Post-session thoughts

There is little question in my mind that this session made more consequential and major changes than any session of my 43 years as a legislative employee. The scope and breath of the changes are breathtaking. The changes include big tax changes, but less so than a number of big bills over the last 40 years (1987 and 2001 comes to mind). However, this session’s tax bill is unique in including both a large tax cut and increase. That may be a first since statehood.

Retirement allows me to pay casual and sporadic attention to what the legislature is doing.  I no longer know the details or what happened or the why: politically, practically, or personality-wise. That allows me to react in ways that are unrestrained by the hard realities that govern what can actually be done. That’s the context for these reactions to a few random things: comparisons to the Minnesota Miracle session, indexing the gas tax, increasing tax progressivity, local sales taxes, stadium reserve, and stuff unrelated to taxes. Take it all with a grain of salt, given my distance from the action. Warning it’s very long and boring.

Minnesota Miracle

Various DFLers have made claims that this session was similar to the Minnesota Miracle, i.e., the changes made in the iconic 1971 legislative sessions. Some of the claims were to put it kindly, fact challenged. That grated on the amateur historian in me. Former Representative Tom Berg published a STRIB op-ed that sets many of the facts straight. See also this MCFE piece that provides more useful context and comparisons.

The 1971 Minnesota Miracle was (at least) two things: bipartisan and a big tax increase. The Republicans (technically conservatives in the era with no party designation of legislative candidates) controlled both houses of the legislature. The tax bill, which it took until October to reach agreement on, was its centerpiece. It increased sales, individual income, and corporate taxes in a major way on everyone, one way or another.

In my view, the Miracle’s tax increases were driven by the need to fund the demands the baby boom put on education and other public services. In those days, Minnesota heavily relied on property taxation to fund schools. As the baby boom went to school, building and operating demands led to big property tax increases. Property rich districts were able to meet those demands. Other districts had difficulties, leading to unpopularly high property taxes and/or inadequate education services. The predictable result was a major property tax revolt, along with dissatisfaction with the level and quality of local, mainly education services. The DFL rode the property tax revolt to electoral success, winning the governorship and increasing representation, but not majorities, in the legislature in the 1970 election and ultimately to majorities in 1972. (This experience led, in my opinion, to their obsession with the legislature managing property taxes. An obsession that went on for 30 years and only broke with the 2001 property tax restructuring.)

The Minnesota Miracle was only possible because both parties recognized the inevitably of broad-based tax increases to meet those needs. Anything remotely similar occurring with the current Republican Party and its tax aversion would be a true miracle.

The substance of the Miracle legislation was a large state tax increase for state aid payments to forestall future local property tax increases, while funding increased local services, especially education but also city and county services, more equally distributed across the state.

This session, which disposed of (mainly spent) a big surplus, enacted new programs, and made a myriad of policy changes, is more comparable to the 1973-74 session, when the DFL had its first trifecta ever. (I don’t think the old Democratic Party before its merger with the Farmer Labor Party ever had unified control either for that matter.) The 2023 session, unlike 1971, mainly involved enacting the agenda progressive DFLers have developed over the last decade plus. 1971 focused on a tax increase to address basic spending needs (mainly education) and the property tax revolt. The current iteration of the GOP likely does not even agree with DFLers that some of the social problems they addressed in 2023 are appropriate fodder for government to address. The difference with 1971 seems stark. (Disclosure: I’m old but I was out of state in college in 1971. But I did hear legislators, staffers, and journalists who were working then tell numerous stories about it.)

Bipartisanship beyond deals compelled by the supermajority requirements for bonding bills are now a thing of the past. The increased partisan polarization and unwillingness to compromise is national and a two-party phenomenon, as reflected in two recent NYTimes stories, Mitch Smith, In a Contentious Lawmaking Season, Red States Got Redder and Blue Ones Bluer (6/4/2023), and Mike Baker, In a Year of Capitol Feuds, Oregon Has a Political Breakdown (6/4/2023).

Indexing the gas tax

The legislature indexed the gas tax for inflation. As I argued in two prior posts (here and here), the crisis in road funding heavily results from the legislature’s failure to maintain the historic real level of the gas tax. For most of its history the Minnesota legislature would periodically increase the nominal rate of the gas tax so it was about 50 cents per gallon in current prices; it’s now 28.5 cents. Relying on dedicated funding and the failure to maintain the gas tax ensures inadequate road funding and puts pressure on local property taxes, the fallback funding for city streets and county highways.

