop.
• Congress is also facing a showdown on federal budget cuts. A brief federal government shutdown would not have a major impact on Minnesota because the state does not have a large federal workforce. However, a prolonged shutdown could impact the entire national economy and result in slower economic growth. Also, the ultimate outcome of the federal budget debate could mean fewer federal dollars flowing to state and local governments in the future.

Global Insight, the state’s national economic consultant, gives a 65 percent probability that the economy will follow the path predicted in the forecast. There is also a 20 percent chance that the economy will perform better than expected, and a 15 percent probability that economic growth will fall below projections.

In response to the improvements in the forecast, Governor Dayton has already announced that he will drop his proposal of a temporary three percent tax rate for the highest-income households, reduce cuts to the Department of Human Services and restore funding for transit.

As policymakers move forward with deciding how to resolve the state’s $5.0 billion budget deficit, they should remember that the state may be benefiting from a short-term burst in economic growth, but we will not be able to further “grow” our way out of this deficit. As a result, long-term budget solutions need to be on the table – but those solutions need to be smart. As Stinson noted during Monday morning’s press conference, relying heavily on spending reductions would be more damaging to the state’s economic recovery than a comparable increase in taxes.

More information on the forecast is available on the Minnesota Management and Budget website, including slides from this morning’s presentation and the full forecast document (if you have trouble accessing their website due to heavy traffic, you can use this alternative link).

-Christina Wessel

The Governor’s supplemental budget included a package of business tax cuts, including such proposals as a 20 percent corporate tax rate cut, an Angel Investment Credit, expansion of the Research and Development tax credit, and tax incentives to redevelop St. Paul’s Ford plant. In the short term, the proposals have a relatively small price tag – $20 million for the FY 2010-11 biennium, but the costs increase significantly in future years, reaching $322 million in FY 2012-13 and an estimated $800 million in FY 2014-15.

The Minnesota House and Senate tax committees each have crafted proposals they say would spur more investment. Their packages are very similar in content to each other, but differ in the amount and sources of funding.

Both House (HF 2695) and Senate plans (SF 2568) would spend less than the Governor’s proposal. Their bills contain:

• A small business investment credit for early stage capital investments (also called the Angel Investment Credit).
• A refundable historic structure rehabilitation credit.
• Additional flexibility for the city of Bloomington to help redevelop the Mall of America site
• JOBZ-like tax subsidies for the Ford plant in St. Paul (CARZ), provided conditions are met. Those include a pledge by the manufacturer to invest $100 million in plant renovation.
• A voluntary special assessment mechanism for property owners who want to make energy efficiency improvements.
• Numerous tax increment financing proposals, including “compact development districts”.

Both the House and Senate had hoped to pay for the jobs bill by eliminating a dividend deduction on Real Estate Investment Trusts (or REITs). House Tax Chair Ann Lenczewski said legislators hoped it would raise $10 million a year. When the Department of Revenue evaluated it, it generated roughly $1 million a year.

So other funding sources needed to be found.

In the House, Representative Lenczewski first proposed “early conformity” on the expiration of some Bush-era income tax cuts for higher-income households. Accelerating the tax changes by one year would generate $77 million in FY 2011 only. Lenczewski proposed putting that money into a special revenue account and spreading it out–$15.2 million a year for five years–to pay for the job creation programs through FY 2015. Lenczewski said it was not a permanent tax increase but one-time money, and it was revenue neutral. The administration rejected the proposal, calling it a tax increase.

Lenczewski next proposed using money from increased tax compliance, a proposal that eventually passed the committee, despite concerns from the Department of Revenue about whether it would be able to raise the anticipated funds. It will net about $10 million a year for FY 2011-13.

In the Senate, Tax Chair Thomas Bakk proposed eliminating the Political Contribution Refund (PCR) for FY 2012-13 to pay for the bill. The PCR is part of the state’s campaign finance system that provides refunds for small donations to candidates or political parties. The Governor has unalloted it for the FY 2010-11 biennium. Bakk’s plan would have generated $11 million in the next biennium, he said. But he wanted to do a larger package of tax incentives.

In the Senate tax committee, an amendment was passed that took out the cuts to the PCR, but instead eliminated the lower income motor fuels tax credit, which would generate at least $30 million a year for the next three years. This funding made it possible to increase the size of the Angel Investment Credit and Historic Structure Credit.

The lower income motor fuels tax credit was part of the 2008 transportation package. The credit was an effort to offset the regressive nature of the bill’s gas tax increase. Minnesotans can apply for the credit on their income tax forms for the first time this year. The credit is $12.50 for individuals and $25 for families.

