’98 percent’ constitutional amendment undercuts common-sense budgeting

April 4, 2012

In our ongoing effort to highlight the pitfalls of budgeting by constitutional amendment, we just released an issue brief, ’98 Percent’ Constitutional Amendment Creates Barriers to Common-Sense Budgeting. The 98 percent amendment is one of several proposed constitutional amendments that would severely limit lawmakers’ ability to create a budget that meets our state’s needs. The 98 percent amendment is short-sighted on many grounds: it would increase budget gridlock, slow the response to a crisis, jeopardize the state’s credit rating, worsen budget deficits and undermine critical state investments.

The amendment would limit general fund spending to 98 percent of forecasted revenues. The other two percent goes into a reserve account. Lawmakers could not spend above the 98 percent limit or use the reserves unless responding to an emergency. Further, any emergency spending would require a supermajority vote (60 percent) in both the bodies of the Legislature. When the reserve account reaches five percent of state revenues, a reduction in the state sales tax would be triggered.

Here is why state lawmakers should reject this amendment:

It would increase gridlock and gimmicks at the Capitol. To understand the problems the amendment would create, one needs only consider recent history. It took a 20-day government shutdown before Governor Dayton and the Legislature reached a deal on the FY 2012-13 budget. The painful solution included more than $2 billion in service cuts and creative financing schemes that no one liked (school aid shifts and the sale of tobacco revenue bonds). Had this amendment been in place, policymakers would have needed to reduce net general fund spending by $1.3 billion. In other words, they would have needed to find an additional $1.3 billion in cuts and shifts.

It would slow our response to a crisis. In the face of an emergency “involving the health, safety, or welfare of the citizens,” the amendment would require supermajority votes in the House and Senate to tap reserves or raise revenues beyond the 98 percent cap. This risks slowing the state’s response to a crisis and empowers a small number of legislators to block action on important priorities while trying to get concessions on unrelated issues.

It would risk weakening the state’s credit rating. The 98 percent amendment would likely hurt the state’s credit rating and increase its borrowing costs, similar to the supermajority amendment. The national credit rating agencies frown on states with constitutional restrictions that undermine their flexibility to address budget problems. Minnesota’s credit rating has already taken recent hits. The 98 percent amendment would raise another red flag.

It would make deficits deeper. This amendment effectively creates a tax cut account, not an effective rainy day fund, and it could make future deficits worse. The amendment requires the state to put two percent of revenues into a reserve every biennium, even in the middle of a recession. It wouldn’t take long for the reserve to reach five percent of revenue, triggering a mandatory tax cut. The state would face the perverse possibility that a tax cut would be triggered that would tip the state into deficit or deepen an existing revenue shortfall.

It would interfere with investments in the state’s future. This amendment would interfere with Minnesota’s ability to recover from a recession and invest in our future. For instance, putting two percent of forecasted revenue off limits would prevent Minnesota from taking full advantage of economic growth coming out of a recession. Other states could be rebuilding while Minnesota might be forced to make additional cuts to education, job training and infrastructure.

Our issue brief goes into more detail about the many drawbacks to this proposal and why it is wrong for Minnesota.

-Scott Russell

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House omnibus tax bill digs deficit hole deeper

March 29, 2012

Policymakers will soon need to work out differences between the House and Senate omnibus tax bills in a conference committee, making this a good time for an overall picture of what’s in the House bill, House File 2337.

The House omnibus tax bill contains a number of tax cuts. In the short term, those tax cuts are primarily paid for by deep cuts to the Renters’ Credit, a property tax refund for low- and moderate-income renters.

But in the long term, the House omnibus tax bill digs the state’s future deficit hole deeper, adding $228 million to the $1.1 billion projected revenue shortfall in FY 2014-15. And the cost of the bill grows over time, because it gradually eliminates the statewide property tax through 2025. If the statewide property tax were eliminated all at once in FY 2014-15, the cost would be $1.7 billion. The bill does not identify a replacement revenue source or the cuts in services that would be needed as a result of eliminating the statewide property tax.