Is 2023 indexing a cause for celebration? I have mixed feelings, but the answer must be no. It’s like patching a leaky tire and re-inflating the tire only to its previously half-deflated state (or half-inflated if you’re a glass half full person). On the upside, you stopped the leaking. On the downside, you’re still driving on a more or less flat tire. If the legislature had indexed the tax in 1988 or 2008, the last two times it increased the tax, transportation financing would not be in crisis. A normal increase in the supplemental funding sources (license tax including hiking the tax on EVs) would be all that was needed. Indexing it now without also enacting a hefty increase does not solve the problem. My more basic fear is that this is last ever increase in the gas tax rate beyond indexing adjustments.

The delivery fee probably makes some sense as a half-baked alternative that may be politically more acceptable than a simple gas tax increase. A gas tax increase would have been simpler, easier to administer, and better. But politics operates in second and third best alternatives. (Interesting side question: Why is the delivery fee more politically acceptable than a plain vanilla gas tax increase? Hard to say. It’s new; it’s different; it’s less universal; opposition hasn’t ramped up for people who aren’t paying attention; gas prices are much more visible; etc. I’m sure the professional political flacks have better reasons or explanations.)

Based largely on instinct (not data or analysist), a weak case can perhaps be made for the delivery fee as correcting for external costs. These deliveries, particularly of small and light packages, impose more carbon emissions and road wear than customers driving to neighborhood stores to pick up merchandize (particularly for UPS and FedEx deliveries that use a lot of fuel and put more wear on streets with their bigger trucks than small passenger cars or USPS vehicles). However, exempting small dollar amounts, as politics appear to require, probably exempts deliveries that should pay the most (based on external costs). At least that is my intuition. These are the deliveries that most likely would be forgone with customers postponing trips to the store until they can pick up multiple items and it is where trucks are least likely to be needed.

Policy continues to muddle along. More road funding is clearly needed. We can’t make fossil-fueled vehicles pay for even their user costs of the road system. Meanwhile, the legislature enacts subsidies for buying EVs, including electric bikes that I assume are used heavily for recreational purposes. So, we’re subsidizing both fossil fuel use and reducing fossil fuel use. Go figure. Yet, one more example of how politics yields flawed policy. Aargh.

Doubling down on progressivity with a helping of volatility

Progressivity

Increasing progressivity is the traditional centerpiece DFL tax policy priority. At times I have thought their progressivity focus verges on an obsession, totally eclipsing the other standard tax policy principles. I personally have more heterodox policy views and think that proportional and regressive taxes are okay, if they have offsetting virtues (revenue stability, ease of administration, efficiency, etc.) and/or fund services with a progressive distribution, which most do. 

With full control, one would expect DFLers to make the tax system more progressive. The 2023 session income tax changes fulfilled those expectations, providing large cuts for lower income households and modest increases on upper income households. However, transportation funding (see above) and the authorization of regional and local sales taxes (see below) will undercut those effects.

The table provides numbers for some context. It reports the revenue estimates (per DOR) of the fiscal year 2026 numbers to eliminate one-time effects and expresses the absolute value of the changes as a percentage of MMB’s forecast for total income tax revenues to give some context for their scale. It shows tax cuts of over $860 million targeted to filers with incomes under $100,000 (typically a lot under that especially for the credit changes) or about 5% of projected collections and imposing increases of just under $350 million on filers with incomes over $200,000, most with a lot of income over that or about 2% of collections. The absolute value of the cuts and increases is about 7% of projected FY 2026 income tax collections, an aggressive restructuring of the distribution of the tax burden.

	FY 2026 amount (millions)	% of income tax revenues
Tax cuts (targeted to filers w/ <$100k incomes)
Child and working family credit changes	$394.4	2.2%
SS and qualified pension subtraction	319.5	1.8%
Rent credit on income tax	136.8	0.8%
Misc. credits	13.6	0.1%
Total cuts	$864.3	4.9%
Tax increases (targeted to filers w/ >$200k incomes)
Deduction phase-out	187.6
NIIT	87.7
GILTI subtraction, excess biz losses update	71.9
Total	$347.2	2.0%

The bill also increases corporate taxes and enacts a potpourri of tax expenditures, primarily extensions but some new ones too. The corporate tax increases (about $250 million/year) will be scored as regressive in the next Incidence Study. The largest share of these increases is the new tax on GILTI and there is some reason to think that the Incidence Study’s methodology measures this as more regressive than it really is, as I have speculated before. That may be so, because it likely represents return above normal profit levels that cannot be easily shifted to consumers to minimize tax, including state tax, and thus falls more heavily on capital or highly paid corporate employees. Just guess, of course.

