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The STRIB reprinted a column by Justin Fox (Bloomberg economics writer) with more evidence of traditional retailers’ woes. This follows up on my recent post on the use of the Bloomington/MOA tax to help finance MOA’s proposed waterpark, which it appears to hope will get more open wallets into MOA’s stores, hotels and restaurants.

Fox reports that in-store retail jobs have dropped by over 400k since 2017 – despite a growing economy and retail sales. The obvious explanation is more online sales and less buying in stores. Employment growth in online retail jobs has not totally offset the decline of in-store jobs and many of those online jobs (no surprise) are in “couriers and messengers” with smaller growth in warehouse employment.

Some observations:

• These jobs data underline the challenges faced by traditional retailers, including MOA.
• The data reflect some fundamental shifts in the character of jobs (clerks versus stockers, pickers, and drivers).
• Most retail jobs have never been very good (high paying) so it is hard to get too choked up about this, BUT
• Conversion of sales from bricks and mortar to online sales appears to yield productivity increases, as one would expect, and that should lead to compensation (wage) increases as employers share some of the productivity dividend with their workers, BUT
• The modern (post 1980s) pattern by businesses is to not share much of their productivity dividends with lower wage workers, but rather to channel them back to capital (shareholders or owners) or more highly compensated employees (i.e., management, particularly top management).
• This is just one more data point in what appears to be the inexorable growth in inequality.

Retail malls face daunting challenges – the specter of Amazon and online shopping is dramatically reducing purchases at malls and big box stores.  Bankruptcies, including outright liquidations (Herbergers and Pamida to name two affecting Minnesota), of malls and retailers show the harsh reality of this phenomenon.  This WaPo article describes the challenges and how they have resulted in closures. According to a Credit Suisse study it cites, 25% of malls are expected to close by 2023.

The WaPo story describes how more successful malls are adapting.  Thriving malls, according to the story, are doing so by reinventing themselves as “integrated lifestyle hubs” whatever that is. It appears to mean figuring out alternative way beyond a standard shopping experience of attracting customers to show up and spend money – e.g., providing yoga studios, fitness centers, microbreweries (what else?), health clinics, and so forth.

One assumes that this challenge must be hitting our local giga-mall, the Mall of America (or MOA). Moreover, because MOA is so big and, thus, must lure many more customers to its premises, the challenge is much bigger than adding a few yoga studios, microbreweries, and other trendy stuff can solve.

Rather than its years-ago plan of simply adding more of same in phase II, MOA’s answer is to build a big waterpark. The theory is that adding a large waterpark as part of Phase II will attract enough people to MOA who will spend money at its hotels, restaurants, and shops to keep most of them afloat. [I have thoughts about whether this will work, but I have no comparative advantage in judging such things so won’t spend any time on it. I think, though, we can safely say the move is risky.] This is a variation on what Triple Five (MOA’s owners) are doing at their just opened giant mall in NJ.  The WaPo story discusses the Ghermezians (Triple Five’s owners) and their strategy as it relates to the NJ mall and its plans for another big mall in Miami, so I’m not totally making this up.

As with all things related to MOA, one can safely predict that its response will both:

• Be risky
• Involve government reducing MOA’s costs and risk.

What I find interesting about this is the creativity of MOA’s advisers in devising a way to use decade-old (2008) special legislation to put together a financing plan that snags government subsidies and reduces the credit risk to Triple Five’s enterprises, including MOA.  How they did that can only be described as financial alchemy.  Whoever came up with this should get the Rumpelstiltskin award (to mix two metaphors involving gold).  It’s a story worth outlining.

In spring 2008 (after the Great Recession had begun but before its existence was commonly recognized), the legislature enacted special legislation to help Bloomington finance and finally develop Phase II of MOA.  (Why Phase II took so long to develop is a separate story with many twists and turns. The delays probably helped MOA dodge a bullet of holding too much obsolete retail space in the current environment.) This legislation was controversial (both in the legislature and in Bloomington).  Controversy centered on whether the public should provide more subsidies to MOA’s owners beyond those approved in the 1980s and 1990s.  Opponents (including Rep. Ann Lenczewski who chaired the Houses Taxes Committee and represented Bloomington) felt that more public assistance was inappropriate.  (MOA’s increased property tax, through TIF, had paid for the Phase I’s parking ramp and built up a war chest of development money, so the city, county, and school had to that point had not received any expanded property tax base as a result of MOA construction nearly 20 years earlier.)  By contrast, construction trade unions (who generally favoring spending more on projects that their members work on) and legislative supporters of the mall supported more TIF for Phase II by allowing an extended TIF period. Because that would have exceeded what is permitted under Minnesota law generally, it required enactment of special legislation for Bloomington.