The bill’s tax cuts total $95 million in FY 2012-13 and $420 million in FY 2014-15. The primary focus of the tax cuts are businesses or business investments. The major tax cut provisions include:

  • Phasing out the statewide property tax on businesses and cabins so that it is fully eliminated in 2025 ($40 million in FY 2012-13 and $310 million in FY 2014-15).
  • Increasing the Research & Development Credit, a refundable tax credit for businesses with certain research and development expenditures ($26 million in FY 2012-13 and $42 million in FY 2014-15).
  • Allowing emerging biotechnology corporations to transfer or sell certain tax benefits to other corporations ($10 million FY 2012-13 and $45 million in FY 2014-15).
  • Increasing the Angel Tax Credit for those investing in certain start-up businesses ($5 million in FY 2012-13 and $10 million in FY 2014-15).
  • Creating a jobs tax credit for employers who hire qualified veterans ($2 million in FY 2012-13 and $4 million in FY 2014-15).
  • Allowing businesses to get a sales tax exemption when they purchase capital equipment, instead of requiring them to pay the tax and apply for a refund ($8 million each in FY 2012-13 and FY 2014-15).
  • Increasing the targeted property tax refund to homeowners of any income level whose 2012 property taxes increase by at least 12 percent and $100 ($4 million in FY 2012-13).

As we’ve previously noted, in the current budget cycle these tax cuts are primarily funded by a proposed 38 percent cut to the Renters’ Credit, which refunds a portion of property taxes that renters pay through their rents. As a result, the average refund would be cut by $213, and 66,200 Minnesota households would become ineligible – that’s one in five currently eligible households.

In addition, the bill raises some revenues by replacing the current Foreign Operating Corporation deduction for companies with international activities with a credit (raises $25 million in FY 2012-13 and $40 million in FY 2014-15).

The bill raises $1 million by changing Local Government Aid (LGA) so that cities with populations of more than 5,000 will receive the same amount of LGA in 2013 as they did in 2012. A number of local development provisions are also in the bill.

-Nan Madden

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Senate omnibus tax bill worsens state’s future revenue shortfall

March 27, 2012

The Senate Tax Committee passed its omnibus tax bill, Senate File 1972, last week. The bill includes $104 million in tax cuts in FY 2012-13 and $195 million in FY 2014-15. The major tax cut provisions include:

  • Conforming to federal rules that increase the standard income tax deduction for married couples in 2012 only ($62 million in FY 2012-13).
  • Creating a new income tax benefit for people with military retirement pay that replaces a smaller credit for past service ($24 million in FY 2014-15).
  • Increasing the targeted property tax refund, which provides a property tax refund to homeowners of any income level whose property taxes increase by 12 percent or more in a single year ($2 million each in FY 2012-13 and FY 2014-15).
  • Phasing out the statewide property tax paid by businesses and cabins ($29 million in FY 2012-13 and $142 million in FY 2014-15). The tax would be fully eliminated for taxes payable in 2026.
  • Increasing the Angel Tax Credit for investors in certain start-up businesses ($2 million in FY 2012-13 and $4 million in FY 2014-15). The bill also eliminates the compensation and minimum wage requirements for businesses receiving investments that qualify for the tax credit.
  • Phasing in a capital equipment upfront exemption for businesses ($4 million in FY 2012-13 and $10 million in FY 2014-15). Currently, business purchases of capital equipment are exempt from the sales tax, but the business must pay the tax and apply for a refund. The bill would allow businesses to get the sales tax exemption at the time of purchase, starting with smaller businesses in 2013 and reaching all businesses in 2016.
  • Extending tax benefits to qualified data centers by another year ($6 million in FY 2014-15).

The bill freezes Local Government Aid (LGA) so that cities will receive the same amount in 2013 as they did in 2012. This is a $1 million reduction in LGA in FY 2014-15. The bill also requires local governments to publish certain kinds of budgetary information.

In the current budget cycle, the tax cuts in Senate File 1972 are paid for by other provisions in the bill, mainly a $100 million transfer from the state’s budget reserve. (The Senate omnibus education finance bill would transfer another $416 million from the state’s budget reserve to reverse a portion of the school funding shift.) The  omnibus tax bill gives the Dayton administration the option to identify savings in state agencies, and reduce the $100 million transfer from the budget reserve by the amount of those savings.

