Categories
Uncategorized

2020 session tax preview

Last Thursday, Mark Haveman, the director of Minnesota Center for Fiscal Excellence, and I made a CLE presentation to the Tax Section of the Minnesota State Bar Association on the 2021 legislature’s likely tax agenda. Mark presented the more objective stuff – what we know about the budget and economic situation. Foolish as it may seem, I opined (translation “made some wild guesses”) about which the tax provisions the legislature might consider and enact. This post consists of the notes I used for my presentation.

Update note: Political and economic events often cause whatever slight value there is in a presentation like this to decay quickly. The November forecast, congressional decisions on a COVID relief package, and similar often may make economic and financial assumptions obsolete. Political events similarly may shift the context. The Senate majority’s announcement that Senator Carla Nelson will chair the taxes committee may fall in the latter category. It was made a few days after the presentation and could suggest a more moderate or pragmatic approach to tax policy issues and/or the potential need for revenue increases than I assumed (or not). As an interesting aside, the two tax chairs (Representative Marquart is the presumptive House chair) represent their caucus’s districts that voted most heavily for the opposition’s presidential candidate. Biden carried Nelson’s district by more than a 9-percentage point margin, while Trump carried Marquart’s by over 18 percentage points. That reality probably partially explains their more moderate views and may bode well for reaching compromises. The reality, however, is that big decisions (such whether to increase taxes and how) are now made by caucus leaders, not tax chairs.

Predicting what the legislature will do is a fool’s errand, which is likely why they asked me to talk today. As always, outcomes of the Minnesota tax legislative process will be determined by:

  • The fiscal and economic environment: the size of the budget gap (deficit) and the spending imperatives/demands – e.g., the perceived need for the state to respond to COVID-19 and its other more usual priorities.
  • The political environment: the split legislature means both parties will need to reach agreement to enact a budget. 2019 provided evidence that that can be done when there is a budget surplus, since the parties can agree to divide the surplus dollar between each of their preferred priorities (GOP = tax cuts; DFL = more spending). The one recent experience with a large budget gap (2011-12) does not bode well for reaching agreement easily and on time. There now are different political actors (new Governor and legislative leaders), but it’s unclear how much personalities, rather than the character of the parties themselves and their differing policy views, drove the difficulty of resolving matters. The ongoing fights over the Governor’s emergency powers and COVID-19 executive orders surely will make reaching agreement more difficult.

Political Environment: How can the two parties find agreement?

Mark Haveman’s presentation covered the fiscal and economic environment – more of an objective exercise; I’ll move into the subjective realm of politics and guessing what the legislature will do in response. If economic forecasting is a fraught with uncertainty, then forecasting politics is a hopeless waste of time. But it’s fun or, at least, it was a frequent topic of conversation with my former legislative staffer colleagues over lunch or at happy hours. Despite being insiders and working for key actors in the process, our predictions were little better than chance. Having lost the advantage of being an insider, my predictions likely will be worse than chance. Don’t say you weren’t warned.

What does the election tell us about the political environment?

When asked to do this presentation, one of the suggested topics was to assess the impact of the election on tax legislation in the 2021-22 session.

The Election Results. All legislators were on the ballot but no state executive branch officers (e.g., governor, AG, etc.) were. The election resulted in little change in the partisan balance of power:

  • The DFL picked up one net Senate seat, but the GOP still retains the slimmest of majorities (34-33). Breaking news as of yesterday, Senators Bakk and Tomassoni broke away from the DFL caucus to form their own moderate caucus, so the split is now 34-31-2.
  • The GOP gained 5 net House seats but the DFL retains a slim majority (70-34). The House GOP also has a rump caucus, but it is to the right of the main caucus, not a centrist affair like the new Senate caucus. So, it’s not an opportunity for the DFL to coopt and does not obviously weaken the GOP caucus’s bargaining position.

