Random Thoughts

WaPo is reporting that last week JP Morgan sent a note to its clients saying that there was a 90% chance of a recession, according to market indicators. Events on Sunday (i.e., Saudi Arabia’s oil moves) and movements in the bond market today (the entire Treasury yield curve was below 1% when I wrote this!) provides more evidence for that. Of course, the stock market is imploding, but I regard the bond market moves as more telling. None of this means that it is a sure thing that the economy is heading into a recession, but the probability is much higher than it was a week or month ago. It’s unlikely to be 90%, but that’s probably closer to reality than the 29% or 37% reported in February forecast.

The implications for state budget policy seem obvious. With regard to the projected budget surplus, only two things should be done:

• Appropriate money to help prepare for and mitigate the effects of the coronavirus. According to media reports, the legislature is doing that. It should speed things up.
• Move the rest of the surplus to the budget reserve or leave it on the bottom line.

If a new budget forecast were done now (well, after a new GII estimate is available), it seems obvious the surplus would be gone and there would a shortfall of some size. It is imprudent, as a result, to spend general fund money or cut taxes – anything that diminishes general fund resources – unless you would be willing to do that without a surplus. Cutting unnecessary stuff would be wiser, but likely politically impossible. Giving the governor authority to unallot without meeting the stringent requirements now in law (i.e., exhausting the budget reserve) would be a good move, but probably would be opposed by DFLers and so will not be seriously considered.

With regard to bonding, by contrast, it is fine to proceed with a robust bill. The lag between passing a bill and ramping up projects means that doing so can’t be justified under a rationale that it will allow taking advantage of the big dip in interest rates. But these extraordinarily low rates may persist for some time (lets hope not, because that means the economy is in bad shape) and although it is counter to one instincts (based on personal/household budgeting rubrics), borrowing and making public capital investments during a recession is a good thing. So we might as well get the projects and bonding authorizations on the books to allow that to happen if the recession is a long one or if low rates persist for other reasons.

On a separate issue, Bernard P. Friel wrote a letter to the editor responding to John James’ and my Strib op-ed on taxing social security. Incongruously (to me, anyway), the Strib made it the spotlight letter on Sunday. His essential point is that state taxation of social security is inconsistent with both the original purpose of social security itself and the 1983 law that subjected benefits to federal taxation. The former was intended to promote the general welfare by providing old age benefits and the latter to shore up the financing of those benefits. He goes on to write “There is nothing in that preamble or in the [social security] act suggesting that part of the benefits provided should be used to reform a state’s tax system.”

This response to our op-ed is a total non sequitur, of course. The purpose or policy behind a federal law does not dictate state tax treatment. Congress is perfectly capable of limiting state taxation and has done so repeatedly (e.g., prohibiting states from imposing individual income taxes on interest paid by Treasury securities, taxing railroad retirement benefits, limiting taxation of railroads, air carriers, and so forth). It has not done so for social security benefits. Consider a counter example: Congress’s purpose in paying civil servants and their pensions in no way relates to state taxation and state taxes on those payments could be viewed as making it more difficult for the federal government to achieve its underlying objectives. But that wouldn’t lead one to conclude that states should not tax federal employee pay or pensions under their income taxes would it? Well, for some years Minnesota did not tax federal salaries (until the late 1930s, I believe) and did not tax federal pensions until the 1970s. This was due to an expansive, old view of intergovernmental tax immunity doctrine. I wonder what Mr. Friel’s views were of those decisions as policy matter?

John and my views are not intended to “reform” the Minnesota tax system. Rather, we seek to preserve the status quo, which has been in place for 35+ tax years. An entirely different matter. We’re trying to prevent “deforming” of the state tax system, something much less ambitious than reform.

I mention all of this only because I used to know Bernie. At least, I assume that the Bernard P. Friel who wrote to the Strib is the same Bernie Friel that I knew as a long-time partner in the bond department at Briggs with several blue chip clients when I started working at the House. I can remember him calling up to lecture me on how TIF law had gone astray when it was being used to subsidize low-income housing and another time on how the Dorsey bond lawyers we’re pushing the envelop in some deal that they had signed off on. I’m glad to see that he is still kicking around and as opinionated and feisty as I remember him. He must have retired over 20 years ago and be in his 80’s.