Fortunately, the bill does not include any cuts to the Renters’ Credit. This puts it in stark contrast to the House omnibus bill, which makes $67 million in cuts to this property tax refund for low- and moderate-income renters.

But the Senate bill does not have a sustainable way to pay for its proposed tax cuts. It adds $194 million to the deficit for the next budget cycle, which is currently projected at $1.1 billion, and that doesn’t include the cost of inflation. The state also still has a way to go to fully reverse the school funding shifts, currently estimated to cost another $2.4 billion.

And the tax cuts grow over time, primarily through the phase-out of the statewide property tax. If that tax were fully phased out in FY 2014-15, the cost would be $1.7 billion. But the bill does not have a plan to replace that with other revenues – or identify the cuts in services that would be needed to fill in such a hole.

The House has passed its omnibus tax bill, House File 2337, and differences between the two bills will need to be resolved by a conference committee.

-Nan Madden

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Learn more about what a health insurance exchange will mean for Minnesota

March 22, 2012

This Friday marks the 2nd anniversary of a significant step forward in reforming the nation’s health care system – the passage of the federal Patient Protection and Affordable Care Act (ACA). Major changes do not come easily or quickly, but we’ve already seen some important improvements in health insurance coverage: children can stay on their parents’ insurance until age 26, insurers can’t deny children coverage for pre-existing conditions, and plans must provide preventive services with no out-of-pocket costs.

Minnesota is in the midst of implementing another key element of successful health reform - a state health insurance exchange. The exchange will be an online competitive marketplace for individuals and small businesses to shop for health insurance, allowing them to compare cost and quality. More than one million Minnesotans are expected to use the exchange to enroll in public or private health insurance plans once it is up and running in 2014.

An exchange has the potential to enhance the quality of life in our state by improving health outcomes for many Minnesotans – particularly those who struggle to find adequate and affordable health insurance. A thoughtfully designed exchange will increase access to health care by making health insurance more affordable, ensuring a basic level of coverage and reducing health disparities.

Our new issue brief, Health Insurance Exchange Will Improve Access and Affordability for Many Minnesotans, takes a closer look these and other important improvements in health insurance that are on the way.

And there is another opportunity to learn more about health insurance exchanges this Sunday afternoon in Saint Paul! We are co-hosting a community event – Building a Healthy Exchange - that will examine the promise of a well-designed exchange. Attendees will hear from public officials and members of the community about Minnesota’s vision for a successful exchange. You can RSVP online.

We will continue to track the state’s progress on designing a health insurance exchange that will work for all Minnesotans.

-Christina Wessel

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New issue brief highlights mixed news from the February Forecast

March 14, 2012

We recently released our analysis of the State of Minnesota’s February forecast: Surplus Short-Lived as Deficit Looms. It explains how the $323 million surplus gives Minnesota a chance to catch up on some bills, but the projected $1.1 billion shortfall in FY 2014-15 reminds us that we are not funding the state’s priorities in a sustainable manner.

Although the national economy is showing modest improvements from last November’s forecast, there is still a great deal of uncertainty. There are some major federal policy decisions on the horizon that could have a significant impact on the economic recovery.

More details are available in our issue brief.

-Scott Russell

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Constitutional tax and budget amendments create practical problems, taxpayer group says

March 14, 2012

The Minnesota Taxpayers Association warns that constitutional amendments that limit the state’s budget choices would have negative impacts and unintended consequences.

“Constitutional amendments that constrain fiscal decision making have popular appeal but their philosophical problems and the practical mischief they can introduce into state and local fiscal systems make this poor policy,” its November/December newsletter said. The Minnesota Taxpayers Association is a non-partisan, nonprofit organization created “to advance economy and efficiency in government.”

Its analysis critiques both the supermajority amendment, which requires a 60 percent vote in both the House and Senate to raise state taxes, and an amendment that would limit general fund spending to 98 percent of forecasted revenue.

The Minnesota Taxpayers Association said that the supermajority requirement would create roadblocks to substantial tax reform. Major reforms involve a complex package of tradeoffs, including changes to tax bases and rates -  some of which increase revenue. Adding a supermajority requirement into the mix “transforms the merely difficult into the nearly impossible,” the association wrote.