Tentative reflections on the potential general impact of the election results

Split control makes major tax and other policy changes unlikely. I think it is fair to say (without any inside knowledge) that the DFL had high hopes of gaining control of the Senate. That would have enabled them to close the budget gap and potentially fund new initiatives with tax increases. Retention of GOP control makes that improbable if not impossible. A variety of tax increases may have been possible and certainly some were likely under full DFL control (see below for my speculation as to what shape that may have taken); they are no longer. More likely, little will happen – in terms of material tax increases.

The GOP did quite well nationally and almost as well as in Minnesota (ignoring the elephant in the room, the presidency). This likely will make Republican legislators less willing to compromise on taxes and more willing to “roll the dice” waiting to see what the voters do in 2022 when everyone, including the governor, is on the ballot. It is likely to make moderate DFLers more reluctant to take risks (e.g., vote for tax increases as bargaining positions in the legislative poker game). This will be especially true for those with “swingier” or red districts (and remember this is a redistricting year, so some suburban and rural members may not know the exact political complexions of their districts). For example: Paul Marquart, the current and likely 2021-22 House tax chair, represents a bright red district that Trump carried by a wide margin. He will be instrumental in formulating House DFL tax positions.

Primary challenges eliminated a few moderate DFL members in safe districts. The general election also eliminated a few DLFers in swing districts. That combination is likely to make reaching deals with the GOP harder for the DFL caucuses, since one would guess the replacement members (fewer moderates) will be less willing to compromise. The new two-member Senate moderate caucus is a further reflection of that trend.

The election has further sorted the parties geographically. The DFL more heavily represents center cities, inner ring suburbs. and college towns in Greater Minnesota – the seats the DFL lost were mainly rural or exurban. (The one House exception was the South Saint Paul and Cottage Grove seat the DFL lost. The Senate DFLers picked up a St. Cloud seat.) By contrast, the GOP more heavily represents rural and exurban areas and gained seats there. (That leaves the outer suburbs and the Iron Range as the battle grounds, for whatever that is worth.) The creation of the new Senate moderate caucus is another data point in that trend. It may reflect that the Iron Range is ultimately destined to go Republican, contrary to its longstanding historical roots, making it consistent with the rest of rural Minnesota and overcoming its unique industrial labor history that created a strong affinity for the DFL Party. For those interested in the details of this geographic political split, I recommend listening to Todd Rapp’s fascinating presentation at the MCFE November Policy Forum, available online here (Todd’s presentation begins at the 1:34 mark) to MCFE members or reading Peter Callaghan’s MinnPost story based on that presentation.  As a demographic matter, the GOP voters appear to be whiter, older, and less educated while the average DFL voter is younger, browner, and more highly educated.

An interesting question is whether this geographic and demographic sorting will influence tax policy positions – e.g., the design of state aid formulas and tax expenditures? Unclear, but I tend to think it is no accident that the GOP is such a strong proponent of exempting social security benefits from income taxation (its partisans are older and more likely to be collecting social security) and that they are willing to cut LGA which heavily goes to urban areas (on a dollar basis), areas they don’t represent. Will it affect support for student loan tax expenditures or other policies that have clear geographic or demographic beneficiaries (younger voters tend to vote DFL)? Hard to say; the effects are probably small and long run.

As an aside, rural Minnesota clearly benefits from a positive “balance-of-payments” from state government (i.e., these communities receive materially more in state aid and other state spending than they pay in state taxes). One might wonder how long that arrangement will persist if they remain solidly Republican and (if ever) the DFL regains control of both houses of the legislature and governorship for an extended period. That seems unlikely to occur for quite a while, given the geographical distribution of partisans (i.e., Todd Rapp’s point about the distribution of GOP voters making Republican legislative caucuses competitive for at least the next decade). Moreover, the DFL always holds hope of again competing for rural districts, so it will be reluctant to cut back on funding just because they solidly vote Republican. But without caucus members strongly advocating for rural interests, a natural tendency would be to prioritize other funding areas.