Horner’s comment. After I had written (but not posted) this piece, Republican Tom Horner’s STRIB op-ed, Minnesota’s future: Minnesota Miracle or Minnesota Mayhem? was published providing his take on the 2023 session. He makes an assertion that seems contrary to my observations about progressivity:

This year saw a mishmash of ad hoc increases in taxes and fees. Combined, they made Minnesota’s taxes more regressive and more complex.

Tom Horner, Minnesota’s future: Minnesota Miracle or Minnesota Mayhem? STRIB (6/26/2023) [emphasis mine].

He cites no source for this assertion, which I suspect is based purely on his impressions and little or no analysis. Confident assertions like this that are not based on facts and analysis irritate me to no end. (Aside: I respect Horner and wish the Republican Party had scores more folks like him and that they listened to them, rather than marginalizing them as RINOs. I also don’t disagree with some of his takes on the session. But I find his apparent concern about regressivity to be a bit off for a Republican, except as a way to tweak DFLers. The pattern in deep red states is to reduce progressive taxes, i.e., income taxes, and if tax increases are necessary, to increase regressive taxes, primarily sales and excise taxes. That is more revealing about Republican’s true feeling about progressivity. So, when they oppose tax increases because they’re regressive, I assume it’s just to make rhetorical points. Obviously, as a more moderate type, Horner may actually care about progressivity but I suspect it was a throwaway point.)

My discussion focuses solely on the individual income tax, which I think will unquestionably become more progressive. That’s about $1.2 billion in progressive changes, I would note. I’m not sure whether those effects will be overwhelmed by other tax and fee changes. (I don’t think Horner knows either; he just thinks he does. Technically, his assertion is about “increases” so he may be conveniently ignoring the very progressive tax cuts that are implicitly funded by the increases. I think you need to consider the net of both in measuring distributional effects.) Obviously, the 2023 local sales tax changes will result in some unclear but significant increase in regressive taxes. There is the mandated one percentage point increase in the metro sales tax rate (about $770 million for FY 2026) and some unclear increase in city and county rates across the state, depending upon referendum votes and decisions by local governing bodies. Transportation finance changes in addition to the metro sales tax (delivery fee, MVST rate increase, registration tax rate increase, and gas tax indexing) may amount to $400 million more in revenue in FY 2026 (ignoring the sales tax which is in $770 million amount). Some of these may be mildly regressive (MVST and registration tax) and others more so (delivery fee?). Whether these will more than offset the progressivity of the individual income tax changes is unclear to me. If required to, I’d guess that they wouldn’t. But it would be just a guess.

Note that the stable, but regressive, taxes go to dedicated or local spending, whereas the general fund gets the progressive but also volatile income and corporate tax revenues. That brings me to my next observation.

Volatility

An almost inevitable, if unintended, effect of increasing progressivity is to increase the volatility of revenues. That will surely be the effect of the 2023 income and corporate changes, both the tax cuts and the increases. A few points:

• Untaxing more social security and public pension benefits subtracts for the base a quintessential stable (and growing with the retirement of the baby boom) portion of the income tax base. This income is immune from oscillations of the business cycle, unlike capital gains, investment income, profits of unincorporated businesses, or even wages to a lesser extent. From an investment perspective, the revenue from taxing social security benefits is like the yield from a Treasury bond, a sure thing. (Caveat: Social Security finances technically are on a legal path to reduction next decade if Congress does nothing. Politically that is unthinkable to me, but politics can yield strange, if unlikely, results.)
• Child credits are a function of the number of children and are inversely related to income. The more income a family has, credits are reduced or eliminated. This means that the credit will likely be a stable and modestly countercyclical cost/tax expenditure. If the economy drops into recession and family incomes drop or fail to rise, credit costs will grow. That will happen when the states budget is least able to bear the costs. As an aside, credit parameters are indexed for inflation, so the nightmare budget scenario is stagflation, like the 1970s, where prices go up and incomes do not.
• Higher income filers, the focus of the tax increases, derive much more of their income from volatile sources – capital gains, profits of unincorporated businesses, bonuses, and similar – than middle income taxpayers who rely more on wages. Shifting more tax to high-income folks will inevitably increase volatility. The new net investment income tax (NIIT), which applies to individuals with million-dollar incomes, is sure to heavily consist of capital gains, the most volatile portion of the tax base. I would guess that more than half of it is capital gain in a typical year (more in bull markets and less in bear markets).
• Corporate profits historically are volatile, as well; their volatility as a major revenue source are eclipsed only by capital gains.