A compromise was reached that became law in 2008. One element of this compromise – inserted by opponents to permit the city to make MOA pay more of the development’s cost – allowed the city to impose a sales tax that would apply ONLY TO MOA.  2008 Minn. Laws, ch. 366, art. 5 § 28.  This was done by limiting the taxing authority to the area of the two TIF districts in which MOA is located. Imposing the “tax” would have raised the price of taxable purchases at MOA and was for obvious reasons opposed by MOA.  In effect, it would have been little different than expecting the owners and their tenants to pay more of the mall’s infrastructure costs (parking ramps and so forth), rather than taxpayers.

This “tax” is a tax in name only.  MOA could have reached the same result by charging more rent to its retail tenants (e.g., a lease can have a “gross receipts” clause that varies the amount of rent based on how much revenue the tenant generates, adding such a clause to MOA’s retail leases could easily include a sales calibration to rent which replicated the effect of a sales tax).  Although Bloomington approved the special law to use its other provisions, it did not impose the tax. I assume it made that choice because MOA opposed paying more of the cost of Phase II’s parking ramps or whatever else was planned for the TIF money.

The Great Recession put most development of Phase II on hold shortly thereafter.  Legislation enacted in 2013 provided a wholly different funding mechanism (i.e., not a standard TIF extension) for Phase II that relied on the Fiscal Disparities taxes paid by MOA, rather than diverting city, county, and school property taxes as TIF does.  This mechanism will be used to finance the second big parking ramp and other infrastructure to serve MOA.  But the MOA sales tax remained on the books, essentially a vestige of the 2008 legislative negotiations.

But as MOA formulated its waterpark plan in 2017-2018, the MOA sales tax provided an opportunity for it to snag some government subsidies. Bloomington apparently is more than happy to oblige MOA, since the costs will be born by the feds.  As I noted in my earlier post, Bloomington choose to skip tapping potentially a small state subsidy under the Minnesota income tax. For that, other Minnesota governments should be thankful.

The proposed waterpark will be, for all intents and purposes, a private facility. The normal way to finance it would be for MOA or a new for-profit entity formed by Triple Five to finance it with some combination of equity and debt.  I’m sure that is the way the waterparks in Wisconsin Dells have been financed and I suspect that to the casual observer, the MOA waterpark will appear little different functionally than those at the Dells.

I have no knowledge of the financial condition of Triple Five, a private entity, but assume that its credit must be stretched (maybe to the max) by the amount it has spent on its mammoth NJ mall that just opened and its Miami plans.  The media has reported that Triple Five pledged 49% of MOA to secure its borrowings for the NJ mall.  That likely made the cost of it borrowing to finance the MOA waterpark unaffordable (relative to projections of waterpark revenues), if lenders or bond market were willing to make credit available at all.

So how can MOA successfully borrow money to finance the waterpark? Enter the 2008 MOA tax, which I had always considered a dead letter, as an enabling mechanism. There were essentially two steps involved:

1. Have the waterpark owned and operated by a nonprofit, but not just any nonprofit but a 501(c)(3) entity, a charity under the federal tax code that qualifies to have its facilities financed with tax-exempt bonds. I’m not sure exactly what the “charitable” purpose is (and haven’t made any effort to find out), but the federal tax law is malleable and expansive when it comes to the types of charitable purposes that qualify.  (You don’t need to be a classic charity that helps the poor; in fact, I doubt poor people will get a break when they try to use the waterpark. They probably would rather not have poor people show up at all, since they won’t be prospective shoppers with fat wallets.) If a state or local government is willing to issue debt to finance the facility, the interest on the debt will be exempt from federal tax. That will, as I described in my previous post, lower the interest rate on the bonds, making it easier for the project to cash flow after paying its debt.  The government subsidy is courtesy of the lower federal income tax revenues resulting from the foregone tax on the bonds’ interest.
2. Pledge the MOA sales tax as additional security for the bonds.  Although revenues from the waterpark itself will be pledged to pay the bonds, that probably won’t do the job. Without some unknown amount of equity and/or a track record or some assurance that the waterpark will generate enough revenues, a pure revenue pledge is unlike to be enough to induce bond buyers to fund the project. In their minds, it’s too risky. MOA could pledge its revenues and/or equity but remember much of that has already been pledged to the NJ Mall and doing so would cause the bonds to lose their tax-exempt status under the federal tax law. The latter is so, because the project would be secured (too much) by a private business, not a government or qualifying nonprofit. That is where the goofy MOA sales tax comes in. Recall its proceeds are really not functionally different than mall revenues but the federal tax law considers it to be a real tax, so pledging it does not contaminate the project with private business revenues or security interest, as pledging MOA lease payments would.

