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Congress should reject hard caps on discretionary spending

July 26, 2010

Hard caps on nondefense domestic discretionary spending will not significantly reduce long-term deficits. That’s because the biggest factors contributing to long-term deficits are primarily the 2001 and 2003 Bush tax cuts and the costs associated with the wars in Iraq and Afghanistan – not domestic discretionary programs. According to the Center on Budget and Policy Priorities:

Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019, including associated debt-service costs.

Domestic discretionary spending is the portion of federal spending included in annual appropriations bills to fund a broad range of national priorities, including education, environmental protection, law enforcement assistance, food safety, nutrition, medical research through the National Institutes of Health and more. Nondefense domestic discretionary spending makes up about 18 percent of all federal spending.

Earlier this year, Senators Jeff Sessions and Claire McCaskill introduced an amendment to the Federal Aviation Administration bill that would have imposed hard caps on all nondefense domestic discretionary appropriations bills for the next three years. According to the Center on Budget and Policy Priorities, the Sessions-McCaskill amendment would have required cuts totaling nearly $30 billion in fiscal year 2011 or five percent below the President’s budget request. In fiscal year 2012, the Sessions-McCaskill amendment could have required cuts totaling almost $100 billion; a 15 percent cut below the President’s budget request.

In addition to these spending cuts, the Sessions-McCaskill amendment also required a two-thirds supermajority vote in the Senate to change the hard caps on discretionary spending, with no exceptions for any changes in the national economy or other factors that could make reconsideration of the caps necessary. If the Sessions-McCaskill amendment were adopted, a minority of only 34 out of 100 senators could prevent Congress from raising the spending caps to meet a future economic challenge or emergency.

Placing hard caps on domestic discretionary spending would also impede efforts to raise revenues to reduce long-term federal deficits. That’s because in past deficit reduction agreements, multi-year discretionary spending caps were linked to revenue and entitlement savings. The Session-McCaskill amendment would result in deep cuts to domestic discretionary spending without securing any savings from other parts of the budget, including revenue increases. Simply imposing new caps on discretionary spending places all of the burden for reducing the deficit on one part of the budget and ignores how much tax cuts have contributed to deficits. The Center on Budget and Policy Priorities notes that the Bush-era tax cuts from 2001 and 2003 account for $1.7 trillion more in deficits from 2001 to 2008, and $3.4 trillion more over the 2009-2019 period.

Fortunately, the Sessions-McCaskill amendment was not adopted. However, it is likely that there will be continuing attempts throughout the remainder of this year to attach this amendment to individual appropriations bills or to a continuing appropriations bill later this year. A balanced approach to deficit reduction is needed — one that looks at both fair and appropriate spending cuts as well as the elimination of selective tax cuts that are contributing to long-term deficits.

-Steve Francisco

Leave a Comment » | Federal Budget, Taxes | Tagged: budget, Taxes, budget deficit, federal deficit, Budget Process | Permalink
Posted by Steve Francisco

Bad news and really bad news about Minnesota’s financial situation

July 12, 2010

First, the bad news. Despite some optimism from the Governor at the end of the 2010 Legislative Session that the cash flow situation for FY 2011 was manageable, the latest news from Minnesota Management and Budget (MMB) shows that the state’s cash balance in the statutory general fund will dip to near zero as early as October. The cash balance will remain near or below zero until May. That’s clearly well below the minimum workable cash balance of $400 million.

The administration is proposing some options to help manage the cash flow situation which could be implemented as soon as this August. Recommendations include:

Deferring $83 million in K-12 payments until May 2011.
Deferring $89 million in payments to the University of Minnesota until June 2011.
Delaying $221 million in sales tax and corporate tax refunds over $5,000 by up to six months (all would be paid out by January 2011).
Delaying $110 million in payments to health plans and county-based health services in October and November (all would be paid by December 2010).

Unfortunately, these actions wouldn’t be sufficient to completely resolve the cash flow problem that persists through next spring. The state is also pursuing a line of credit option to help manage those shortfalls.