Prudent budgeting would suggest increasing the budget reserves in response to (1) making the most important revenue source more volatile and (2) significantly increasing spending. The 2023 legislature did put about $200 million in the budget reserve likely to accommodate the latter factor. 2023 Minn, Laws ch. 62, art. 2 § 58.  I assume that amount was based on budget reserve percentage calculated by MMB in 2022 but don’t know that. I will be interested to see if MMB increases the reserve percentage in September under Minnesota Statutes, section 16A.152, subdivision 8, as a result of the 2023 tax bill’s income and corporate tax changes. I assume it will.

I have argued before that the current robust budget reserve balance will still be insufficient to fully offset revenue reductions that result from deep recessions, like those experienced in the 1981-82, 2002-03, and the Great Recession, if only because the revenue reductions from trend persist over more than one biennium. The 2023 changes may accentuate that effect. This is in addition to the more basic question of whether the new revenues, on a permanent basis, are sufficient to cover the spending commitments.

Local sales taxes

The parade of local sales tax authorizations continued. My count (likely incomplete) follows. It lists new authorizations or increases in rates, not extensions, added projects, changes in approval procedures, and similar. (On that score, multiple cities used the session as an opportunity to expand the purposes and durations of their sales tax authorizations. No surprise. It makes sense to get it when the getting is easy. Any lobbyist worth her salt will tell you that.) See this MinnPost story on the city and county taxes, which includes maps and a table. The two Met Council taxes are imposed by state law (i.e., the statute mandates the Council to impose them). The city and county taxes are subject to the usual voter approval. Unless otherwise specified, references are to a city:

• Metropolitan council for housing (0.25%); 2023 Minn. Laws ch. 37, art. 5 § 2
• Metropolitan council for transportation (0.75%); 2023 Minn. Laws ch. 68, art. 3 § 29
• City of St. Paul (1%) 2023 Minn. Laws ch. 64, art. 10 § 2 (citations for the taxes below are all to article 10)
• Beltrami County (0.625%), § 25
• Blackduck (0.5%) § 26
• Bloomington (0.5%) § 27
• Brooklyn Center (0.5%) § 28
• Chanhassen (0.5%) § 29
• Cottage Grove (0.5%) § 30
• Detroit Lakes (0.5%) § 31
• Dilworth (0.5%) § 32
• East Grand Forks (1%) § 33
• Fairmont (0.5%) § 34
• Henderson (0.5%) § 35
• Hibbing (0.5%) § 36
• Golden Valley (1.25%) § 37
• Jackson (1%) § 38
• Jackson County (1%) § 39
• Monticello (0.5%) § 40
• Mounds View (1.5%) § 41
• Proctor (0.55) § 42
• Rice County (0.375%) § 43
• Richfield (0.5%) § 44
• Roseville (0.5%) § 45
• St. Joseph (0.5%) § 46
• Stearns County (0.375) § 47
• Stillwater (0.5%) § 48
• Winona County (0.25%) § 49
• Woodbury (0.5%) § 50

The list is remarkable in its length, inclusion of multiple Twin City suburbs, rates higher than the mode rate of 0.5%, and for overlapping authorizations (e.g., the seven-county metropolitan area, Jackson County, Stearns County, and cities in those jurisdictions).

A rate increase of a full percentage point in the metropolitan area will occur and if history is any guide, the voters in many individual cities will likely approve more, some of which will affect many nonresident shoppers (e.g., Bloomington, Roseville, and Woodbury are all major regional shopping locations). After all the referenda are held, it will be interesting to see what the combined effective state and local sales tax rate for Minnesota is.

Historically, Minnesota underutilized local sales taxes, compared with most states. That is probably no longer the case. For the legislature to continue to authorize taxes on a case-by-case basis when authority becomes so commonplace, if not universal, is a needless hurdle. Continuing the current process clearly seems to be a misallocation of legislative and municipal resources. Once authorizations are the norm, saying no to requests is a near impossibility for legislators, especially when principled reasons for doing so are not apparent and there is no budget constraint to fall back on to say no. The charade of insisting the projects be “regional” because nonresidents bear much of the burden has led to funding mainly amenities, like recreational facilities, that are nice-to-have but hardly essential. But I have previously made that case.