Its research review found little or no difference between supermajority and non-supermajority states when comparing their revenue growth. The association concluded that supermajority requirements were at best unnecessary and, “At worst, they can severely hamstring the ability of government to modify tax policy in response to demographic conditions, economic realities, and federal changes.”

Another constitutional amendment would limit general fund spending to 98 percent of estimated revenue. Surpluses would go into a budget reserve that would have limits placed on it: it could only be used for emergency spending, subject to a supermajority vote. Reserves reaching a certain size would trigger a sales tax rate cut, although the Legislature could pass an alternative tax cut. The Minnesota Taxpayers Association said this amendment would ratchet spending down, effectively mandating an all-cuts approach to budget shortfalls.

Take the FY 2012-13 budget as an example. To solve the $5 billion shortfall, state leaders used approximately $3 billion in one-time money and over $2 billion in spending cuts. The Minnesota Taxpayers Association said the final budget would have been very different had the revenue-limiting amendment been in place since the start of the recession. In that case, the state would have had to cut an additional $1.7 billion from the budget — while at the same time, budget reserves could have reached a level to require tax cuts.

In addition, the amendment could undermine government redesign and reform. History shows that surpluses can pave the way for reform, and the amendment would take surplus money out of play for such purposes. The amendment also would complicate efforts to transfer duties between the state and local governments.

Lastly, the amendment would encourage greater use of dedicated funds, the association said. Legislators would want to protect popular programs, and they could avoid the general fund revenue limit by funding programs through fees or other dedicated revenue.

Overall, MTA expressed concern about creating momentum for constitutional budget amendments. Learning from other states’ experiences, repeated amendments can clutter a state’s foundational document with contradictory provisions, and “create an incomprehensible state/local fiscal system severely constraining governments’ flexibility to respond to changing circumstances and conditions.”

-Scott Russell

Posted in Budget Process, Constitutional Amendments, Taxes | Tagged | 1 Comment

House omnibus tax bill makes dramatic cuts to renters’ property tax refunds

March 13, 2012

Last month we discussed dramatic cuts to the Renters’ Credit passed by the House Property and Local Tax Division. Those cuts were used to pay for a reduction in the statewide business property tax.

The cuts have been amended into the House omnibus tax bill (House File 2337), which is expected to be voted on in the House Tax Committee this week. This bill also includes a reduction in the statewide property tax paid by businesses and cabins, as well as increases in a few business tax credits. The committee started to hear testimony today, and we stated our opposition to the cuts to the Renters’ Credit.

The Renters’ Credit refunds a portion of the property taxes that more than 281,000 low- and moderate-income Minnesota households pay through their rents.

The bill proposes a substantial restructuring of the Renters’ Credit, similar to what was passed by the Legislature last year but was vetoed by Governor Dayton. Some of the proposed changes impact all renters:

  • The share of rent that is considered the renter’s share of property taxes is the starting point for calculating the Renters’ Credit. The bill cuts it from 17 percent to 15 percent.
  • The value of the Renters’ Credit would be eroded over time, because the income ceiling and refund schedule would no longer be indexed for inflation.

In addition, the bill would create two very different property tax refund schedules – one for households that include seniors and people with severe disabilities, and one for all other kinds of households.

For households that include seniors and people with disabilities:

  • The maximum income for eligible families is reduced from $53,539 to $40,000.
  • The maximum refund amount is cut for households with incomes between $26,010 and $40,000.
  • The average credit for these households is cut by $103, and 4,100 households will lose their entire credit.

For all other households:

  • The maximum income for eligible families is cut to $25,000.
  • The maximum refund amount is cut from $1,550 to $1,000.
  • Refund amounts are reduced across all income ranges.
  • The average credit is cut by $256 for these households, and 62,100 will lose their entire credit.

These changes would cut property tax refunds this year by $67 million, which Minnesotans have already begun to apply for, and are in addition to the $26 million cut that was passed in the 2011 budget.

The House Tax Committee is working to pass the omnibus tax bill this week. Lawmakers should reconsider the cuts to the Renters’ Credit. If they believe the business tax cuts in this bill are good policy, they should find a better way to pay for them, rather than asking Minnesota’s low- and moderate-income renters to shoulder the full burden.