Voila, problem solved – at least in theory – (1) the federal subsidy through tax exempt bonds lowers the interest rate; (2) compartmentalizing the waterpark in a separate, unrelated nonprofit entity insulates MOA’s credit from being on the line; (3) pledging the MOA tax, effectively means the mall and its tenants, are standing behind the waterpark, making Bloomington happy; and (4) the MOA tax appears to the federal tax law and to MOA’s and Triple Five’s creditors to be government support, rather than MOA’s support.

Some of my random observation on all of this:

• The unclear color of the money. This only works (we’ll know whether it does work, if bond sale goes through) because of the chameleon-like character of the MOA tax. Its color or true nature depends upon your angle of view: from the federal tax law’s, MOA’s, the bond market’s, and MOA creditors’ perspectives, it’s a tax; from the perspective of Bloomington and financial realists, it is a private contribution or payment by MOA and its tenants.  For the former, that means the MOA tax provides an independent, government source of funding for the waterpark other than MOA itself.  For the latter, it means that the city is not taxing its constituents to pay for a private waterpark and keeps the viability of the waterpark from being tangled up with the city’s finances.  Which is correct? I would tend to the latter view, but Bloomington is inextricably linked to MOA’s success, as I note below.
• Clothing retailers at MOA won’t care.  I’m curious what MOA’s tenants think of this scheme. They certainly have a stake in the ongoing success of MOA and so, I’m sure, would like to see the water park succeed – success being defined as attracting sufficient customers to ensure the ongoing viability of the overall development and their own operations. It is worth noting that the MOA tax will hit those tenants very unequally: because of Minnesota’s clothing exemption, clothing retailers will be spared. Those who sell taxable goods will be more directly affected.
• Nobody will notice (okay, most won’t notice). The structure of the sales tax, as an add-on at the cash register, makes it an effective way to disguise its price-raising effects to shoppers. Research on the behavioral effects of taxes shows that taxes that are built into the explicit prices of commodities (e.g., excise taxes like the gas tax and cigarette taxes that show up in the sticker price of the product) have much larger effects on purchasing behavior, as contrasted with a tax, like a retail sales tax, that only shows up at the cash register – probably after the consumer has already decided to buy the item. That should provide small comfort to MOA’s tenants who may have their sales taxed, if the water park’s finances go South.
• Is it worth it? The real public policy question here is whether the government (whether city, state, or federal) should go on subsidizing MOA. Answering that question would typically be done with a thorough and careful cost-benefit study, something that has never been done throughout this process (from 1984 on).  (Full disclosure: As a legislative staffer, I worked on MOA state legislation from 1985 through 2018 and so was complicit in that failure.) Given that this “sales tax” is really little more than an odd sort of rent increase at MOA, it’s hard to get too excited about that issue here, although issuing more tax-exempt bonds for private projects is never good in my mind. I totally understand why Bloomington is going along (see the next bullet for more on that).
• It ain’t easy to dismount a tiger. The current dilemma Bloomington faces illustrates how long-ago decisions effectively bind a city or put it on a course that is very difficult to deviate from. It’s like the old Chinese proverb of how difficult it is get off the back of tiger. The state’s 1977 decision to build the Metrodome effectively required Bloomington to redevelop the Met Stadium site, a prime piece of real estate that was close to the airport and on 494. The city in 1982 had two basic choices, a classic fork in the road:
  1. It could have allowed the private market to redevelop the site without government assistance. That likely would have resulted in some mix of retail, hotels, and offices and would have generated immediate tax base as the site gradually built out. Given how prime a site it was, the development likely would have been high value and would have contributed to Bloomington and its 494 strip being a classic “Edge City.”  (Interestingly, Wikipedia does not list Bloomington as an Edge City.  I had always assumed it was.)
  2. The other path, chosen by the city as encouraged by then Governor Perpich, opted for a signature development, MOA. That approach was perceived to help give Bloomington a national reputation (sort of like a corporation buying naming rights, I guess), making up for the loss of hosting the Twins and Vikings at Met Stadium.  That loss, by most accounts, stung Bloomington public officials and business community as a big loss of prestige and visibility for the suburb. But that required the city (and county and school) forgoing increased property taxes from the site for well over 30 years because TIF was used, recycling the increased property tax back into the development. That period has now ended (thanks to the 2013 special legislation which shifted the ongoing property tax costs to the fiscal disparities program spreading costs over the entire metro area), but that doesn’t end Bloomington’s costs and responsibility.