Given the unequal distribution of the sales tax base among cities, a free-for-all authorization of city taxes strikes me as the antithesis of the thinking behind the Minnesota Miracle. One of its central themes was to equalize the ability of schools to fund education and cities to provide basic services. I guess for nonessential services, like community centers, parks, and trails which are common purposes of the city taxes, that’s not a big deal. But authorizing local taxes preempts the state’s ability to tap the tax base and, in my opinion, there is little doubt that the sales tax is the least unpopular broad-based tax. (Recall voters approved the state legacy sales tax constitutional amendment, as well as the vast majority of city taxes that have been submitted to them.) So, preempting it for nonessentials may be a strategic mistake, if you’re concerned about making sure you can provide basic and essential government services. A nasty side effect is to undercut local accountability., since these projects are outsides of normal city budgeting for basic services.

Moreover, pushing up the rate inevitably encourages noncompliance and outright evasion, a persistent issue with retail sales taxes. Retail sales taxes are notoriously easier to evade than VATs, because they are collected at one point, on final sale. By contrast, a VAT is collected at each point in the supply chain. That is a main reason all the other developed countries have abandoned the retail sales tax model in favor of VATs.

A fine mess to be sure.

Taxing Marijuana

The final gross receipts tax rate in the law legalizing recreational marijuana is 10%. Sales are also subject to the regular sales tax, including local sales taxes. Four observations about that:

• As far as I can tell, medical marijuana continues to be totally tax free – exempt from both the sales tax and MinnesotaCare tax. Thus, it pays a lower tax than FDA approved drugs, which are subject to the latter tax. I always thought that was peculiar. Medical marijuana businesses pay higher federal income taxes because of I.R.C. § 280E’s disallowance of business expense deductions. That seems a stretch to use as a justification for their special state tax exempt status. As a product, medical marijuana seems most analogous to health and nutrition supplements, which pay the sales tax.
• The 10% gross receipts tax applies to Delta 8 THC (hemp legal federally) products. Sales of these products, legalized and regulated in 2022, currently pay just the sales tax, so this is more than a doubling of their tax. According to this MinnPost article, at least some in the industry welcomed imposing the tax (and more state regulation) and consider it very modest as state weed taxes go (it is). I assume that sales of these products are occurring in other states but without any regulation or special taxes. It’s not clear to me what the 2022 regulation and validation of these businesses got them – publicity and a patina of legitimacy, I suppose – in return for the now substantially higher taxes than imposed on comparable businesses selling the stuff in North Dakota or Wisconsin? Maybe nobody is selling Delta 8 products in those states? Seems unlikely but I don’t know.
• Recreational marijuana will pay a modestly higher tax than alcohol. Alcohol pays the regular sales tax, the excise tax, and an additional 2.5% additional sales (technically gross receipts) tax. My back-of-the-envelope calculations suggest that the state tax on marijuana will be about 40% higher than that paid by alcoholic beverages. (I converted alcohol excise tax revenues into a retail sales/gross receipts equivalent rate to determine that using 2021 revenues from the two types of alcohol taxes.) Alcohol taxes are too low to recover anything close to the state and local governmental costs of alcohol abuse (e.g., DWI enforcement and penalties, chemical dependency treatment, state MA costs of treating alcohol-induced cirrhosis, etc.), much less other external social costs (lost productivity, domestic abuse, and similar). Whether the modestly higher marijuana tax is high enough to do so is a big unknown. Unclear how politically easy it will be to increase the weed tax in the future; it’s very difficult to do so for alcohol (fixed dollar excise tax rates have not been changed in decades despite inflation eroding their burden) because of the industry power and the fact that moderate social drinkers consider it unfair to pay for governmental costs imposed by abusers. On the latter, it seems to me a reasonable charge for making a semi-dangerous drug (alcohol) widely available.
• Minnesota’s marijuana tax will be among the lowest for states with recreational weed. See, e.g., Figure 9 and Appendix A in Tax Policy Center, The Pros and Cons of Cannabis Taxes (9/22/2022). (Missouri, a state not covered in the TPC report because of its recent legalization (11/2022), is a state with a lower tax than Minnesota at 6%. MO DOR. But Missouri does tax medical marijuana, unlike Minnesota, and municipalities are allowed to impose an additional 3% tax according to Wikipedia. If that means both the relevant city and county do so, the combined state and local Missouri taxes will be higher than Minnesota’s tax. Missouri’s taxes appear to be set in its constitution, likely because it was part of a voter initiative. I don’t know if the legislature can raise the rates. If so, I would expect it to do so at some point.) Minnesota’s low rate probably means it cannot hope that weed revenues will offset any potential inadequacy of the tax bill’s tax increases to pay for the 2023 spending commitments, unless a future legislature is willing to increase the rate. The fact that no neighboring state has legalized recreational marijuana (for now) should help, though.

