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Senate passes care workers unionization bill; House vote expected Saturday

May 15, 2013 by seanolsen 2 Comments

The Minnesota State Senate voted 35-32 today to pass S.F. 778, which would enable independent day care operators and personal care attendants who serve customers that receive state subsidies to organize unions.  All Republicans in the chamber, including Sen. Julianne Ortman of Chanhassen, voted against the bill as did four DFL Senators (Terri Bonoff of Minnetonka, Melisa Franzen of Edina,  Greg Clausen of Apple Valley, and Bev Scalze of Little Canada).  The bill now moves to the House; which is expected to take up the bill on Saturday.  It appears that there are sufficient votes in the House to pass the bill, which Governor Mark Dayton has indicted he would sign.

Republicans in the Senate subjected the bill to 17 hours of debate, reflecting the highly controversial nature of the bill.  Unionization of such persons would be a different model than the traditional form of labor union, where employees organize and collectively bargain with their employers.  If the union were to be approved in this case, independent day care operators and personal care attendants — who generally function as small businesses of their own or independent contractors — would have a union to work on their behalf in St. Paul, bargaining with state agencies on work rules and regulations and lobbying legislators on reimbursement rates.  Care workers who provide services to clients that receive state subsidies but who vote against the union would be subject to “fair share” dues to cover a portion of the costs of the union’s representation as they would benefit from whatever changes the union negotiates.

Republicans have objected to the redefinition of the traditional union relationship introduced by this bill.  Additionally, they point out that in some cases AFSCME Council 5 — which is seeking to represent the day care workers — would end up negotiating with other AFSCME employees over work rules.

These are indeed valid concerns — and that’s coming from someone who generally finds themselves in labor’s camp on these sorts of issues.  The much-derided federal Employee Free Choice Act had a number of good reforms in it, for instance — such as equalizing the standards for certifying and decertifying unions and improving enforcement of certification elections.

But S.F. 778 feels like a step too far.

That’s not to say, though, that independent day care operators and personal care attendants don’t have valid concerns.  Day care subsidies were cut by 2% in the last budget cycle, passing increased bills to strapped working class families and forcing hard decisions on providers of day care services.  Personal care attendants, meanwhile, are besieged by low pay, long hours, and physically demanding work.  They deserve better from state government than what they have received in recent years.

DFL majorities in the Legislature should focus on passing those reforms into law this session as opposed to passing a bill that looks like political payback.  There’s no reason that we can’t increase reimbursement rates and address a number of the work rule issues that would be of great benefit to these vital workers.  And if Republicans come back in the future and want to undo those changes, it shouldn’t be politically difficult to hammer them for it.

[Picture is S.F. 778 author Sandy Pappas.]

Economy, Legislative Watch, State, State Legislature
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Rep. Ernie Leidiger

Leidiger goes “nucular” over House energy bill

May 10, 2013 by seanolsen 6 Comments

It’s been a fairly quiet session for State Rep. Ernie Leidiger thus far.  Being in the legislative minority has limited his already meager ability to shape legislation.  He’s chief authored just three bills so far (all transportation-related) — only 15 House members have been less ambitious — and has kept a low profile this session with no Bradlee Dean sightings or campaign finance kerfuffles.

Tuesday night, the House debated H.F. 956, the omnibus energy bill.  The key point of contention in the bill was an ambitious solar energy mandate included in the bill.  Under the terms of the bill, investor-owned utilities (Xcel Energy, Minnesota Power, Otter Tail Power and Interstate Power & Light) would be required to produce 4% of their electricity via solar by 2025 on top of the existing renewable energy mandates.  Cooperatives and municipal utilities would be exempted from this requirement.  Additionally, investor-owned utilities would be required to subsidize solar installations for residential and commercial customers.  Mining companies and paper mills receive protection from potential rate increases that would result from the mandate, and the bill would continue and expand incentives for solar equipment manufacturers in the state.

There’s a lot to chew on in those provisions.  Very real questions can be raised about the necessity of setting a mandate for solar, when the state is currently in the midst of a boom in wind production (up to 14% of the state’s electricity in 2012) and the reality that such a solar mandate may be quite costly for utilities to comply with.  Adding a 4% solar requirement on top of an increase in the  existing renewable energy standard from 25% to 40% would give Minnesota the highest renewable and solar energy mandates in the nation at 44% in total.