Opting for a mega development, like MOA, is much higher risk – obviously because of the public investment (cost), but also because a big single use development is less certain to generate a return, long run. In investment terms, it is not diversified the way a market-driven, but more modest development of mixed uses would be.  It’s like investing all your money in one growth stock, rather than buying a diversified mix of stocks and bonds. Your chances are greater of striking out or hitting a home run, but it’s safer to try and hit a single.

Another consequence of choosing path #2 that probably was not recognized by Bloomington in 1985 is the ongoing effects of opting to fund a signature development like MOA. A mammoth development like MOA in a modest sized city will always be an implicit city responsibility. If MOA falls on hard times and requires extensive repurposing or new investment, there is little question that city will feel it is practically and politically necessary to help pay for that and will undoubtedly ask for the state’s help as well, at least if past experience is any guide. The city’s behavior with regard to the waterpark is instructive in this regard. It illustrates a sobering, but often little recognized cost of not just allowing the private market to determine the course of real estate development.

I have not been following Andrew Yang’s presidential campaign, so I missed his proposal to impose a federal tax on state and local tax incentives for economic development. I became aware of it when two law professors, David Gamage and Darien Shanske who specialize in SALT issues, posted a paper about it on SSRN. I am familiar with and respect their work and recommend reading their paper; it’s short and reprints Yang’s proposal in full so it saves going to his website to read it.

Yang’s proposes to impose a 100% federal tax on state and local governments that provide targeted tax incentives to businesses to locate in the state or locality. This is the equivalent of an outright prohibition – if the feds tax the incentive away, why would anyone provide one? Yang’s proposal, as is typical of campaign positions, does not have much detail as to how taxable incentive would be defined. 

Gamage and Shanske like the idea, but don’t think It should be an outright prohibition.  They would use a lower tax rate (maybe 50%).

It is worth noting that this or variants on it are not new. For example, two former staffers at the Minneapolis Federal Reserve Bank, Art Rolnick and Mel Burstein, made a similar proposal in 1995. It attracted some attention and then Minnesota Congressman David Minge (later a Court of Appeals) introduced a bill (HR 1060 in 1999) to implement their proposal.  It too was structured as a confiscatory tax.

Like Gamage and Shanske, I’m attracted to the idea of doing something like this in theory.  There are number of reasons why targeted (deal-by-deal) incentives are bad policy, aside from the race-to-the-bottom argument that is commonly cited (e.g., by Yang). What is most persuasive to me is simply that this is not what government should be doing (which is to provide public goods, education, assistant to poor people, etc.) and it is not what the government is competent at doing. On the latter front, government will, almost by definition, always overpay (only the business knows how much it needs to change its behavior) and what the public gets will rarely be worth it.  States and cities feel that they need to engage in this type of behavior to be “competitive” – a sort of prisoner’s dilemma.  A federal law that ruled these inefficient and parochial practices out of bounds could be viewed as saving the states from themselves – in theory anyway. [Note: In my view, general state tax competition – on rates and general tax bases and on the type, quantity, and quality of government services – is good just as a market economy is a good way to allocate scare resources. It’s the deal-by-deal incentives that are bad.]

That said, I’m skeptical about how anything like this would work out in actual practice. The devil is in the details of how you define the incentives that are subject to the tax, how the IRS enforces that, how states and businesses try to work around it, and how the courts apply the rules. Litigation under existing federal restrictions on state taxation – e.g., under the 4R Act which prohibits the state and local taxes from discriminating against railroads – has resulted in immense amounts of litigation,  uncertainty, and some court decisions that in my opinion are based on junk economics read into the general terms of the federal statute.