Both the House and Senate tax leaders have said through this process that they hoped to agree to a bill in advance, avoid a conference committee and get a proposal the Governor will sign.

At this point, it looks like the House will vote on a smaller jobs bill funded with anticipated revenues from tax compliance efforts, and the Senate will vote on a larger package funded by the elimination of the lower income motor fuels credit. But perhaps ongoing negotiations will bring about a compromise by the Monday floor vote.

While the desire to promote job growth is understandable, the discussion about funding sources highlights the challenge that states face in trying to stimulate the economy through tax provisions. Experts at the Center on Budget and Policy Priorities have outlined the major issues in a recent paper. First, it’s hard to make sure that broad-based reductions in the income or corporate tax, such as proposed by the Governor, have an impact within the state. The tax cuts might be distributed as dividends to shareholders across the country, or held in reserve by the corporation. Second, as we’ve seen in the legislative discussion, because states have to balance their budgets, efforts to provide tax incentives for job creation must be paired with a reduction in spending or an increase in another tax. These actions themselves can have a counter-productive drag on the economy.

Lenczewski’s plan pays for the jobs bill through a one-time tax increase on high-income individuals, a choice that minimizes the drag on the economy.

Bakk acknowledges he doesn’t know if the jobs bill will be successful or not, but he believes the legislature needs to make its best faith effort to spur the economy.

“There might be thousands of jobs in this bill. There might be zero,” Bakk told the Senate Tax Committee. “We can’t sit on our hands and do nothing.”

-Scott Russell

The Governor’s supplemental budget included a package of business tax cuts, including such proposals as a 20 percent corporate tax rate cut, an Angel Investment Credit, expansion of the Research and Development tax credit, and tax incentives to redevelop St. Paul’s Ford plant. In the short term, the proposals have a relatively small price tag – $20 million for the FY 2010-11 biennium, but the costs increase significantly in future years, reaching $322 million in FY 2012-13 and an estimated $800 million in FY 2014-15.

The Minnesota House and Senate tax committees each have crafted proposals they say would spur more investment. Their packages are very similar in content to each other, but differ in the amount and sources of funding.

Both House (HF 2695) and Senate plans (SF 2568) would spend less than the Governor’s proposal. Their bills contain:

• A small business investment credit for early stage capital investments (also called the Angel Investment Credit).
• A refundable historic structure rehabilitation credit.
• Additional flexibility for the city of Bloomington to help redevelop the Mall of America site
• JOBZ-like tax subsidies for the Ford plant in St. Paul (CARZ), provided conditions are met. Those include a pledge by the manufacturer to invest $100 million in plant renovation.
• A voluntary special assessment mechanism for property owners who want to make energy efficiency improvements.
• Numerous tax increment financing proposals, including “compact development districts”.

Both the House and Senate had hoped to pay for the jobs bill by eliminating a dividend deduction on Real Estate Investment Trusts (or REITs). House Tax Chair Ann Lenczewski said legislators hoped it would raise $10 million a year. When the Department of Revenue evaluated it, it generated roughly $1 million a year.

So other funding sources needed to be found.

In the House, Representative Lenczewski first proposed “early conformity” on the expiration of some Bush-era income tax cuts for higher-income households. Accelerating the tax changes by one year would generate $77 million in FY 2011 only. Lenczewski proposed putting that money into a special revenue account and spreading it out–$15.2 million a year for five years–to pay for the job creation programs through FY 2015. Lenczewski said it was not a permanent tax increase but one-time money, and it was revenue neutral. The administration rejected the proposal, calling it a tax increase.

Lenczewski next proposed using money from increased tax compliance, a proposal that eventually passed the committee, despite concerns from the Department of Revenue about whether it would be able to raise the anticipated funds. It will net about $10 million a year for FY 2011-13.

In the Senate, Tax Chair Thomas Bakk proposed eliminating the Political Contribution Refund (PCR) for FY 2012-13 to pay for the bill. The PCR is part of the state’s campaign finance system that provides refunds for small donations to candidates or political parties. The Governor has unalloted it for the FY 2010-11 biennium. Bakk’s plan would have generated $11 million in the next biennium, he said. But he wanted to do a larger package of tax incentives.

In the Senate tax committee, an amendment was passed that took out the cuts to the PCR, but instead eliminated the lower income motor fuels tax credit, which would generate at least $30 million a year for the next three years. This funding made it possible to increase the size of the Angel Investment Credit and Historic Structure Credit.