Will formation of the new Senate caucus affect the shape of a final budget deal, specifically with regard to the possibility of enacting tax increases? Off-the-top-of-my-head, I don’t think it will change that much. I simply cannot imagine the GOP majority moderating its tax aversion just because it has two moderate allies who are not actual caucus members. The bigger “what ifs” are what would have happened if the DFL had flipped the Senate with a one or two vote majority. In that instance, Senator Kent likely would have found that she was negotiating with Senator Bakk to keep him from defecting to a GOP-led form of coalition control, in which he would have had a central role in budget negotiations. It could become important if a vacancy occurs in the GOP Senate ranks, though.

Basic Tools for Closing a Budget Gap

There are four simple mechanisms that the governor and legislature typically use to close a budget gap:

  • Spending reductions are an obvious first approach. The administration has announced it is already taking some baby steps in cutting state agency spending. But most state spending funds programs operated by schools, cities, and counties. Those amounts are set by statute, which the governor cannot unilaterally reduce so long as there is money in state coffers to fund them.  Reductions in these programs flow down to the local government budgets. They have some limited ability to offset reductions by using their reserves or raising local taxes – typically property taxes. So, state spending reductions can result in local tax increases. But that flexibility is limited in the short run, because of issues of timing and political acceptability.
  • State tax increases come in two flavors – (1) temporary or (2) permanent. Temporary increases are useful or politically attractive, if the perception is that the drop in revenues is also temporary and IF you think that temporary tax increases will not become permanent.
  • “Shifts” or deferrals of spending or acceleration of revenues – accelerating the collection of revenues/taxes or deferring spending until the next fiscal year. The most frequently used of these is to delay the payment of state aid to school districts. Flexibility in government accounting rules allows the state to increase its “settle-up” payment of aid to school districts (made after the end of the fiscal year when pupil counts and other factors that legally determine the final aid amounts are known) without accruing the liability. The normal settle-up payment is 10%. In the past, the legislature has more than tripled that percentage. That compels many schools to engage in cash flow borrowing, but not necessarily to cut their budgets beyond the small added interest cost of the borrowing. Increasing the school shift could conceivably be used to realize one-time budget savings of $1 billion to $3 billion. The shift is a “permanent” reduction in the level of aid (i.e., it doesn’t need to be “paid back”) until the settle-up percentage is reduced, either legislatively or by the statutory allocation of forecast surpluses.
  • Using reserves or other set-aside moneys – this is the classic looking through the couch cushions for money. The current biennium is likely to burn through the basic reserves, but there are a variety of other moneys that have been set aside, such as the stadium reserve (to identify one that most will recognize but there are others) that legally can be tapped for general fund purposes.

To bracket the possibilities for the 2021 session, it is useful to think about what each party would do if they were in full control of all three entities (governorship, House, and Senate).

What would GOP do if it controlled?

The GOP has not simultaneously controlled all three entities since the 1960s, so we must rely upon what they proposed when they controlled one or two of the relevant entities – i.e., 2003-05 (House and governorship) and 2009-10 (governorship) and 2011-12 (House and Senate) – when there were large budget gaps or deficits. That’s not a totally reliable indication of what they would do if they were in full control or as an actual enacted change, since those positions are typically formulated as opening bids or bargaining positions for the legislative negotiations.  But it is the best indication that we have.  So, based on those experiences, the following seems likely.