And now for the really bad news. The latest economic update released by Minnesota Management and Budget shows the state’s revenue collections for the current biennium are below expectations. We are closing FY 2010 (which ended on June 30) with a $99 million revenue shortfall. This shortage will be absorbed by the $6 million policymakers left on the bottom line and the $266 million in the cash flow account. As a result, there is no deficit for the current biennium. However, if there is another shortfall of more than $173 million before the end of FY 2011 (that’s what will be left in the cash flow account), then policymakers may need to solve another budget deficit before June 30th. (As a side note, the cash flow projections mentioned above take into account the $99 million shortfall.)

The future doesn’t look any rosier. Remember that the actions of the 2010 Legislative Session left the state with a $5.8 billion deficit for the FY 2012-13 biennium, $6.9 billion if you include inflation. Although the U.S. economy is showing consistent growth, the economic update points out that, “a crisis of confidence is emerging now as Americans begin to recognize how slow this recovery is likely to be.” Although most economists do not fear another recession, real GDP growth is now expected to average 2.9 percent over the next biennium, not the 3.5 percent initially projected. As a result, “it appears that the 2012-13 budget gap is likely to be materially wider than end-of-session estimates.”

State policymakers may soon be regretting that they did not take more action to reduce the FY 2012-13 deficit during the last legislative session. A slim ray of hope could come from the federal government. Congress has been debating for months whether to provide states with additional fiscal relief. This latest financial news clearly shows that the crisis in the states continues and federal assistance is critical to preserving core public services and sustaining economic growth.

-Christina Wessel

Leave a Comment » | Economy | Tagged: budget, cash flow, deficit, economic update, forecast, minnesota | Permalink
Posted by Christina Wessel

Analysis of the November forecast: job and wage losses driving deficits

January 7, 2010

Minnesota’s economy is starting to heal, but it is going to be a long, slow recovery according to the state’s most recent budget forecast (released early in December). Minnesota is estimated to have a new $1.2 billion shortfall in the current biennium, driven by a larger-than-expected drop in income tax revenue. The state now faces an estimated $6.6 billion deficit for FY 2012-13 (including inflation).

The Minnesota Budget Project has just released our analysis of the state’s November forecast. In addition to highlighting the overall numbers (which we blogged about in December) and the deficit problems facing the Health Care Access Fund (which we blogged about this week), this analysis looks at the underlying economic problem driving our state’s budget problems – jobs and wages.

The forecast offers this discouraging assessment:

“Employment in Minnesota is now expected to fall by more than 150,000 jobs between the first quarter of 2008 and the first quarter of 2010, 30,000 more than projected last February. If this forecast holds true, more than a decade of job creation will be lost.”

When economists tally the final numbers, Minnesota is expected to have four percent fewer jobs in 2009 than in 2008 and non-farm wages are predicted to drop nearly six percent. It’s the first time the state’s wages and salaries have dropped from one year to the next since the state began tracking data in 1970.

And that has taken a big toll on the state’s finances. While this year’s general fund spending is actually tracking slightly lower than projections, income tax revenue is predicted to drop an additional $827 million for this biennium (FY 2010-11). That loss accounts for nearly 70 percent of the new $1.2 billion deficit.

Among the other forecast findings: the economy is stabilizing but firms will be slow to hire, choosing instead to increase hours for existing workers. The national employment numbers are not expected to return to pre-recession levels until 2013.

Minnesota Management and Budget will release the next major economic forecast in late February, after the legislative session has begun.

-Scott Russell and Christina Wessel

Leave a Comment » | Budget Process, Economy | Tagged: budget, budget deficit, forecast, unemployment | Permalink
Posted by Scott Russell

Legislature passes bill to balance budget with taxes, education shift

May 18, 2009

The tax conference committee wrapped up their work on Monday night, the last day of the legislative session. The bill includes elements similar to what was in HF 885, the legislature’s previous tax bill that was vetoed by the Governor:

A new fourth income tax bracket on taxable income over $250,000 for married couples, as in HF 885. This raises $516 million in FY 2010-11.
A surtax on income earned from charging interest over 15 percent, also as in HF 885. This raises $216 million.
$286 million raised from alcohol taxes, slightly more than in HF 885.
$14 million net raised from additional tax compliance.