The lower income motor fuels tax credit was part of the 2008 transportation package. The credit was an effort to offset the regressive nature of the bill’s gas tax increase. Minnesotans can apply for the credit on their income tax forms for the first time this year. The credit is $12.50 for individuals and $25 for families.

Both the House and Senate tax leaders have said through this process that they hoped to agree to a bill in advance, avoid a conference committee and get a proposal the Governor will sign.

At this point, it looks like the House will vote on a smaller jobs bill funded with anticipated revenues from tax compliance efforts, and the Senate will vote on a larger package funded by the elimination of the lower income motor fuels credit. But perhaps ongoing negotiations will bring about a compromise by the Monday floor vote.

While the desire to promote job growth is understandable, the discussion about funding sources highlights the challenge that states face in trying to stimulate the economy through tax provisions. Experts at the Center on Budget and Policy Priorities have outlined the major issues in a recent paper. First, it’s hard to make sure that broad-based reductions in the income or corporate tax, such as proposed by the Governor, have an impact within the state. The tax cuts might be distributed as dividends to shareholders across the country, or held in reserve by the corporation. Second, as we’ve seen in the legislative discussion, because states have to balance their budgets, efforts to provide tax incentives for job creation must be paired with a reduction in spending or an increase in another tax. These actions themselves can have a counter-productive drag on the economy.

Lenczewski’s plan pays for the jobs bill through a one-time tax increase on high-income individuals, a choice that minimizes the drag on the economy.

Bakk acknowledges he doesn’t know if the jobs bill will be successful or not, but he believes the legislature needs to make its best faith effort to spur the economy.

“There might be thousands of jobs in this bill. There might be zero,” Bakk told the Senate Tax Committee. “We can’t sit on our hands and do nothing.”

-Scott Russell

A major element of the legislation is that it institutes a cap-and-trade system which will set a limit on the amount of greenhouse gases that businesses are allowed to emit, creating emissions allowances. The bill uses revenues from the sale of 15 percent of the emissions allowances to directly reimburse lowest-income households for their increased expenses as prices for energy and energy-intensive goods are expected to rise.

This relief would be provided on a monthly basis to the lowest-income 20 percent of the population, or roughly those below 150 percent of the poverty line, through an existing mechanism known as an Electronic Benefit Transfer (EBT). A small amount of additional relief is provided through an expansion of the Earned Income Tax Credit (EITC) for low-income workers without children, a group that is difficult to reach through the EBT system. You can learn more about how low-income households would benefit from the bill in a new report from the Center for Budget and Policy Priorities, “How Low-Income Consumers Fare in the House Climate Bill.”

There are many elements of the current legislation that are strong positives for low-income communities. This act will make strides in cleaning up the air to create healthier low-income communities, and it will do so without harm to the budgets of the lowest-income households. It also provides for new economic opportunities such as green jobs and increased funds for weatherization programs.

There are many vocal opponents of this legislation, so it is important that the Minnesota members of Congress that voted for H.R. 2454 (Reps. Ellison, McCollum, Oberstar, Peterson and Walz) hear from low-income advocates thanking them for their support. Find out more about how to contact your representative and please call today.

However, as action on the bill shifts to the U.S. Senate, there are some elements of the bill that we believe can be improved:

• Consumer relief in the House bill phases out completely at 160 percent of the poverty line (about $35,000 for a family of four). We urge the Senate to extend relief to all moderate-income families.
• In the House bill, relief is provided based on what the Energy Department calculates as a household’s average reduction in purchasing power. Given the high heating costs in our state, some Minnesota families will face higher than average reduction in purchasing power if energy costs increase. Funds should be allocated to the existing Low-Income Home Energy Assistance Program (LIHEAP) which provides assistance to low-income consumers who face utility shut-offs or other hardships.

You can learn more about our position on how to improve the bill in the Senate by reading “American Clean Energy and Security Act: Impact on Low- and Moderate-Income Minnesotans.” The Senate is expected to take action on this bill in September.

-Leah Gardner

Obviously, there is an urgent need to find ways to limit greenhouse gas emissions. However, we should be careful to protect low and moderate-income consumers from the potential burden of higher energy prices. For those in the lowest income quintile with an average annual income of below $27,500, even a 15% reduction in emissions could cost an average of $750 in increased energy costs.

The good news is we can both decrease greenhouse gas emissions and protect vulnerable consumers.

The Center on Budget and Policy Priorities, for example, recently recommended one option: a “climate rebate.” A climate rebate can be funded with revenues raised from auctioning off emissions allowances. For low-income families, the rebate can be distributed using existing systems including the Electronic Benefit Transfer (EBT) systems and the Earned Income Tax Credit (EITC). For middle-income families, a climate tax credit would be a more appropriate vehicle.