  • Heavy reliance on shifts or deferrals – it seems likely that they will do the maximum feasible amount of shifts (not sure what that would be, but maybe $3 billion or more), since that is the path of least political resistance. The obvious big candidate is the school shift. Because few of the other previously enacted shifts have been reversed, there are not too many other options. One possibility would be to increase the June accelerated sales tax (e.g., slightly raising the percentage rate and/or adding excise taxes once again). There may be other minor spending side deferrals that are possible.
  • Spending reductions would make up most of the rest. In the past, the GOP has proposed large cuts in human service and state agency spending and to not increase K-12 and transportation spending. I would expect that pattern to continue in the Senate’s proposals. They will likely also propose substantial cuts in aid to cities and counties, as well as in the property tax refund. The city and county aid cuts will focus on aid paid to urban cities (Minneapolis, St. Paul, and Duluth) and counties (Hennepin and Ramsey especially), since doing so has little effect on the districts they represent. On the property tax refund, I would expect that they will propose renter credit cuts with smaller cuts in the property tax refund if any (probably scaling it back so higher income homeowners get less). In 2011, they proposed significant renter credit cuts.
  • Rummaging through the couch cushions will also be done. I would expect that this could be good for a modest amount (at best, somewhat over a $100 million or so).

Obviously missing here are tax increases. Governor Pawlenty proposed a cigarette tax (well, okay, fee with a fig leaf special fund) increase in 2005 that was enacted. But that was an 11th hour proposal to reach a compromise and the GOP has stepped its tax aversion quite a bit in the 15 years since. Opposition to tax increases of any type defines the party’s brand; supporting tax increases is sure to earn an elected Republican the RINO (Republican In Name Only) moniker. As a result, and based on Senator Gazelka’s public statements, I think the GOP will strongly oppose closing the gap with virtually any tax increase. I’ll get into this a bit more below under the potential compromise or deal.

What would DFL do if it controlled?

The DFL was in control of both legislative bodies and the governorship in 2013-14 in a somewhat similar budget situation, so that provides a reasonable guide, along with what they have said on the record. Based on that and my own wild ideas:

  • Modest reliance on shifts – during and in the aftermath of the 2002 recession and the Great Recession the DFL regularly railed against the heavy reliance on the school shift that was a legacy of the Pawlenty era, but I see no way that the Governor and House do not propose some version of it just to make the numbers work without a massive tax increase that they know (1) will not be agreed to under any scenario by the GOP and (2) would be a political liability in the 2022 election when the Governor and all legislators are up for election. I would guess that this number (pending the uncertainty about the size of the gap) will be in the $1 billion to $2 billion range.
  • Small spending reductions – just as the GOP will not propose tax increases, the DFL will be reluctant to propose large spending reductions. They still will propose and agree to some. But we are here to talk about taxes.
  • Heavy reliance on tax increases – I expect both the Governor and House to propose to close the gap heavily with tax increases. Based on 2013, the go-to options will be corporate, income taxes on high-income filers, tobacco taxes, and to a much lesser extent a collection of other taxes. I will speculate about that more below.
  • Couch cushions – like the GOP this will be de rigor. Since MMB has the best knowledge about these options, the governor seems likely to take the lead. But some of them have already been tapped during the 2020 sessions and legislators are often willing to push the envelope more than governors. Legislators, however, tend to be willing to propose ones of more questionable practicality or legality to make their opening bids in the negotiations more politically palatable while still “balancing” (at least on paper).

Since this seminar is supposed to be about taxes, I’ll speculate about what sort of tax increases the Governor and House may consider including in their budget proposals and, then, further speculate about whether any of them could actually get enacted. Here is where I’m in really dicey territory – evidence-free, fake news, conspiracy theories, whatever you want to call my idle speculation. None of this is based on inside information. Except as otherwise specifically noted, I expect the GOP response to each of these options to be no. At the end, I will speculate possibility of a budget “deal” to end the (likely special) session.