As an aside, the Senate version of the bill, S.F. 901, had a much smaller (and in my opinion, more responsible) set of provisions related to solar energy.  The mandate in the Senate bill was only 1%, and it removed the requirement that utilities subsidize solar installations.  Unfortunately, the House bill was chosen by DFL leadership as the baseline version of the final omnibus bill.  The House bill deserved a no vote, in my opinion, based on the solar mandate issue.

So there’s a lot in this bill that could be criticized.  Of the many provisions listed above, which does Leidiger choose to criticize?  Well, none of them, exactly.  Check the video out for yourself (the video will jump to the start of Leidiger’s speech, nearly six hours into debate on the bill):

First off, let’s get Leidiger’s charming Bush-like pronunciation of the word nuclear as “nucular” noted for the record. (Sometimes, a word really is pronounced the way it is spelled.)  It’s also telling that Leidiger’s rant is met midway through by chuckles.  Even Rep. Mary Franson, who enjoys a good rant as much as anyone in the House, appears to go from mild bemusement to indifference to apparently checking her e-mail.

Next, let’s talk about some of Rep. Leidiger’s facts.  Leidiger is certainly correct that China has been building nuclear power plants in the last decade, and is continuing to construct them (although scaled back significantly since the Fukushima reactor issue in Japan).  However, to imply that nuclear is the core of China’s “baseline power” isn’t true.  Nuclear power only represents 1% of China’s electric production today, and will only represent 6% by 2020.  However, the growth in nuclear is only half of that expected in renewable energy in China.  Wind power in China is booming — to the extent that today wind power in China produces more power than nuclear — and that trend is expected to continue.

energy

It should be pointed out that both Minnesota and the United States are currently and will continue to be larger users of nuclear power than the Chinese.  It’s not clear, and Leidiger certainly doesn’t specify, what it is exactly about Minnesota solar mandates and the Chinese construction of nuclear power plants that constitutes the threat to our national security.

Is it the fact that China is the leading manufacturer of solar panels?  If Chinese manufacturing is now a source of national security distress, we’re in a whole world of hurt.  The fact of the matter is that both political parties in this country have largely backed trade and economic policies that have encouraged the off-shoring of American manufacturing jobs — prioritizing the ability to buy low-priced products made elsewhere (like from — ahem — certain office furniture companies) and breaking the power of organized labor ahead of nurturing solid middle-class jobs and promoting critical industries.

And let’s not forget that Leidiger in the past has criticized government programs like the stimulus that sought to boost the American solar industry.  Neither Leidiger nor his party (nor Democrats, for that matter) have produced any meaningful reforms designed to reverse those trends.  The horse has left the barn on this issue, sadly.

Besides, dependence on foreign oil has proven to already be a national security risk.  Yet, Leidiger and his cohorts want us to continue on the fossil fuel bandwagon, despite the potential domestic drilling areas like ANWR  aren’t going to be long-term solutions to the problem.

Or maybe that’s not what he’s getting at.  The argument in its totality makes about as much sense as pronouncing nuclear as “nucular”. If you can figure out what Ernie’s talking about, let me know in the comments.

[h/t to the anonymous tipster who alerted me to Leidiger's speech]

Carver County, Economy, Legislative Watch, State, State Legislature
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certainty

Which tax provisions will survive?

April 30, 2013 by seanolsen 2 Comments

Yesterday, after an inexplicable and embarrassing false start, the Minnesota State Senate passed its version of the omnibus tax bill.  The bill now moves to conference committee where it will be reconciled against the House’s version of the bill as well as Governor Mark Dayton’s budget proposal.  This may prove to be more work than expected, given that all three parties in the negotiations are DFL-controlled.

On a net basis (tax increases less new aids and credits), all three proposals raise between $1.5 and $1.7 billion dollars, but they get there in notably different ways:

1415summary

Let’s dig into the details.  Here are some of the key provisions in each plan:

1415details

Some elements should come together pretty quickly:  increasing LGA, increases to tobacco taxes, and reduction/removal of corporate exemptions for foreign source royalties and operating companies.

Other pieces are going to be more difficult.  House DFLers have committed themselves to paying off the remaining K-12 funding shift this session.  The temporary 4% surcharge on income is designed to get them to that point, raising $1.2 billion on its own.  However, both Dayton and Senate Democrats have listed the surcharge as not acceptable, and neither of them make any moves towards paying off the shift in their proposals.