The bill also includes two tax cuts:

$75 million in FY 2010-11 by allowing businesses to get a sales tax exemption at the time they make the purchase (currently they must pay the tax and then apply for the refund).
$5 million in FY 2012 for Angel Investor Credits for high tech businesses.

The bill also includes the K-12 education shift that the House proposed. The spreadsheet passed out in the tax conference committee indicates the net impact of all bill provisions would be to close the $2.7 billion gap remaining for the FY 2010-11 biennium.

The House and Senate passed the bill in the final hour of the legislative session and it is probably a safe assumption that the Governor will veto this bill, leaving the state’s budget unbalanced for the FY 2010-11 biennium. The Governor has indicated that he will balance the budget through his unallotment authority, although he does have the option to bring the legislature back into special session to try to reach a negotiated agreement. As we have previously reported, the Governor had indicated to the legislature that he primarily plans to cut aids to local governments, other tax credits (such as the Renters’ Credit and Political Contribution Refund), human services and higher education.

-Nan Madden

Leave a Comment » | Budget Proposals, Education, Taxes | Tagged: budget, budget deficit, budget proposal, income tax, renters credit, Taxes | Permalink
Posted by Nan Madden

New budget bill raises revenues to fund education and health care

May 8, 2009

Just when you thought you knew what was going on…the Legislature introduced a curve ball on Thursday afternoon. The House and Senate passed a bill, HF 885, to act as a placeholder for a combined tax, education, and health and human services bill. Apparently, this bill is not meant to substitute for the work currently going on in the already formed conference committees, but to supplement it.

The House and Senate immediately appointed a new conference committee to work out the details. The committee met and passed the bill late Thursday night/Friday morning. The committee chairs – Representative Lenczewski and Senator Bakk – noted that the Governor raised just under $1 billion through his proposal to issue bonds. This bill is an effort to raise a similar amount of revenue but not through borrowing. It raises $992 million in revenue using proposals based on the House and Senate tax bills:

A 4th tier income tax rate of 9.0 percent on taxable income above $250,000 for married filing joint households – raises $516 million in FY 2010-11.
Increases in alcohol taxes of $241 million.
The Senate’s provision for a surtax on income raised through excess interest rates, which raises $216 million.
Increased tax compliance initiatives to raise $19 million.

These revenues go into three new accounts in the general fund. In FY 2010-11, the revenues are distributed as follows:

$586 million to the E-12 education account.
$288 million to the nursing homes and long-term care account.
$114 million to the hospital account.
$5 million is appropriated to pay for the tax compliance activities.

This bill is an attempt by the legislative majorities to help make their priorities clear.

The 4th tier income tax would blink off in 2014 if the February 2013 forecast shows that there would be a $500 million balance. (This would mean $500 million is left after refilling the budget reserves and cash flow account. Also, any shifts that may be enacted this year would have to be paid off first as well.)

Obviously, some issues are not resolved. It was specifically mentioned that it is not yet determined whether the legislature will pass an education funding shift, nor does this bill necessarily establish the targets for the remaining budget conference committees. Committee members noted that cuts in these priority areas will still occur, but they will be mitigated by raising these revenues.

More details and next steps will be more clear in the days ahead…and any mistakes made while blogging at 12:35 in the morning will be corrected as well.

As a side note – the House and Senate both amended the joint rules to eliminate the 5th deadline which said conference committees were to finish up by midnight on Thursday (as we reported yesterday).