Stadium Reserve

We can finally say goodbye to the unnecessary stadium reserve account. The tax bill repeals it and ends the resulting sequestration of gambling tax revenues from other general fund uses. 2023 Minn. Laws ch. 64, ar. 13 § 18. The repeal is not effective until 60 days after MMB certifies the stadium bonds are paid off. A STRIB story reported that was done last week. Rochelle Olson, U.S. Bank Stadium paid off as of Monday (Strib, 6/26/23).

The reserve account was unnecessary and ill-designed. It was unnecessary because the bonds were backed by the general fund (the reserve account is part of the general fund, by the way) and so have more than adequate security. Gambling tax revenues are unrelated to the stadium’s use or operations, so that provides no rational basis for capturing them in a dedicated stadium account. It was ill-designed as a reserve because it had no dollar limit. A typical reserve would have a ceiling amount of no more than a couple years of debt service payments. The lack of a limit caused the account to capture almost as much money as the outstanding principal amount of all the bonds.

Thus, the reserve’s main effect was to set aside the revenues from authorizing charities to conduct electronic gaming (more actually was captured because all the increase in gambling tax revenues were used in the calculating the increment). This kept that money from being used for standard general fund purposes. Would the bonds have been retired in 2023 absent that? I don’t know, but there is some chance they would instead have simply been refunded to reduce their interest rate and the money used for other purposes, including tax cuts when the Republicans controlled the Senate. 

It does seem clear that inclusion of the reserve in the original stadium financing law has redounded to the benefit of:

• Minneapolis – Its stadium payment obligations will drop under the 2023 changes and the city will gain access to its sales tax for other purposes (subject to legislative approval, of course) sooner than otherwise would be the case.
• The Vikings – With the bonds gone, shilling for more subsidies will become easier. Similarly, the reserve’s flush funding made government funding of stadium improvements an easier lift. The cost of the proposed security improvements is mindboggling to me. This STRIB story reports that $15.8 million in improvements have been authorized with $48 million more coming to secure the main entrance. (I don’t know about stuff like this, but the stadium must be assumed to be a high value target of some enemy of society. Are other venues, like Huntington Bank Stadium, similarly secured? Maybe college football fans aren’t as tempting a target as NFL fans? Are the Vikings being asked to pay for their share of these improvements? I haven’t noticed anything to that effect.) I’m sure this is just the first of many asks/demands for improvements, maintenance, upgrades, etc. If the general fund were still paying off the bonds, I suspect that they would be scrutinized more carefully and skeptically.
• Lawful gambling interests – The tax bill cuts their tax rates. 2023 Minn. Laws ch. 64, art. 13 § 3. I suspect that this is connected to repealing the reserve. Yes, they’re unhappy with the tax bill’s changes in the rules for conducting electronic gaming. But absent the original stadium bill, they might still be fighting, like proponents of sports betting, for any type of authorization to conduct electronic games and some charities (I assume but don’t know) don’t do electronic games and will benefit from the rate cut. Of course, it is possible if lawful gambling had not been entangled with the stadium financing, the legislature would have independently reduced their taxes.
• Tribes – The tax bill clarified that lawful gambling’s electronic games must function less like classic slot machines (i.e., determining whether you win with only one tap or click). I assume flush revenues from electronic gaming in the reserve made it easier to make that change, which the tribes must think reduces competition with their casinos.

General fund purposes for standard uses are the obvious losers. I am happy the reserve is no more and am sorry that I did not do more back in 2010 to apprise legislators of its poor design and more generally the lack of need for it. It probably would not have made a difference, but I feel remiss in not making more of an effort. Mea Culpa to Minnesotans who care about following good state budgeting, rather than willy-nilly dedicating more funds than needed to pay for the latter-day equivalent of Rome’s bread and circuses. (Context: I get that the NFL’s popularity and its monopoly allows it to extract money from the public. That’s the hard economic reality for metropolitan areas and states that want to host franchises and it’s realistic for elected officials to decide to pay the price. The issue is how much must be paid to keep a team. The reserve, in my view, unintendedly allocated an extra dollop to that enterprise. It just illustrates how seemingly meaningless, under-the-radar legislative details can have big financial consequences.)