Meanwhile, the Senate has stayed committed to advancing sales tax reform — proposing an expansion in goods and services subject to taxation while lowering the rate to 6% — while Dayton (in his updated budget) and House DFLers have stayed away from such proposals.

House DFLers have also advanced an increase in alcohol taxes that has run into substantial controversy.  Neither Dayton nor the Senate have embraced such a proposal.

So how do we get to a final bill?  Well, as it turns out, much of the Governor’s proposal ends up serving as a middle ground between the legislative proposals.  Dayton’s income tax rate increase on the wealthy touches a smaller group of taxpayers than the Senate version, which may be acceptable to the House.  But in order to get the House on board, Dayton and the Senate are going to have to make a significant move towards paying back the school shift.  How to do that?  By adopting the Senate’s cigarette tax revenue plan or the House’s plan which includes alcohol tax increases.  The House is likely also going to have to scale back (or eliminate) their property tax reforms.  Taking those steps should be able to ensure that at least half of the remaining shift is paid off.

With less than three weeks remaining in the legislative session, DFLers haven’t given themselves much time to hash through these issues, given the fragile nature of the coalitions they have had to put together to get these bills through the respective chambers.  It will be interesting to watch and see how the negotiations unfold.

Economy, Legislative Watch, State, State Legislature, Taxes
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carvergop

To the Woodshed We Go

April 10, 2013 by seanolsen 21 Comments

 

Sometimes, it’s not just the weather that makes you cranky.  Sometimes, it’s the politicians that drive you nuts.  Let’s take some folks out to the woodshed for some well-deserved constructive criticism.

Legislative Republicans:  For Digging the Hole Even Deeper

A few days ago, we talked about how Legislative Republicans were engaging in some rather remarkable rhetoric about the state budget — and that their promises were unlikely to add up unless they introduced substantial cuts to all areas of the budget outside of K-12 education and health and human services.  Well, yesterday, it got worse.  House DFLers introduced their K-12 education bill, and Republicans (Rep. Kelby Woodard again) added to their audacious promises.  Already faced with the prospect of coming up with nearly $1.5 billion in cuts, Woodard signed the GOP up for a 2% increase in the basic formula ($300 million) and fixing the special education funding gap (another $475 million on top of the DFL proposal).  Doing all of what Woodard and the GOP claim can be done with “existing resources” would now take over $2 billion in cuts to other areas of the budget, or nearly a 20% across-the-board cut.  Again, remember these numbers the next time a Republican legislator bloviates about how everything can be done with “existing resources” without offering any details of how they would make it happen.

Governor Mark Dayton and House DFLers:  For Bonding Bills That Need Some Changes

This week, Governor Mark Dayton and the House DFL caucus released their proposals for odd-year bonding packages.  Such requests are somewhat uncommon, as bonding is usually done in even years only, although additional bonding has become a frequent point of negotiation during budget stalemates in recent years.  While I agree with DFL logic that we should take advantage of low interest rates to invest in infrastructure, an odd-year bonding package should imply that we’re doing some special things here.  Too much of both proposals is taken up with the same old local projects (many of which have been already rejected in previous cycles), which can easily wait for inclusion in the usual even-year bonding package.  The House bill has some stronger elements to it — particularly its increased emphasis on transportation and higher education projects.

It’s also inconceivable to me that you can have two $800 million bonding bills, none of which make any commitment to the Mayo Clinic “Destination Medical Center” proposal.  As a state, we have an opportunity to support nearly $6 billion in private investment in the state with a maximum of $585 million in infrastructure improvements.  We should be jumping at this opportunity to help create thousands of long-term, good-paying jobs in Southern Minnesota by including a substantial investment towards this project (between $75 and $150 million as called for in the stand-alone legislation).

I’d like to see a more focused bonding bill that focuses on transportation, higher education, State Capitol renovation, and the Mayo project — less expensive and more appropriate for an odd-year bonding package.

While we’re at it, let’s also deliver a kick-in-the-pants to the Democratic majorities in the Legislature for the leisurely pace of their budget bills so far.  Last session, the Republican majorities had already passed through the first version of all the budget proposals by this point (to be fair, they then languished for a long time in conference committee before coming back for final approval).  It’s time to shift the budget process into a higher gear, folks.