-Christina Wessel and Nan Madden

Leave a Comment » | Budget Process, Budget Proposals, Education, Taxes | Tagged: budget, budget deficit, Budget Process, budget proposal, deficit, human services, revenues, Taxes | Permalink
Posted by Nan Madden

Notes from Obama administration budget briefings

May 7, 2009

The Obama administration presented five telephone budget briefings today (May 7) on highlights of the President’s complete budget for fiscal year 2010, which begins October 1, 2009. In February, the President sent Congress a preliminary budget, but today the administration sent Congress its complete budget with specific spending proposals as well as a list of programs where the administration proposes to terminate or consolidate funding in the coming year.

The release of the President’s complete budget, along with the Congressional budget resolution conference report that passed both the U.S. House and Senate last week, clears the way for Congressional appropriations committees in the House and Senate to begin making specific decisions about how much money will actually be spent for a broad range of federal programs and activities in the next fiscal year.

The five subject areas covered in today’s briefings included education, housing and homelessness, energy, agriculture, and issues concerning the faith community.

These notes do not address every program that may fall under the subject categories. Instead, they report the administration’s description of what they consider to be the highlights in their budget. For additional information or if you have questions about a specific program in the budget, you may email the White House Office of Public Liaison at public@who.eop.gov. Here are the highlights of what we learned today.

Education – The President’s budget proposes $47.6 billion for the Department of Education in fiscal year 2010, an increase of $1.3 billion above what was in this year’s budget. The new administration’s budget for education focuses upon improving teacher effectiveness, turning around struggling schools, giving pre-schoolers the skills they need to prepare for kindergarten, and promoting innovation and research.

The President’s budget includes:

$1.5 billion for Title I School Improvement Grants to give states and school districts the resources to create and implement plans for improvement, corrective action or restructuring. These funds are in addition to the $3 billion previously appropriated in the American Recovery and Reinvestment Act (ARRA).
$517 million for the Teacher Incentive Fund to improve the education workforce, with an emphasis on rewarding those principals and teachers and other school personnel who raise student achievement, close achievement gaps and work in hard-to-staff schools. This funding is in addition to $200 million in the ARRA and $100 million in the 2009 budget.
$500 million for Title I Early Childhood Grants to encourage school districts to spend money under the ARRA to start or expand preschool programs.
$300 million for the Early Learning Challenge Fund competitive grants to states.

The Individuals with Disabilities Education Act (IDEA) receives flat funding in the President’s fiscal year 2010 budget after receiving $12.2 billion in the ARRA.

For higher education, the administration noted that in February, the maximum award under the Pell Grant program was increased to $5,500 for fiscal year 2010. The administration has also proposed that Pell Grants would increase by the rate of inflation plus one percent in future years.

The President’s budget proposes to abolish funding for 12 education programs that the administration contends are ineffective based upon research evidence. Note that while funding would be abolished, some of the functions of these programs may be merged into other existing programs. A few of the programs that the administration would stop funding include Even Start, an early education program, mentoring, character education, civic education and the National Institute for Learning.

For further information on the Department of Education budget, go to www.ed.gov/

Housing and Homelessness – Highlights in the budget for the Department of Housing and Urban Development (HUD) include:

An infusion of $1 billion into the Affordable Housing Trust.
A new $250 million Choice Neighborhoods Initiative to revitalize high-poverty neighborhoods through investments in distressed public and assisted housing and closer linkages with school reform and early childhood interventions.
$4.5 billion for the Community Development Block Grant Program (CDBG), a $550 million increase in funding to fulfill the President’s promise to fully fund the program. The President also proposes to update the CDBG formula that is more than thirty years old.
$150 million for the new Sustainable Communities Initiative to spur better coordination between urban and rural efforts to integrate transportation, housing and land use planning in ways that maximize choices for residents and businesses, lowers transportation costs, saves energy and improves the quality of life.
A new $100 million Energy Innovation Fund to encourage private sector investments in the energy efficiency of the nation’s housing stock.