As an aside, the fact that Yang structured this as a tax, rather than a regulatory prohibition, is likely a result of Chief Justice Roberts decision in the first ACA case upholding the ACA’s insurance mandate as a tax, rather than a regulation.  Gamage and Shanske discuss this and suggest a 100% might be unconstitutional (I doubt it). My observation is that this is pushing us back to the future – e.g., to the days when Congress styled child labor regulations as taxes to avoid the pre-FDR Court’s narrow view of Congress’s Commerce Clause powers.  Given that the Court has regularly been judicially enforcing dormant commerce clause rules to prevent states from discriminating against out-of-state businesses (interstate commerce), I have a hard time getting my mind around the idea that this needs to be done as a tax, rather than a prohibition. Of course, if you want to go the route suggested by Gamage and Shanske, a tax is the better approach, since it allows structuring it as a disincentive, rather than an outright prohibition.  Making it a tax allows the IRS to enforce it; a regulatory regime might be an orphan with no federal agency enforcing it and few private parties having standing (or an economic incentive to do so even if they have standing) to challenge state incentives in court.  So those are the arguments, I guess, for doing it as a tax.

Minnesota has a part time legislature. That means many legislators have day jobs beside being legislators. Some consider that to be feature, not a bug, of the system: it permits (requires?) shorter legislative sessions; the state can get by with paying legislators less; more legislators will have ongoing connections to real workplaces; etc. But it also creates ethical challenges and probably requires looser or more flexible ethics rules to accommodate potential conflicts of interest.

Thus, it was no surprise when minority leader and former speaker, Kurt Daudt, announced two weeks ago that he had taken a new job working for an out-of-state firm, Stateside Associates, while continuing as a legislator.  See the STRIB story on this. The firm is a “public affairs” firm with blue chip (Fortune 500) clients. I have no knowledge of the firm (and have not researched it) but assume it must advise corporations about interacting with state governments and probably is involved in lobbying them given its name.  Daudt is quoted in the story as saying he will not be lobbying or working on issues related to Minnesota. Democrats naturally criticized Daudt, a Republican, and the nature of the firm makes that criticism easy. It’s pretty common for legislators to work for lobbying firms after they leave office; it’s more unusual when they are working for a firm that does lobbying when they are in office.

The media coverage of this made me cringe, but not because of the potential substantive ethical questions, but rather because of the uncomfortable position it likely puts some of my former colleague at House Research in (I won’t speculate as to whom, although I have a good guess). In response to the Democrats’ charges, the STRIB quotes Daudt as responding: “He said he consulted with the House legal counsel [i.e., House Research attorneys] before accepting and was told it did not run afoul of any chamber rules. House rules prohibit members from being paid to lobby but do not otherwise restrict members’ outside employment.”  On the TPT show Almanac, I heard Daudt make the same contention and Speaker Hortman demurred, suggesting more examination of the situation may be appropriate.

Advising members of how to apply ethics rules (whether House Rules or state law) can put Minnesota legislative attorneys (both House and Senate) in unfortunate, no-win situations.  Why this is so requires a little explanation.

Legislative ethical norms have, as a practical matter, two different, but complementary elements:

1. The legal restrictions – this is what the House or Senate rules or Minnesota’s various law applicable explicitly prohibit or require of legislators. These are the rules that House and Senate lawyers can and regularly do provide advice to members on, when they ask. House Research has a useful publication on the topic for anyone interested in the substantive rules.
2. Public perceptions of the behavior or actions – this element is not a legal requirement or restriction, but whether a typical voter or member of the public will think the behavior is okay or violates their ethical principles.  Even if taking a position or action is perfectly legal under the House Rules or state law, it may nevertheless violate accepted norms and standards.  This obviously is a subjective and malleable matter; partisan staffers regularly advise members of their caucuses on this dimension. Nonpartisan staffers, like House Research attorneys, are not experts at and don’t try to do that (beyond occasionally suggesting members may want to think about those issues or talk to the relevant partisan staffers who work for their caucuses).

It is widely observed that Minnesota’s legal rules on legislative ethics tend to be flexible, both because of the nature of a part-time legislature and because those are choices that Minnesota lawmakers (both Republican and Democratic) have made over the years. In particular, Minnesota’s disclosure requirements are not very robust. That means there will often be behavior or actions that are legal but may still not look good under the perception rule.

When legislators raise the defense that the nonpartisan, in-house lawyers said their action is legal that only address items #1 above – the explicit legal restrictions – not whether or not the conduct violates #2, the perception rule, which often may be the more important to an elected officials who ultimately is responsible to the voters in his or her district.  So, the legal opinion only helps answer one of the relevant questions.