Minnesota Vikings Stadium Supporters:  For Not Facing Reality

Here’s another issue where on the merits, Governor Mark Dayton and other Minnesota Vikings stadium supporters are right.  In the whole scheme of things, the shortfall in e-pulltab revenues is a problem, but not a crisis.  And stadium opponents are indeed grandstanding (here’s looking at you, Sen. Sean Nienow).  But, guess what?  This problem was foreseeable at the start — maybe not to this extent — but it was hardly a secret that there were serious concerns over the revenue projections.  If you want to shut Nienow and the like up, the answer is simple:  fix the bill and put in place a better backup plan.  Trying to wait this thing out in the hopes the revenue situation will improve is only going to make this issue grow and grow and grow.

It would also help matters if the Legislative Commission on Minnesota Sports Facilities, which will have oversight of the Minnesota Sports Facilities Authority budget was more balanced from an ideological perspective.  Of the 12 members, 10 voted for the stadium bill, one voted against (Rep. Jim Davnie) and one is a freshman (Sen. Karin Housley).  Having some legislators with a more skeptical eye would be useful to the process.

Carver County GOP:  For Wallowing in Sleaze and Extremism

Our good friends over at the Carver County GOP have taken to the Twitter.  So far, they’ve managed to find links to just about every cheap and baseless conspiracy theory out there.  Here are a few examples:

https://twitter.com/CarverCountyGOP/status/322030260839399427

https://twitter.com/CarverCountyGOP/status/321955142683480064

https://twitter.com/CarverCountyGOP/status/321824613673889792

One would have thought that official Republican party bodies would have given up birtherism and bogus voter fraud nonsense by now, but I guess not.  But if tinfoil hats are your thing, you should follow them.

Carver County, Economy, Legislative Watch, Schools, State, State Legislature, Taxes
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woodard

GOP’s phony baloney budget math

April 5, 2013 by seanolsen 3 Comments

Two weeks ago, DFL leaders in the House and Senate released their budget targets, and we should be seeing the specific budget bills in each area shortly (in fact, they are overdue at this point).  Like Governor Mark Dayton’s budget proposal, the legislative budgets each total around $38 billion.

The House budget prioritizes paying back the school shift (accomplished with a blink-on income tax surcharge on top of the new fourth bracket for high-income earners) and property tax relief (an additional $250 million in local government aid).

The Senate budget, like the Governor’s, leaves the school shift untouched — which would keep the current law of any surpluses going to pay down the shift — and prioritizes property tax relief and economic development.

Both legislative budgets contained a surprise, though, as they each sliced $150 million from the forecast spending in health and human services.  Coming after a $1.2 billion cut in the last budget cycle and Dayton’s proposal to raise HHS spending by $128 million, it was a shock to many — including Republicans who have criticized those cuts.

There’s only one part of government where people could die and that’s in our area where the people with disabilities and health care and rural hospitals. I was just really surprised. Nobody saw that coming. — Rep. Jim Abeler (R-Anoka)

While politically convenient to attack DFL cuts to HHS, it makes the budget math for Republicans that much harder.  Republicans have rhetorically committed themselves towards paying back the school shift this session.

We should pay the entire shift back right now. – Rep. Kelby Woodard (R-Belle Plaine)

Before any changes to current law, the state finds itself with a $627 million deficit.  The remaining school shift is $850 million.  That’s a total of $1.477 billion that has to be found — without raising taxes.  Yet, Republicans have boxed themselves in by essentially taking K-12 and HHS off the table.  Those two areas of the budget represent $26.5 billion of the $36.7 billion in forecast spending for the next biennium.

Which means that those remaining areas of the budget would face the equivalent of a 12.5% across the board cut in order to balance the budget.  That includes higher education, public safety, transportation, economic development, and veterans programs.  Some of these programs have already taken severe cuts in previous budget cycles.

Does that sound sustainable or realistic?  Of course not.

But since Republicans are refusing to put forward their own budget proposal, they are attempting to fly free on their phony baloney budget assertions that we can hold taxes steady and cut our way to prosperity.  And they’re trying to avoid having to answer for the cuts that would be required to make their budget math add up.

So the next time your local Republican legislator tries to pass off that spin, ask them for the details of how they make the math work.  Just don’t hold your breath waiting for an answer.

[Picture is of Rep. Kelby Woodard]

Economy, Legislative Watch, Schools, State, State Legislature, Taxes
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official_dayton

Dayton rolls out revised budget plan

March 14, 2013 by seanolsen 6 Comments

Governor Mark Dayton rolled out his revised budget plan today, reflecting adjustments required after the February forecast trimmed the projected 2014-2015 budget deficit from $1.1 billion to $627 million.