The President’s budget for the Department of Housing and Urban Development proposes consolidating or eliminating 27 programs. For further information on the HUD budget, go to www.hud.gov/

Energy – The President’s budget for fiscal year 2010 proposes $26.4 billion for the Department of Energy (DOE). The DOE intends to promote investments in secure, clean, safe and reliable forms of energy, the creation of new jobs, and a commitment to address climate change. The President has set a goal to reduce greenhouse gases by 80 percent by the year 2050. Earlier this year, the Department of Energy received $38.7 billion as its portion of the ARRA.

Highlights of the DOE budget include:

$250 million in additional grants and loan guarantees for renewable energy projects.
$133 million in new funding to study the effect of climate change on wildlife and ecosystems.
Creation of a new Energy Innovation Fund to drive the creation of energy-efficient housing markets and catalyzing lending through a partnership with the Department of Housing and Urban Development (HUD).
Cuts more than $200 million in oil and gas company research that these companies can and do fund on their own.

For further information on the Department of Energy budget, go to www.energy.gov/

Agriculture - USDA states that the President’s budget reflects his concern about the health and welfare of children and providing access to more nutritious food, expanding the capacity of farms and ranches to produce alternative forms of energy and to transition away from fossil fuels. The President’s budget includes $450 million in program terminations, consolidations or reductions and also a proposed $250,000 cap on price support payments paid to farmers.

Highlights cited include:

An increase of $900 million for the Women, Infants and Children (WIC) Supplemental Nutrition Program. This proposed increased in funding builds upon $19 billion that was appropriated in the ARRA for increased Supplemental Nutrition Assistance Program (SNAP) (formerly known as Food Stamps) benefits that average 13.6 percent or roughly $80 each month for a family of four.
$10 billion for the School Lunch Program.
$1 billion for increased food safety inspections.

For further information on the Department of Agriculture budget, go to www.usda.gov/

Issues Concerning the Faith Community – This briefing reiterated many of the same points from the previous briefings but placed particular emphasis upon the fact that the President’s budget sets aside a $634 billion reserve fund for health care reform legislation that is currently being developed in both the House and Senate.

Joshua DuBois, director of the White House Office of Faith-Based and Neighborhood Partnerships, noted the President’s significant proposed expansion of national service programs, particularly AmeriCorps. The budget builds upon the recently-enacted “Serve America Act” by proposing $1.1 billion for national service programs in fiscal year 2010. This represents a 29 percent increase over current year funding and also marks the first time where the President’s budget proposes over $1 billion for national service programs. The President’s proposal would fund 84,000 AmeriCorps positions and would increase the AmeriCorps education benefit for the first time since 1993.

Over the coming days and weeks, we will be analyzing the President’s budget to determine its impact on Minnesota. We will, of course, share our findings with you here on our blog.

-Steve Francisco

Leave a Comment » | Education, Federal Budget, cap and trade | Tagged: budget, Congress, Federal Budget, Health Care, stimulus | Permalink
Posted by Steve Francisco

Legislature won’t meet conference committee deadline

May 6, 2009

***UPDATE: Senator Berglin announced this morning (Thursday) that the HHS conference committee has a target (we’re hearing $503 million in cuts) and plans to meet the deadline and finish by midnight tonight.***

With a number of serious budget issues still outstanding, Speaker Kelliher acknowledged on Wednesday at the Legislative Commission on Planning and Fiscal Policy that the legislature will not meet the May 7th deadline to wrap up conference committees. This is a self-imposed deadline, so missing it doesn’t have any real consequences – it just means arriving at a compromise is getting pushed out closer to the last day of session (May 18th).

Of course, that’s not too surprising to those of us who have been hanging around the Capitol this week. (A little conference committee haiku: We wait in the room. Maybe something will happen, but then it does not.)

There are still major issues that haven’t been worked out, including:

How to use the federal Fiscal Stabilization Funds (about $816.5 million, most of which needs to be spent on K-12 or higher education).
Whether to shift education spending (both the Governor and the House have proposed to delay aid payments to schools, the Senate continues to say “no” to this budget gimmick).
Whether to adopt the Governor’s proposal to bond to balance the budget (both the House and Senate have said “no”).
Whether to raise taxes – and how much to raise in fees.