Unallotment and legislative appropriations

A long running internal question that staff lawyers for the legislature debated was whether the governor’s unallotment power – the legal authority to reduce appropriations to offset revenue shortfalls to prevent deficit spending – extended to legislative appropriations. Allotments are subparts of appropriations that are made under MMB’s directions to agencies to formulate spending plans for their appropriations. The legislature is not subject to this MMB authority, so we (legislative staff lawyers) had typically opined that the Governor’s authority to reduce allotments did not apply to the legislature. See this House Research document (p. 7). Governors have (sometimes) refused to recognize that their authority does not extend to legislative appropriations.

The 2023 legislature slammed the door by adding a specific statutory exemption to the unallotment statute for legislative appropriations. 2023 Minn. Laws, ch. 62, art. 2 § 59. I was surprised that they did not include appropriations to the judiciary in this exemption. Appropriations to the judiciary are also exempt from MMB’s authority to require allotments.  So, our old theory for exempting legislative appropriations also would apply to appropriations to the judiciary. The 2023 bill’s failure to include the judiciary in the new statutory exemption seems to imply that appropriations to the judiciary are subject to unallotment. Judicially resolving that would be tricky, since the courts would be deciding whether the governor can cut their budgets. But the courts have traditionally not been reluctant to protect their independence and funding. So, there is probably little reason to worry about the negative implications of the new legislative exemption.

Process and politics

These are some of my throwaway, footnote type thoughts on topics which I don’t have expertise in but like to talk about. More specifically, these are the sorts of topic we used to have water cooler or lunch discussions about back when I worked for the legislature – e.g., politics, what motivates legislative decisions, do process changes matter, etc.

Budget process and finishing on time

The 2023 legislature made a massive number of changes in enacting a state budget and more broadly (abortion, guns, recreational marijuana legalization, elections, employment law, etc.).  It enacted a capital investment bill, a task typically done in non-budget years. And it did all of that within the constitutionally allotted time for the regular session.

Commentators have suggested the legislative budget process is broken because the legislature regularly fails to finish by the constitutional adjournment date. See this MinnPost commentary by David Schultz for example. I am skeptical that process fixes will make any difference when partisan control is divided and politics are as polarized as they are now.

To be fair to Schultz, he lists ideological polarization as a major cause of budget breakdowns. Schultz posits it is the anti-government libertarian ideology of Republicans that is the problem. That may have been true in 2011. I don’t think it is now. The post-Trump Republican Party is less fiscally conservative and anti-government than was the case before 2016. The GOP is more tribal – “Own the libs” – and focused on cultural war issues (guns, transgender issues, CRT, etc.) and less ideologically anti-government and libertarian in Schultz’s terms. The concession GOP legislators exacted for agreeing to a bonding deal was more government spending for nursing homes, not exactly anti-government. Nationally, the differences in the handling of the debt ceiling in 2011 and 2023 also illustrate the change. Despite the superficial rhetoric, the 2023 version of the GOP appears to have given up on the notion of seriously downsizing federal government spending. I assume they recognize the impossibility of doing that when social security, Medicare, defense, and veterans’ programs are off limits. That was not true in 2011 when they promoted entitlements cuts. It’s also a truism that both parties’ policy and rhetorical views have been nationalized. (Data point: DFLers going to brief White House staffers on how they pulled off the 2023 session’s enactment of many o the national party’s agenda items.)

Returning to Minnesota, I think partisan polarization and division is the problem, not the budget process or the length of sessions. (A longer and better process would be good. Don’t get me wrong. But that is so only if it leads to more analysis, study, and thoughtful discussion/debate and there is not necessarily any correlation between that and length or various process changes, in my skeptical view.) The last three trifectas (1987, 2013, and 2023) all finished by the deadline. That was so, despite enacting ambitious and sweeping policy changes (1987 and 2023) or facing a big deficit (2013). I doubt more time or process changes would help much when control is divided. We’d still have brinkmanship, special sessions, and ugly fiscal deals like 2011’s borrowing for current operations. We haven’t had enough tests of trifecta control and a tight budget (just 2013) to reach much in the way of conclusions, of course.

Pushing all the chips in the pot

During their last trifecta in the 2013-14 session, I was surprised by DFLers’ restraint in not resolving various of their long running agenda items (e.g., inflation in the budget as a low-profile example and election law changes as a higher profile one). I assumed that they thought they would have enduring or at least periodic control. It turned out to be a decade before they regained trifecta control.