Here are the key changes in the proposal compared to Dayton’s original budget:

  • All sales tax reform is removed from the budget:  no business sales tax expansion, no expansion of consumer sales taxes to services, and no reduction in the sales tax rate.
  • The $500 property tax refund has been removed, although Dayton does invest an additional $18 million in increasing the pool for the renter’s property tax refund.
  • The cut in the corporate income tax rate has been removed, but changes to eliminate tax breaks for foreign operating companies and foreign royalty payments remain in the budget, raising about $370 million.
  • The proposed school shift payback in 2016-2017 has been removed from the budget.  Dayton would continue with current law, paying back the remaining shift as surpluses come in.

Dayton’s spending plan remains essentially unchanged from his original proposal.

Legislative reaction fell as expected along party lines.  Democrats, many of whom were wary of Dayton’s business sales tax proposals, were more positive about this budget.

“For too long we have seen our budget deficits resolved by deep cuts to the middle class and one-time fixes,” said House Speaker Paul Thissen. “That approach has only given us more deficits, higher property taxes, and larger classroom sizes. It is high time we reject the status quo and build a budget that positions our state to thrive in the future.” (via kare11.com)

One point of contention among DFLers is likely to be Dayton’s failure to address the school shift.  Expect a DFL legislative budget that includes a partial shift payback.

Republicans, meanwhile, continue to call for the budget deficit to be closed by reducing spending.

“I think it’s time for the people of Minnesota to weigh in on all of the taxes and just ask the question, do you need high taxes to grow the economy? We don’t believe so,” said Senate Minority Leader David Hann, R- Eden Prairie. (via MPR)

GOP legislators have yet to introduce a budget proposal of their own, continuing a regrettable trend of legislative minorities choosing to complain from the sidelines instead of producing something that can be matched up side-by-side.

Economy, Legislative Watch, Schools, State, State Legislature, Taxes
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Rep. Ernie Leidiger

Highway 212 expansion bill introduced and other happenings

March 4, 2013 by seanolsen 1 Comment

Here’s a roundup of some of the happenings around the area:

  • A bill has been introduced in the State Legislature (chief authored in the House by Rep. Ernie Leidiger and in the Senate by Sen. Julianne Ortman) to expand U.S. Highway 212 to four lanes from Jonathan Carver Parkway to County Road 43 in Dahlgren Township.  Also included in the bill is $8 million for construction of an interchange at US-212 and County Road 140 in Southwest Chaska.  This bill would be a critical next step in making sure that US-212 is built out to four lanes to Norwood-Young America.  Additionally, the CR-140 interchange is critical to the success of the Southwest Chaska Master Plan recently ratified by the City Council.  This is a good bill and I hope it will be included in the omnibus transportation package this year.
  • State Representative Joe Hoppe submitted his year-end campaign finance report on February 25, some three-and-one-half weeks late.  Of note in Hoppe’s report is that he collected over $1,700 in “special source” funding in 2012 that he was forced to return.  ”Special sources” include lobbyists, political party units, and political action committees.  Additionally, Hoppe’s penchant for filing late in 2012 cost him over $2,600 in late fees with the Campaign Finance and Public Disclosure Board.  Some fiscal responsibility…
  • The City of Chaska City Council meeting tonight has been cancelled.
  • The Chaska Hawks girls basketball team (ranked #7 in Class AAA) will play Richfield (ranked #2 in Class AAA) on Thursday night with a berth in the State Tournament on the line.  The Hawks romped past Benilde-St. Margaret 69-41 on Saturday to reach the section final.  The game will be at 7 p.m. at Minnetonka High School.
  • On the Chaska restaurant front, Dickey’s Barbecue Pit is open in Chaska Commons, while downtown’s Egg & Pie Diner is headed for a mid-March opening.  Construction is also underway at the future location of BullChicks in Chaska Commons.
Carver County, Chaska, City Council, Downtown Issues, Economy, Legislative Watch, State, State Legislature, Transportation
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dollar

After the Forecast: Adjusting the Brick City Budget

February 28, 2013 by seanolsen 10 Comments

Yesterday’s release of the state’s February Economic Forecast provided a dose of good news regarding our budget scenario, trimming $463 million off of the projected deficit for 2014-15.  While Governor Mark Dayton has indicated he will release his updated budget proposal the week of March 11, I’ve made changes to my original “Plan C“, and I’ve detailed them below.