-Nan Madden

(Note: new fiscal analysis came out on March 14, and we have made minor changes to the blog to reflect the more current figures.)

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Governor Dayton’s supplemental budget focuses on fixes

March 12, 2012

On Monday morning, Governor Dayton released a supplemental budget proposal that focuses mostly on addressing concerns from last year’s budget. The recent February Forecast projected a small surplus for the current budget cycle, so no major budget changes are required.

Recognizing the state’s delicate financial situation, the Governor offers a budget-neutral proposal that includes $44 million in additional general fund spending for the FY 2012-13 biennium, but offsets that with $44 million in revenue increases. The Governor’s proposal leaves all $657 million in the state’s budget reserve.

The Governor’s supplemental budget responds to several concerns that have been raised since policymakers agreed to a budget for the FY 2012-13 biennium last July. These primarily are in the Health and Human Services area. For example, two significant changes include:

  • Repealing a 20 percent cut in payments to people who work as personal care attendants (PCA) for family members with a disability. PCAs enable individuals who need assistance with the activities of daily life to remain in their community and avoid institutional care. This cut raised the concern that relative caregivers, especially those in rural areas, would have to find a different job to support themselves financially, leaving their relatives with no options for at-home care. A temporary restraining issued by a Ramsey County judge prevented this cut from being implemented last October.
  • Restoring coverage for dialysis and cancer treatment under Emergency Medical Assistance (EMA). EMA provides health care coverage for qualifying non-citizens who face a medical emergency or suffer from a serious chronic health condition. In the 2011 budget agreement, coverage was reduced to medical emergencies treated in an emergency room or hospital. The Governor’s proposal partially restores coverage for treating some non-emergency, but critical, health concerns.

The Governor also moves forward with funding his “Jobs Bill,” which includes creating the Jobs Now Tax Credit for businesses that hire unemployed Minnesotans, veterans or recent graduates in 2012 or early 2013. New hires must remain employed for one year in order for the business to qualify. The Governor also expands the FastTRAC training program for underprepared adults and adds $10 million to the Minnesota Investment Fund to provide loans to expanding businesses.

There are also a small number of proposed changes in K-12 education, public safety, transportation, agriculture, economic development, state government, and environment, energy and natural resources.

The Governor proposes to pay for the spending increases in his supplemental budget by scaling back corporate tax reductions for corporations with overseas activities and by requiring certain online retailers to collect sales taxes. These provisions, similar to ones proposed by Governor Dayton last year, result in $44 million in additional revenue in the FY 2012-13 biennium and $120 million in FY 2014-15.

Whatever agreement Governor Dayton and the Legislature ultimately reach this session, they would be wise to follow Dayton’s approach of moderation in a time of great financial uncertainty. Policymakers should recognize the importance of having adequate reserves to address cash flow concerns and respond to economic changes, address some of the most harmful outcomes that have risen from last year’s actions, and ensure that they do not increase the size of the $1.1 billion shortfall that awaits us in the FY 2014-15 biennium.

-Christina Wessel

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Agreement is growing: constitutional budget amendments are wrong for Minnesota

March 8, 2012

The drumbeat of opposition to proposed constitutional budget amendments continues to grow. Individuals, organizations and the news media are increasingly speaking out against amending the state constitution to impose strict restrictions on budget decisions.

Minnesota newspapers have featured a number of editorials and guest columns criticizing the idea of legislating by constitutional amendment. Here are quotes from a few:

  • “Constitutional amendments should not be a substitute for solving problems that can be resolved with regular legislation that has been studied and vetted.” – Mankato Free Press editorial
  • “… it seems Minnesota’s partisan legislators have discovered an easy out for them on specific policy dilemmas: Instead of deciding for themselves or having to compromise, let the people take them off the hook.” -  St. Cloud Times editorial
  • “The lesson: once a constitutional question is voted on and passed, all the laws in the universe will not change unintended consequences. If you make a mistake, you are stuck with it, no matter what.” – Former Senator Steve Murphy column in Red Wing Republican Eagle
  • “A constitution should be a framework for government, and amendments should add to that structure. By putting issues of the moment in the form of amendments on the ballot, we may be diluting the value of the constitution.” – International Falls Journal editorial.