And once the House, Senate and Governor can agree on these issues – in other words, once they figure out how much spending they will need to cut – then they can finally set targets for the rest of the conference committees. (FYI – they still hold out hope that the Public Safety, State Government, and Agriculture and Veterans Affairs budget bills could meet the Thursday deadline.)

-Christina Wessel

Leave a Comment » | Budget Process | Tagged: budget, budget deficit, Budget Process, budget proposal | Permalink
Posted by Christina Wessel

Senate tax bill takes a different approach towards restoring fairness to the tax system

April 23, 2009

On Tuesday the Senate tax committee released its tax omnibus bill and the House tax committee passed theirs. The House bill wipes the tax expenditure slate mostly clean, raises alcohol and cigarette taxes, cuts taxes for some businesses and increases the income tax on the highest-income earners (check out our blog on the bill).

The Senate has similar goals to the House: making sure revenue increases are part of a balanced approach to resolving the budget shortfall, and ensuring that those revenues are raised fairly. But they take a different approach to get there.

The Senate omnibus tax bill raises more revenue than the House ($2.6 billion in FY 2010-11 versus $1.5 billion), and the Senate relies much more on the income tax to raise revenue. Chair Bakk said that this approach acknowledges that the tax cuts enacted in the late 1990s and early 2000s were not sustainable, as the economy has worsened since then and revenue has fallen off (from Politics in Minnesota’s Steve Perry – hats off to their comprehensive coverage of “the T-word”).

Here are some of the major provisions of the Senate tax bill:

Unlike the House and Governor, the Senate raises enough revenue to balance its budget for four years. According to the latest economic forecast, we face a $4.6 billion deficit in FY 2010-11 and a $5.1 billion deficit in FY 2012-13, not including the impact of inflation. The House tax bill is about a $1 billion short of a balanced budget in FY 2012-13 and the Governor doesn’t provide enough details to figure it out. In contrast, the Senate tax bill raises enough money in both budget biennia to balance the budget (when combined with other elements of the Senate plan, including spending cuts).
Raises $2.2 billion for the FY 2010-11 biennium through changes to income tax rates. The bill creates a new income tax rate of 9.25% (slightly higher than the House proposal of 9%) on income above $250,000 for married joint filers. It also bumps up the three existing tax rates to 6%, 7.7% and 8.5% (currently 5.35%, 7.05%, 7.85%). All of these income tax rate increases would blink off once the state’s budget is balanced. The bill also repeals the low-income motor fuels tax credit, eliminates the tax deduction for mortgage interest paid on a second home, and exempts up to $2,400 of unemployment compensation from income taxes.
Includes tax cuts for businesses targeted at stimulating the economy, but also raises some business taxes. The Senate tax committee provides an upfront sales tax exemption for capital equipment purchases by businesses (note this provision is not in the House bill), and also provides an income tax subtraction for pass-through income. The bill raises $132 million in FY 2010-11 from increasing the statewide property tax paid by businesses, and puts on hold the transition to Single Sales Factor, which raises $26 million in FY 2010-11.
Creates a new surtax on income from “excess” interest collected, raising an estimated $216 million in FY 2010-11. For transactions that have an interest rate over 15 percent, this would impose a 30 percent tax on the portion of income generated the interest that exceeds 15%. This provision has already generated a lot of testimony, for and against.
Expands the definition of business “nexus” to enable sales tax collection on some internet purchases. This proposal takes a page from the state of New York, and attempts to address the fact that the state sales tax is not collected by businesses like Amazon.com that sell online to Minnesotans, but don’t actually have a store in Minnesota. For details on how it does this, read this helpful summary from the Department of Revenue. It raises $23 million in FY 2010-11.
Aids to counties and cities is reduced – by about $14 million a year for counties and $16 million a year for cities – and levy limits are repealed. These aids were previously cut by the Governor in December through the unallotment process. The House would cut aids to local governments much more than the Senate.