Recall that what I was trying to accomplish with my proposal were the following things:

  • Minimize middle-class impacts as it relates to sales tax changes
  • Make a meaningful payment towards the remaining K-12 school funding shifts
  • Minimize negative impacts that come with expansion of sales taxes to B2B services

Having a $627 budget deficit instead of $1.1 billion makes it significantly easier to close the budget gap while accomplishing the three goals from above.

Let’s talk about the adjustments I make on the revenue side first.  My total revenue increase has been cut by over 40%, made up of the following components that have changed:

  • Business sales taxes are eliminated in this proposal
  • The new fourth bracket for high income individual income taxpayers is pared back by 25%
  • Sales tax rates are lowered to 6.25%, and consumer services are added to the sales tax base.
  • Income tax cuts for the lowest two brackets are implemented, meaning all married couples filing jointly will get a tax cut on their first $135,000 of income.

Combined, the last two bullet points are revenue-neutral and designed to minimize impact of the sales tax base expansion on lower and middle-income taxpayers.

Similarly, I pare back spending increases by a similar percentage.  While I tend to agree with politicians who point out the need for investment in critical areas of our budget like education, transportation, and health care, it’s not politically or financially prudent to propose tax and spending increases of the scope found in Governor Dayton’s budget given the smaller deficit we now face.  There needs to be balance, and a recognition that moving too fast to increase taxes and spending in a still-fragile recovery may not produce the anticipated results.

  • K-12 education sees an increase in spending of $380 million over the current forecast, made up of a $200 million partial repayment of the remaining funding shift, $50 million to fund optional all-day kindergarten, $44 million to expand early childhood programs, and $84 million in increased special education.
  • $80 million in increased higher education funding directed towards expanding grant programs to make college tuition more affordable
  • Dayton’s metro area transit sales tax plan is kept in place, which shifts some transportation funding out of the general fund budget

Here’s how it all breaks down:

brickcitybudgetfebupdate

What are your thoughts?  Let me know in the comments.

Economy, Legislative Watch, State, State Legislature, Taxes
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official_dayton

Budget picture brightens; projected deficit down to $627 million

February 28, 2013 by seanolsen 4 Comments

The updated state budget forecast was released today, and it contains some good news.    The projected budget deficit for 2014-15 has fallen by $463 million to $627 million.

Of the $463 million improvement, $323 million reflects increased revenues.  Most of the revenue increase comes in individual and corporate income taxes and is primarily a result of changes in Minnesota law passed earlier this month conforming state tax law with federal tax law.  On the spending side, the early opt-in to the Medicaid expansion as part of the Affordable Care Act continues to pay dividends for the state, as projected spending on these programs is projected to drop $64 million from the previous forecast.

The $627 million deficit figure does not include inflation on the spending side of the equation.  Projected inflation for the 2014-15 biennium totals $854 million.  Governor Mark Dayton’s original budget proposal did not include inflation into his baseline spending, so that amount was — in real terms — a spending cut.

Also of note in the updated forecast was the continuing dismal performance of electronic pulltabs, which are being used a funding source to back the bonds on the new Minnesota Vikings stadium.  When passed last May, estimates of revenue in the 2012-13 biennium totaled  about $35 million, but to date, the state has collected less than $2 million.  As a result, revenue estimates have been slashed in half for the coming biennium, leading to the question of whether or not it’s time to start looking for a Plan B.

To further illustrate how poorly the e-pulltabs have fared, when the bill was passed, it was anticipated that by the end of 2015, pulltab revenues would have exceeded stadium expenses by $65 million,  Now, pulltab revenues aren’t expected to catch up to expenses until 2021.

Gov. Dayton is speaking this afternoon outlining his reaction to the updated forecast, although he is not expected to release his new budget until the week of March 11.  Dayton has signaled an increased renters tax credit and exemptions for capital equipment. Additionally, I will be posting an updated Brick City Budget proposal that reflects the new figures tomorrow (or later today).

Economy, Legislative Watch, State, State Legislature, Taxes
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shot-in-the-foot

Shooting Ourselves In The Foot: Breaking Down The Sequester

February 27, 2013 by seanolsen 13 Comments

Barring a last-minute deal between President Barack Obama and Republican Congressional leaders, it appears that the sequester — $85.3 billion in spending cuts for this fiscal year (and a total of $1.2 trillion in cuts over the next decade) — will be implemented beginning March 1.

What will the sequester mean?  Let’s take a look.