Corporate tax possibilities

  • Conform in some way to GILTI – Speaker Hortman has said this is likely option during campaign, probably similar to what the House proposed in 2019 would be a good guess; Governor likely will propose some other variant that is less aggressive than the House version. Taxing something called “foreign earnings” is attractive politically. Campaign literature that includes charges of “My opponent voted to tax the foreign earnings of multinational corporations” probably is not worth the cost of the paper and ink. In fact, it might cause some more reflective readers to wonder why you would prefer to cut education or other attractive state spending priorities instead.
  • Partial tax on TCJA repatriation income – this has the feel of retroactivity, but the TCJA itself had a similar retroactive feel (i.e., tax applied to income earned potentially many years earlier, which federal law permitted to be permanently deferred; so, the repatriation tax repealed a de facto exemption of income earned many years earlier in some cases); federal tax applied in TY 2017 but is payable in 8 annual installments; state could take a parallel approach requiring recognition of federal repatriation amount in 2021 (i.e., taxing some percentage of the federal 2017 amount as a dividend, payable in tax years 2021- 24). State could argue it is conforming to TCJA’s deemed end of deferral, but with a bonus of four more years of interest-free deferral than allowed under federal law? This has the attraction of being a one-time, temporary tax. Comment about possible GOP response: Although the GOP legislature’s TCJA 2018 conformity bill taxed the income, it used its temporary revenues for a permanent rate cut; that does not show an appetite to use it as a revenue raiser for spending.
  • Impose corporate tax on pass-through entities – this has been proposed as a way to circumvent TJCA’s $10k limit on the SALT itemized deduction (IRS has indicated it will issue regs allowing) – in a twist, DFL could turn it into a revenue raiser by setting a higher rate or not fully exempting the income on the individual income side (suboptimal approach because it would reduce federal deductibility of the tax paid)
  • Temporary surtax – I do not think this has been done since the 1950s.

Individual income tax possibilities

  • Temporary or permanent rate increase on high-income filers – seems like that well has been tapped already with the 2013 rate increase, but that is where DFL rhetoric typically points and other states still have higher top rates.
  • Temporary increase of some sort (surtax as was done in the early 1980s). I doubt that they will go there, since GOP will not agree, and they would be bludgeoned with it in the 2022 campaign as taxing everybody, even though almost 50% of the population does not pay income tax.
  • Repeal 2019 rate cut championed by the GOP – they might not want to go there because it would be a middle-class tax increase, since the rate cuts were on the lower brackets. Same arguments as made for the surtax apply here but it would not be temporary, so even worse politically.
  • Base increase – e.g., limit deductions (mortgage interest, property taxes, or similar), repeal more recently enacted tax expenditures championed by GOP (529 plan breaks, reciprocity breaks for those working in Wisconsin, student loan credit, long term care credit, etc.) – since I’m no longer talking with members, I don’t have a good feel for the politics of any of this. Typically, they are considered a heavy political lift (concentrated opposition from the interest groups that support them) relative to the modest revenue they raise. I am sure that they will not go after the social security deduction that was enacted in 2017 and expanded in 2019, given its political popularity and senior citizens’ electoral power.

Sales tax possibilities

  • Expand base by extending tax to services or repealing some exemptions – this was a classic move in the old days (late 1980s and early 1990s); no one seems to talk about it anymore, but I would not be surprised to see some limited options reappear.
  • Expand local taxing authority – this could be done in the metro area for transit, allowing reduced general fund payments for transit operations or general authority could be provided for cities and counties to impose and use for general purposes. Most existing local taxes are restricted to specific capital type projects. State savings could be realized by offsetting or reducing aid paid to the local units that are granted new authority (LGA for cities or CPA for counties). This passes the formal political responsibility for actually imposing the tax increase to local units, slightly reducing the political risk to legislators. GOP response: This might have some slightly greater potential for inclusion in a final “deal” for that reason. Similar approach was taken in 1992 with counties imposing sale tax rate and offsetting state aid when Arne Carlson was governor and the DFL controlled the legislature. The current, strong version of GOP tax aversion seems unlikely to go for such a fig leaf, though.
  • Temporary rate increase – seems unlikely because Minnesota’s rate is already very high and it’s regressive, which does not appeal to DFL legislators.