That decade of split control likely taught them that they needed to enact as many of their agenda items as possible, rather than holding back for fear of “overreaching.” This STRIB story, Jessie Van Berkel, Ryan Faircloth and Rochelle Olson, How did Minnesota Democrats unify fragile majorities to pass sweeping change? (STRIB, 5/27/2023), has details on behind the scenes deliberations, including advice that they got from former Speaker (during the last trifecta) and now Justice Paul Thissen.

The article does not say so, but I suspect some combination of three factors led to that course of conduct (beyond the massive surplus and the obvious point that almost all of the elected DFLers really believe in and are committed to the agenda as both a political and policy strategy):

• The different personalities and political views of the Senate leaders (Bakk and Dziedzic likely have different perspectives on what each considers disqualifying overreach)
• Recognition that Minnesota’s political geography makes contests for legislative control regularly competitive (more of my thoughts below), making future trifecta control uncertain
• Confidence that they will likely hold the governorship and so can block retrenchments (My view: that depends upon the GOP hewing to its recent practice of nominating far right candidates, the DFL avoiding nominating far left candidates, and/or a third party not taking moderate voters away from the DFL Not sure I would count on all three persisting. For example, Republicans in deeper blue states than Minnesota – recently, Vermont, Maryland, and Massachusetts – have elected governors. Of course, their state parties and nominating processes are likely more concerned about winning than ideological purity, compared with their Minnesota counterparts. At some point, Minnesota Republicans may actually get tired of paying the purity premium and nominate a more moderate candidate acceptable to swing voters. Or not. Both the Maryland and Massachusetts parties appear to be going the way of Minnesota Republicans, rather than the converse.)

Minnesota’s political geography disadvantages the DFL (or conversely advantages the GOP) in contests for legislative control. That is so because:

• There are more DFL and DFL-leaning voters in the state than GOP and GOP-leaning voters. That is why the DFL has dominated statewide elections since 2006. But the two parties’ voters are not evenly distributed across the state. The DFL dominates the center cities and inner ring suburbs, while GOP dominates rural districts.
• Legislative control is determined in the outer ring suburbs, the exurbs, and a few rural areas in which the DFL is still competitive when conditions are favorable to them.
• GOP and GOP-leaning voters are more “efficiently” distributed than DFL and DFL-leaning voters across legislative districts. That is, the DFL runs up bigger margins in its core areas than the GOP does. (Disclosure: I haven’t crunched the numbers on this; I’m asserting it based on casual observation over the last few elections. Doing some real research is a future project.) Put another way, the DFL wins seats in its safe districts by larger margins than the GOP does in its safe districts.

Even though the GOP has fewer voters statewide by a fair margin, it has enough in the key swing districts in the outer suburbs and exurbs that determine legislative control. That allows the GOP to compete consistently for control of one or both houses of the legislature in almost all elections and to win control of one or more when conditions are favorable. (The lack of staggered Senate terms complicates the equation a bit. That may have prevented a DFL trifecta after the 2018 election.) If a few votes had changed in 2022, the GOP could have continued to control the Senate. That context means a get-your-entire-agenda-while-you-can strategy made sense to DFLers in 2023-24.

Changes in the election laws (e.g., allowing felons on probation to vote, making it harder for third parties to become major parties with automatic ballot access, etc.) may help DFLers’ cause a bit. But contrary to Steven Schier (How DFLers kept legislating until Minnesota turned blue, STRIB, 5/21/2023), I’d be surprised if this has much of an effect. This Thomas Edsall NY Times column provides some background on how efforts to suppress or increase the vote for partisan reasons typically don’t matter much. The calculus always comes back to a few swing voters or partisan turnout in a few swing districts. Hard to know.

Risks of going all in. Enacting 90%+ of their agenda means is clearly risky politically, as well as fiscally and administratively. I don’t really have any insight on the political risks, but I think the fiscal risk that they failed to provide adequate revenues to permanently sustain their spending commitment is high, especially when hard times hit. That, however, is just my gut instinct.

The administrative risk of starting up and managing major new programs – e.g., paid family leave, rental housing assistance, recreational cannabis regulation, etc. – in a tight labor market under all the constraints that apply to government employers are obvious. The social needs and policy bases for these programs may be compelling (or not depending upon your view). But administrative failures have the potential both to waste money and to discredit the enterprise politically, no matter how well intentioned. The state’s failures in administering pandemic aid programs (e.g., housing and food assistance) do not inspire confidence although the circumstances were different and perhaps more challenging. But I fear that they may have legislatively bit off more than they can administratively chew.