A constitutional amendment that would require a supermajority vote of the Legislature to raise taxes has been the subject of several recent editorials and columns. Here are some examples:

  • “In reality, a supermajority amendment often just constrains legislative options, requires temporary budget solutions, creates more frequent legislative stalemates and brings higher borrowing costs for the state.” – West Central Tribune editorial
  • “I think you will see programs that help fund our university educational systems, our K-12 education, nursing homes, and others just dry up.” – Crookston Daily Times column by Mayor David Genereux
  • “If this goes to the ballot and is passed, it would lead to bigger legislative struggles, more state shutdowns, budget setting through the constitution, and the most ineffective government ever seen in Minnesota.” – Column by New Ulm Mayor Robert Beussman and East Grand Forks Mayor Lynn Stauss printed in the Granite Falls Advocate Tribune, Grand Forks Herald, Wadena Pioneer Journal, Alexandria Echo Press and Montevideo American News. Also from this column: “The uncertainty of the system will also exacerbate the tax unfairness now in place, making it impossible to pass any tax reform or fairness through the legislative process.” And: “If future legislatures cannot increase taxes or expenditures on the state level, they will find it even easier to pass the cost on to local entities.”

A growing number of Minnesotans see that these amendments are short-sighted, won’t deliver on their promises and are wrong for Minnesota. Now it’s time for the Legislature to see that these rigid requirements would result in unintended consequences that would harm Minnesota for years to come.

-Barb Brady

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New analysis highlights supermajority amendment’s fatal flaws

March 1, 2012

New analysis from the Minnesota Budget Project adds to the growing body of criticism showing how a proposed constitutional supermajority amendment would harm Minnesota. Supermajority Amendment is Wrong for Minnesota explains how the amendment would work, and how it would only worsen the recent trend toward budget gridlock and gimmicks.

The amendment would require a supermajority vote (60 percent) in both the House and Senate to raise taxes. Newspapers around the state are lining up against it. A national study found no evidence that supermajority states are better off than states without supermajority requirements. Our analysis highlights five reasons a supermajority amendment would lead to short-term thinking and poor financial decisions in Minnesota.

A supermajority requirement would create more budget gridlock. It would give power to a small number of legislators who could either block passage of important legislation that had majority support, or use their tactical advantage to strong-arm concessions on unrelated issues.

A supermajority requirement would encourage budget gimmicks. Limitations aside, legislators would look for creative ways to fund services constituents want and value. Last session – even without the supermajority requirement – legislators delayed school funding payments and sold future tobacco settlement revenues. Pass a supermajority requirement and budget gimmickry would likely grow.

A supermajority requirement would create pressure to increase other revenue sources. Leaders would still need to find ways to fund the services that Minnesotans expect. That would create pressure to raise revenues not subject to the supermajority requirement, such as tuition, fees, or gambling. Further, state leaders could push costs down to the local level, adding pressure to increase property taxes.

A supermajority requirement could impede tax reform. There has been discussion in Minnesota about the need to simplify the tax code and adapt it to the modern economy. It is easy to imagine a complex package of tax changes might raise small amounts of revenue – triggering the supermajority requirement. Even proposals to eliminate a single tax benefit found to be wasteful or ineffective would need to pass the higher supermajority threshold.

A supermajority requirement could threaten the state’s credit rating, and ultimately affect borrowing costs for major construction projects. Experiences from other states show that rating agencies frown on supermajority requirements because they limit a state’s fiscal flexibility. Minnesota’s credit rating has been downgraded recently, due in part to recent gridlock and budget gimmicks. Adding a supermajority requirement would raise one more red flag for rating agencies.

Given last year’s state government shutdown, we would hope state leaders could find ways to restore public confidence in the budget process. Our analysis finds that a supermajority amendment is a major step in the wrong direction. It would add to gridlock, restrict legislators’ ability to make decisions in the best interests of the state, and circumvent meaningful public debate about what level of services the public wants and how we pay for them.

-Scott Russell

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