Other taxes or revenue possibilities

  • Increase gas tax and back out some general fund money used for highways (e.g. dedication of sales tax on vehicle repair parts or vehicle leases) – Governor proposed gas tax in 2019 and seems likely to do so again; this could be used as a backdoor way to help general fund by reducing general fund subsidies for highways. Likely GOP response is strong opposition: Senator Gazelka’s public statements and their campaign positions probably lock that in.
  • Increase cigarette excise tax – this was done in 2013 to such an extent that there is little room for additional increases, but the 2017 tax bill repealed indexing of the tax rate. One possibility would be to restore that or to increase the rate by the amount that indexing would have yielded absent its repeal. Sin taxes (same goes for alcohol excise taxes which are a less popular option) are among the most regressive taxes, which causes DFLers generally to disfavor them, but the revenue and government costs of the vices often overcome their equity concerns. Legislators representing districts on the state borders generally strongly oppose increases because they cause leakage of sales to retailers in neighboring states.
  • Increase alcohol excise tax – this has been proposed in the past to fund chemical dependency treatment; excise tax rate was last increased over 30 years ago and is not indexed for inflation; tax is much lower than the government’s cost of dealing with alcohol abuse.
  • Legalize marijuana and impose an excise tax on it. Voters in four states (AZ, MT, NJ, and SD) authorized legalization and taxation in the 2020 election, but I doubt that will sway legislative opponents’ minds. The short run revenue potential is limited because it will take time to institute a regulatory and tax system for a newly legalized product; with its narrower majority in the House I wonder if the DFL has the votes to pass, although one or two libertarian GOPers could crossover and vote for it, I suppose.
  • Repeal some of the GOP-led reductions in the state general tax (C/I property tax) – I doubt that they would propose to eliminate the exemption, but could see DFLers proposing to increase the levy, set the tax as a rate rather a levy, or restore indexing of the levy.
  • Increase estate taxes, e.g., by reducing the exemption amount or making rate changes (e.g., going to a flat rate of 16%, the current top rate, or going even higher as in Washington state) – DFLers favor progressive taxes and estate taxes are an easy way to do that; the small potential revenue yield makes it largely symbolic, but it’s a big symbol to both parties; the ferocity of the debate is surprising given the small revenue stakes and number of taxpayers involved (like Henry Kissinger’s description of academic politics – “they’re so vicious because the stakes are so small”)
  • Others may be proposed (carbon tax?)
  • Compliance initiatives were a staple of Pawlenty administration to raise revenues without increasing taxes. In a stalemate environment, they could reappear. One option a few other states have started to look at are liquidated/defunct partnerships and S corporations with negative capital accounts from booking losses in excess of income. The IRS allegedly has not been attempting to collect the recapture taxes that would be owed as a result and that expanded data availability may allow auditing for that and collecting from the partners or S shareholders. This would be extraordinarily complex for a state (probably why the IRS has not pursued – in addition to the reality that it might encourage zombie partnerships and S corps to avoid paying) and the revenue yield is likely to be long run, rather than a quick fix. That reduces the ability to book money for budget purposes. GOP response: This seems like a live possibility because it is not a tax increase per se. But its viability will depend upon whether DOR staff think it is feasible option – I have no insight on that since I have not been in contact with them.

Prospects for a deal that includes some type of tax increase or other changes?

Based on the 2011 experience, it seems unlikely that the GOP Senate will agree to any meaningful tax increase. The election results, which they will regard as a rejection both nationally and in Minnesota of a liberal or big government agenda, will likely stiffen their resolve in that regard. However, I would not totally write off some limited and temporary tax changes (e.g., on corporations or excise taxes) that raise a modest amount of revenue BUT ONLY IF the deficit/gap is very large (e.g., $3 or $4 billion more than the current estimate).