Details of the cuts

$85.3 billion represents about 2.4% of total government spending.  But the impacts of the sequester will be far more impactful than that, because of the programs that are exempted from the spending cuts.  Additionally, five months of the federal fiscal year has already passed, meaning that the full year value of the cuts have to be taken in a seven-month timeframe.

Half of the spending cuts will come out defense.  $42.7 billion represents 7.8 percent of the defense budget on an annual basis, but compressing those cuts into seven months will result in a 13% cut in defense spending the rest of the year.  There are no significant exceptions to the defense spending cuts, meaning that essentially all items in the defense budget will get an across-the-board cut.  This includes operations in Afghanistan and military aid for Hurricane Sandy relief.  Additionally, President Obama has indicated he will protect soldiers from receiving pay cuts, which means all other programs will see yet larger cuts to make up the difference.  Finally, restrictions in the sequester language mean that the Administration is prohibited from cutting the pay of civilian defense employees and must instead reduce headcount.

The other half of the spending comes out of three categories:  domestic discretionary spending, domestic mandatory spending, and Medicare.  Together, these categories make up the remaining $42.7 billion.  Let’s talk about what is excluded from these three categories first — the list is long and includes Social Security, non-administrative expenses in the Veterans Administration, refundable tax credits (like the Earned Income Tax Credit), Children’s Health Insurance Program, standard unemployment benefits, Medicaid, and most other programs supporting low-income families.  These programs represent over $2 trillion in annual government spending, meaning that all of the cuts are being taken against spending that represents about 40% of the federal budget.

Domestic discretionary spending cuts will total $26.4 billion, representing a 5.2% cut on an annual basis and an 8% cut over the next seven months.  These cuts will hit areas of the budget including education funding for programs like Head Start, will require closing the air traffic control towers at several state airports, federal funding for “Meals on Wheels” programs, and grants for environmental projects.

Domestic mandatory spending will be cut by $5.1 billion, also representing a 5.2% cut on an annual basis and an 8% cut over the next seven months.  These cuts will impact farm subsidies, extended unemployment benefits, and some federal health care programs, such as the Indian Health Care program.

Finally, Medicare will see $11.2 billion in cuts, representing a 2% cut.  Medicare cuts will not impact beneficiaries of the program, but rather reflect a cut in provider and Medicare Advantage reimbursement rates.

What Will Happen?

The budget cuts in the sequester are really just about the worst kind of cuts that could be made.  First off, they are arbitrary and across-the-board.  The President has no discretion on how to distribute the cuts, meaning that effective programs are cut at the same rates as programs that have less impact.  Second, there are too many exceptions.  The cuts, as noted above, represent a small portion of the total budget, but since a majority of the budget is excluded from the cuts, the programs that are hit are hit hard.

These cuts are also going to have major negative impacts on employment and economic growth.  The Bipartisan Policy Center projects a loss of 1 million jobs and 0.5% of gross domestic product.  Other estimates claim job losses in excess of 700,000.  Implementing the sequester is going to seriously damage a still fragile recovery and sluggish labor markets.

Worst of all, the combined effect of all of these impacts mean that we are unlikely to get any meaningful deficit reduction as a result of the sequester.  Slower economic growth means that the economy will produce less tax revenue, making the deficit situation worse than before.  As evidence of how this is possible, one need only look at what is occurring in Europe.  Following rounds of budget cuts, the United Kingdom (which is on the verge of a triple-dip recession), France, and Spain have all missed their deficit reduction targets.  Fed chairman Ben Bernanke warned of the same possibility before the House Financial Services Committee today.

Additionally, the fact that health care and entitlement programs are essentially left off the chopping block means that these cuts do practically nothing to change the long-term debt picture, because that is where the majority of spending (and spending growth) will happen over the coming decades.

The upshot here is that the failure of our political system to take the right path regarding our financial future has us on the verge of a serious self-inflicted blow to our economy.  One might think that the risks here would be enough to get folks looking beyond their own narrow political interest.  But apparently not.  There’s a reasoned approach to be had here, maintaining levels of spending today to preserve the economic recovery while instituting reforms in the medium- to long-term in order to bring debt levels down to a sustainable level.  Who’s going to set aside their party’s political interests to protect the jobs of hundreds of thousands of Americans?

General Sources:

Bipartisan Policy Center (explainer)

Washington Post (state-by-state impacts)

Taxes, U.S. House, Economy, National, U.S. Senate
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