You can access the spreadsheet for the bill online.

Budget-balancing plans are now coming into focus. The Senate and House proposals close the budget deficit using a balanced approach combining one-time resources, spending cuts and revenue increases, while the Governor relies heavily one-time resources and spending cuts to get through two of the four deficit years.

-Katherine Blauvelt

Leave a Comment » | Taxes | Tagged: budget, income tax, interest tax, minnesota, progressive, regressive, renters credit, senate, surcharge, tax | Permalink
Posted by Katherine Blauvelt

Budget cuts would have very real implications for Minnesotans

April 19, 2009

By now we’ve heard a lot about the spending cuts included in the Governor’s budget proposal, but it is often hard to translate how a dollar amount cut from the state budget impacts the everyday lives of Minnesotans.

To help you understand the potential consequences of some of what is being suggested, the Minnesota Budget Project has just released a new analysis, Consequences of the Governor’s Budget Proposal. We focused on the Governor’s proposed cuts because they are what is known at this point and they provide a jumping off point for further policy discussions.

As Minnesotans have looked into the Governor’s proposed cuts in services, they have begun to understand the real implications for people’s lives. We tried to gather as many of those concrete examples as possible and collect them in one place. We hope the synopsis will add to the conversation as legislators are engaged in tough decisions about how to balance the budget, and that policymakers will subsequently question whether struggling Minnesotans are being asked to shoulder too much of the burden of solving the state’s fiscal troubles.

There certainly are more ways that proposed budget cuts would impact Minnesotans’ lives and we expect more stories will continue to emerge. We will update this document after the final budget decisions have been made.

-Beth Haney

Leave a Comment » | Budget Process | Tagged: budget, budget deficit, Budget Process, budget proposal, deficit | Permalink
Posted by Beth Haney

House property tax legislation adjusts homeowner credits and reforms local government funding

April 8, 2009

The House Property Tax Division passed their “division report” on April 1, which are their recommendations for the property taxes and aids to local governments sections of the House omnibus tax bill.

The House set a target of $250 million in cuts to this area of the budget for FY 2010-11, and the committee has sought to come up with cuts while still paying attention to the rising regressivity of the tax system and the need for local governments to fund services in their communities. (This compares to $520 million in cuts in aids and credits in the Governor’s budget.)

Here are some of the big pieces:

Property tax credits: The report makes a $19 million increase to the homeowner property tax refund, commonly called the “Circuit Breaker”. That’s a 6% increase, and it is achieved by 1) increasing the maximum amount of credit by 10 percent, and 2) for households with incomes between $18,120 and $67,909, it would now be a little easier to qualify and the amount of credit would be larger. The proposal also cuts the Market Value Homestead Credit by a similar amount – so they reduce the credit that is based on home value and increase the credit that is based more on income. The division report does not accept the Governor’s proposal to cut the Renters’ Credit.

Aids to local governments: The House would cut aids to cities (Local Government Aid) by 8% in FY 2010-11 and 7% in the next biennium – considerably less than the Governor’s proposal – and repeals levy limits for cities. Counties would face deeper cuts in County Program Aid in the FY 2012-13 biennium than proposed by the Governor, but would be allowed the option of enacting a 0.5% local sales tax. Counties would still be subject to levy limits in Pay 2010.

The House Property Tax Division has had several working groups this legislative session, focusing on local government performance measurement and improvement, local government mandates, and state property tax benchmarks and indicators. The outcomes of those working groups are also incorporated in this bill…stay tuned for additional analysis in the weeks ahead on understanding the potential impact on local services both of reductions in aid and changes in state mandates.

If you want to see the bill itself, visit the House Property Tax Committee’s web site and look for the amendments to HF 2020.

Next step: the division report will go to the full House tax committee, which will consider whether to fully incorporate the report into the omnibus tax bill, or make changes.