Tag Archives: Budget

The 2013 Legislative Session in infographic form

2013 session

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Session endgame heats up with marriage equality vote Thursday

The Minnesota House of Representatives will vote on H.F. 1054 — the marriage equality bill — on Thursday.  The movement of this bill to the floor is a signal from leadership in the DFL majority that they have the necessary 68 votes to pass the bill, as Speaker of the House Paul Thissen has indicated he would not bring the bill up for vote unless there was sufficient votes to pass it.

In recent weeks, there has been substantial movement among rural DFL legislators towards the bill, including Hinckley’s Tim Faust and Crosby’s Joe Radinovich just within the last few days.  With passage seemingly assured at this point, the interesting thing to watch will be if any suburban Republicans vote yes on the bill as well.  21 House Republicans — including Chaska’s Joe Hoppe and Chanhassen’s Cindy Pugh — represent districts that opposed last November’s marriage amendment.  As of now, none of them have publicly indicated their support for marriage equality.

Senate Majority Leader Tom Bakk says he has sufficient votes in his caucus to pass the bill in that chamber as well, but does not intend to bring the bill to the floor until after the House vote.  Governor Mark Dayton has indicated he will sign the bill if it passes both chambers.

Ten states currently have marriage equality, and Delaware’s legislature is also voting on the issue this week (with passage expected).

Meanwhile, negotiations designed to produce a compromise budget between the House, Senate, and Governor are ongoing.  As noted previously, untangling the three tax plans is likely to biggest source the most difficult challenge faced by the negotiators.  With less than two weeks left in the session, the pace is likely to be rather hectic to get through all the necessary business by then.

Which tax provisions will survive?

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.

GOP’s phony baloney budget math

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]

Dayton rolls out revised budget plan

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.

After the Forecast: Adjusting the Brick City Budget

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.

Budget picture brightens; projected deficit down to $627 million

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).

Shooting Ourselves In The Foot: Breaking Down The Sequester

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)

Birthing the all-cuts budget

Republican leaders in the State Legislature held a “birthday party” for Governor Dayton’s budget proposal, which was unveiled one month ago today.  It was a full-fledged extravaganza with cupcakes and candles and gift-wrapped talking points aplenty.

Of course, their GOP’s own budget proposal for the biennium is still in the womb with an unknown due date.  But one thing is clear:  they don’t think taxes should be raised at all to close the state’s projected $1.095 billion deficit for 2014-15.

So let’s take a look at a couple very basic scenarios of what an “all-cuts” solution to the budget deficit could mean.

allcuts

Each of these scenarios essentially looks at across-the-board cuts (it’s unlikely that an actual GOP proposal would work this way, but we’re just trying to illustrate some of the potential impacts).  Keep in mind as you’re looking at these options that the baseline budget for the state does not include inflation, so you can add an additional $890 million to the cuts — effectively meaning that an “all-cuts” approach would cut nearly $2 billion in real spending from the budget.

The first scenario would hold K-12 education harmless from the budget cuts.  Choosing this option would require an across-the-board cut of 5.5% to the other areas of the budget in order to achieve $1.1 billion in savings.  Holding K-12 harmless under this option could take two forms.  Either you could leave K-12 untouched (no cuts and no school shift payback) or you could play an accounting shell game and cut funding by 5% and apply that  to the shift balance (and $824 million cut/shift payback).

The second scenario (as suggested by a commenter here) would apply a 5% cut across-the-board and use any excess balance to pay back part of the school shift.  Such a scenario, would generate a $667 million shift payback, but the 5% cut to K-12 would be larger than the shift payback, resulting in a net $92 million cut to K-12.

Certainly, either option would continue squeezing some waste and inefficiency out of state government, but it would also have very real other impacts.  Cuts of this magnitude in Health and Human Services would limit the ability of those programs to service folks in need.  Cuts of this magnitude to higher education is going to make college less affordable for students.  Cuts of this magnitude to public safety are going to result in layoffs in our corrections and court systems.  Cuts in aid to local governments are going to put further pressure on property taxes.  Efforts to stop invasive aquatic species would be placed at risk.  Programs to encourage new business start-ups would be weakened.

There are plenty of things that could be reasonably objected to in the Dayton budget.  But there’s plenty of reasonable objections to an “all-cuts” approach, too.  The GOP leadership owes it to the state to put their choices on the table and let us see what their priorities are.

[Image courtesy All About Cupcakes]

Making tradeoffs: Plan C versus Plan D

 

Since I rolled out my “Plan C” budget yesterday, one of the main threads I’ve gotten in terms of comments (from John Brunette in the comments and from others via e-mail) has been from folks asking about the spending, and is it necessary to increase spending by that much?

So I went back to the numbers and came up with a budget that was tighter on spending, while still paying back a sizable chunk of the remaining K-12 school shift — as that has been a key Republican criticism of the Dayton budget.  Below is a chart detailing what I came up with — “Plan D”, if you will.  Included is a $275 million payback of the shift (1/4 of the remaining amount, what I would consider the minimum level to be considered “sizable”), and basically holding every other area of the budget flat.  Holding those departments flat essentially functions as about a 2% budget cut, since inflation is not factored into baseline spending forecasts by state law.

Plan D Spending

Adding that spending means there’s a $1.372 billion deficit to make up.  From a revenue perspective, then, I removed all B2B sales taxes and reduced the amount of income tax relief by $80 million.

Plan D Taxes

In some respects, Plan D is preferable to Plan C.  Removing the business sales taxes while maintaining 87% of the income tax cut makes the overall tax package in Plan D more progressive.

Here are some of the things that may well be lost by making these choices, though.

  • Optional all-day kindergarten
  • Additional funding for special education and early childhood programs
  • Wider availability of state college tuition grants, at a time when public university tuition has doubled in the last decade
  • Programs to expand apprenticeships and internships for MnSCU students
  • Improved aquatic invasive species management
  • Up to 270 employees in the Department of Corrections
  • Expanded care options for high-needs children on state health care plans
  • Increased funding for investment and job creation funds

And there are other things that just go unaddressed, like the basic K-12 education formula lagging inflation or funding MnSCU and the University of Minnesota at late-1990s levels despite the fact that those two systems serve over 50,000 more students than they did 15 years ago.

It’s easy to just wave one’s hand away at these issues and criticize proposals that make the hard choices.  Nothing is easier than saying you’re opposed to new taxes.  Those who feel that taxes should not be raised, then, have a duty to tell us what they would do instead.  Minnesota Republicans say that taxes shouldn’t be raised and the school shift repaid.  That means they favor making at least $1.372 billion in cuts from the current forecasted spending.  It’s time for them to avoid the easy way out, step to the plate, and name those cuts.

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