Of course, there are also other options. The key, however, is that we must auction allowances to raise revenues to help mitigate the financial impact on low- and moderate-income families. If we just give those allowances away to the pollution-generating businesses, we won’t have the resources to help.

The debate on cap-and-trade policy is really heating up, so it is important for people who are concerned about low- and moderate-income families to start taking notice and start actively supporting greenhouse gas policies that will both protect the environment and protect vulnerable families.

You can contact me for more information at 651-757-3063 or leah@mncn.org.

-Leah Gardner

First, two items to highlight:

Low-income motor fuels tax credit. The bill provides a $25 refundable income tax credit for individuals and families in the state’s lowest income tax bracket (in 2009, income limits are estimated to be $32,720 of taxable income for married filing jointly and $22,390 for single filers). The House also added an amendment that requires individuals to be a U.S. citizen or lawfully present in the US in order to be eligible for the credit. Since the gas tax is regressive, we think it’s a positive sign that policymakers included a mechanism to try to lessen the impact on low-income families.

Dedication of motor vehicle lease sales tax adds to General Fund deficit. The bill increases the fee on vehicle rentals and short-term leases from 3 to 5 percent of the sales price. Revenue from this sales tax is gradually redirected away from the general fund - first to pay for the low-income tax credit, and the remainder to transit, roads and streets. With the state facing a $935 million deficit, it’s unfortunate that the funds to pay for the low-income credit come at the expense of the general fund - the total loss to the general fund will be about $68 million in the 2010-11 biennium.

The other provisions:

Gas tax. A 2 cent increase in the gas tax is effective April 1 and another 3 cent increase is effective October 1. There is also a gas tax surcharge to pay back trunk highway bonds. This will phase in starting on August 1 with a half cent, increasing up to a cap of 3.5 cents.

Motor vehicle registration. The bill eliminates the cap on the motor vehicle registration tax (“tabs”), but accelerates the depreciation schedule. People will not see an increase in their tabs on their previously registered vehicles.

Local option sales tax. Allows counties in the seven-county metropolitan area to impose a 0.25 percent sales tax and a $20 excise tax on vehicles sales. No referendum is required and the funds are directed to transit projects. In Greater Minnesota, counties could impose a tax of up to 0.5 percent and a $20 excise tax on vehicles sales. The increase would require a voter referendum and funds would go to a specific project.

-Christina Wessel

I’ve been tracking the transportation bill through the House (HF 2800) and Senate (SF 2521). This isn’t a comprehensive analysis, but here are the major revenue components which together would raise several hundred million dollars each year for our state’s transportation needs:

• A 2 cent increase in the gas tax effective (roughly) the first day of the month after enactment and another 3 cent increase as of September 1, 2008.
• A surcharge on the gas tax (capped at 3.5 cents) to recover debt service needed to repay trunk highway bonds.
• Eliminates the cap on the motor vehicle registration tax, but accelerates the depreciation schedule. People will not see an increase in their tabs on their previously registered vehicles.
• Provides a $25 refundable income tax credit for individuals and families in the state’s lowest income tax bracket (in 2009 income limits are estimated to be $32,720 of taxable income for married filing jointly and $22,390 for single filers).
• Increases the fee on vehicle rentals and short-term leases from 3 to 5 percent of sales price. Gradually redirects the motor vehicle lease sales tax away from the General Fund. The funds are first used to pay for the low-income tax credit, then the remainder is distributed with 50% going to Greater Minnesota transit, 25% to metro area transit, 17.25% to county state-aid highway fund and 7.75% to municipal state-aid street fund.
• Allows counties in the metropolitan transportation area (I think potentially 18 counties) to opt-in by resolution of the county board to a half-cent sales tax increase and an excise tax of $20 per vehicle (decreases to 0.25% after June 30, 2028). The funds would be used 50% for transit, 25% for trunk highways or local roads of regional significance and the remaining for any purpose (including up to 5% for pedestrian programs, bicycle programs and pathways). This provision will expire October 2, 2008 unless at least one county in the 7-county metro area imposes the tax.
• Allows any county outside of the metropolitan transportation area to impose the half-cent sales tax and $20 motor vehicle excise tax if approved at a general election referendum. The funds raised would be dedicated exclusively to covering the costs of a specific transportation project or improvement and the tax would terminate oncde the project was completed. (The Senate amended the bill this morning to say “up to” a half-cent tax increase.)

The bill also originally indexed the gas tax to inflation beginning July 1, 2010, but this provision was removed as part of a compromise.

-Christina Wessel