As I suggested at the beginning, making predictions about what the legislature will do it foolhardy. But here goes (disclosure: I would not put any money on my predictions):

  • One thing that is safe to predict is that there will be a budget deal. It may take an extended special session and a government shutdown (as in 2011).  But Minnesota, unlike some states (e.g., Wisconsin and Illinois), does not have a permanent spending authority allowing the state to operate on autopilot in a deadlock. On the surface that is good, because it makes running up a de facto deficit as Illinois has done more difficult. It makes government shutdowns more likely of course.
  • The deal will include a large helping of shifts – closer to the maximum tolerable amount than a minimal amount like $1 billion. That is so because it is something both the DFL and GOP can agree on; it’s the politically easiest solution. Opposition to forcing schools to borrow, which is what the school shift does, was a drum beat of DFL legislative campaigns in 2012 election and may have affected the GOP’s loss of their majorities. But it’s unclear how much that was a factor, given the myriad of factors involved in any election campaign. For example, the 2011 legislative Republicans also were responsible for repealing the market value credit, resulting in homeowner property tax increases (especially in rural areas of the state, their strongholds). One GOP legislative staffer privately told me that they felt the decisive factor in 2012 election was putting the two constitutional amendments on the ballot (Voter ID and Same Sex Marriage ban), which drove the DFL base to turnout in mass. So, it is not clear to me how much they will consider a big increase in the school shift to be a political liability based on the 2012 experience. I think will view the shift as preferrable to tax increases or larger spending cuts in reaching a deal with the DFL. But that’s just a guess by a nonpolitical guy.
  • There will be some amount of spending reductions, many of which will likely be shared or primarily borne by cities and counties through reductions in state aid. Failing to fully fund the current services level of health and human services programs seems likely because there is so much money in those budgets and the GOP typically proposes it.  (Whether you consider that to be a spending reduction typically depends upon whether you are a Democrat – yes – or a Republican – no.)
  • Whether there will be any or significant tax increases is the big unknown. If the deficit remains modest – e.g., because Congress comes through with aid and/or the economy continues to recover – will be a key factor. If the budget gap is less than $4 to $5 billion, I would guess there will be no tax increases or very small ones wearing disguises (fee increases, cuts in tax expenditures, etc.). As the size of the gap rises, the possibility of some type of tax increase rises. But …
  • I would be remiss if I did not point out that the 2011 budget deal uncovered the legal ability of the state to use “appropriation bonds” or non-tax revenue securitization (such as tobacco bonds) as a de facto deficit financing mechanism. I would not be surprised to see that option reemerge if the gap to be closed is exceptionally large ($6+ billion). The tobacco settlement payments are no longer an option.  But there are other nontax state revenues that could be securitized. I would guess the Senate GOP will hold out for that before agreeing to material tax increases. This approach is problematic (more so than deferrals or shifts) because payback must start in the next biennium, deepening the hole the state will be in then. That was not a big problem in 2013-14 because DFL control resulted in enactment of a large tax increase augmented by a modestly robust economic recovery. It would be very problematic with continued divided government and a stagnant economy in the 2023-24 biennium.

Possibility of other tax changes. Even if the final deal does not involve tax increases, I would assume that would not foreclose making changes that shift the tax burdens around without raising revenues. That might allow passing a conformity bill that addresses some of the federal changes made in the CARES Act, among others. Conforming to the NOL and loss changes is highly unlikely because of the large revenue reduction that would result, but there may be ways to mitigate the complexity caused by linking Minnesota law to an earlier version of the IRC.  Working around TCJA’s limits on SALT deductibility for pass-through entities (referenced above as a revenue raiser) is sure to be seriously considered and has a good possibility of being adopted because it is a relative cheap way (feds bear the cost) to bestow a benefit on an important constituency. Addressing extenders will come up in 2022.

In any case, a session that must respond to a (hopefully) once-in-a-century pandemic and close a very large budget gap is sure to hold many surprises and unexpected results. It is also safe to predict that enacting a budget will require a special session that will not conclude before June, if then.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s