A second order problem is that the ethics rules and statutes, by necessity, tend to be written in general terms that leave considerable leeway to whoever is responsible for interpreting them. In the case of House ethics rules, those interpreters are, in the first instance, the House Ethics Committee and ultimately the House itself, a political body of 134 members.  It is, of course, true of most legal rules that lawyers opine on are also subject to interpretation and ambiguity.  But lawyers often have the benefit of court interpretations and/or administrative rules to help in construing a statute or law.  Court decisions (and to a lesser extent administrative rules) are expressed in opinions with reasoning, along the recitations of the facts involved.  A court with will look to those decisions and reasoning in resolving a new dispute. When the Ethics Committee or the House acts – a rarity, thankfully – there is little or none of that to help with the legal interpretations and they institutionally are less bound by precedent than a court. That means that the legislative lawyers typically must interpret and apply ethics rules without the benefits of a series of decisions applying the rules that include reasoning. That makes legislative lawyers’ ethics opinions fraught with more than the usual dose of uncertainty. As a result, the written (or oral) opinions almost always include caveats, cautions, and similar warnings. But, of course, little or none of those hedges get included in news stories or the public discussions for a variety of reasons. 

That is why stories like those about Daudt’s new job make me cringe and feel sympathy for the in-house legislative lawyers who get caught in the middle of what is ultimately often a political, rather than a legal, debate. But it goes with the territory of being a legislative lawyer.

The Strib reports Bloomington will use an Arizona government to issue tax-exempt bonds for the Mall of America’s (MOA) planned waterpark.  Whatever one thinks about the merits of helping MOA with its Hail Mary efforts to preserve the viability of its giant mall, this decision is good news for Minnesota state and local governments – that is, compared to Bloomington itself or some other Minnesota government issuing the bonds.

Interest on these bonds will be subject to Minnesota state income tax.

By selecting an out-of-state governmental unit, Bloomington is foregoing a state income tax subsidy for the project.  Interest on bonds issued by Minnesota state and local governments is exempt from Minnesota individual income taxation (if they are exempt from federal income, as these bonds are proposed to be).  But interest on bonds issued by non-Minnesota state and local governments is taxable under the Minnesota income tax, even if they are exempt from federal tax.  The relevant statute is Minnesota Statutes section 290.0131, subd. 2(a), which requires federally tax-exempt interest on non-Minnesota bonds to be added in computing Minnesota taxable income.  Bloomington’s choice means that Minnesota residents who purchase the bonds will pay state income tax on the interest because the bonds are Arizona bonds even though the MOA waterpark is in Minnesota.

The news story does not say why the city decided to use a non-Minnesota issuer for the bonds and forgo the benefits of a state tax subsidy for the MOA waterpark.  I’m sure that the city and its own entities (e.g., the Bloomington Port Authority) did not want to issue their bonds to minimizes the potential impact on the city’s credit; the story says as much.  Bloomington may also have thought that picking an out-of-state entity that is over a thousand miles away would further distance itself from any stain on its credit, rather than going across the border to Wisconsin which apparently was another option.

This is good news for other Minnesota issuers of tax-exempt bonds because it holds down the supply of Minnesota tax-exempt bonds.

As the article notes, a prime rationale for the financing is tapping the federal tax break for tax-exempt bonds to lower the project’s borrowing costs. By contrast, the benefits of a Minnesota exemption are small – particularly for a large project like this one.

If Bloomington had issued the bonds itself or tapped a Minnesota governmental unit to do so, that would have increased the pool of bonds competing for investors who are in the market for a Minnesota tax-exempt bonds.  Thus, its use of an Arizona entity will help Minnesota tax-exempt bond issuers a little bit.

The simple answer for why that is so goes back to Econ 101: supply and demand.  If Bloomington had opted to use Minnesota bonds, the supply of Minnesota state tax-exempt bonds would have been increased by a good amount (construction cost alone is estimated at $250 million).  Increasing the supply of something moves to the right the point at which the supply curve crosses the demand curve, forcing the price down.  In this case, reducing bond prices means interest rates will rise (the “price” of a bond is inverse to changes in interest rates – higher rates mean lower bond prices).  When the supply of Minnesota tax-exempt bonds increases, Minnesota governments will pay slightly more to finance their projects (higher interest rates) because investors have more Minnesota tax-exempt bonds to choose among.  Put another way, to find willing investors the increased competition would make Minnesota bond issuers pay higher interest rates.

The full story of how this happens takes a more complex explanation (getting into the real “full story” would be even more complex and isn’t worth explaining in a blog post); the 2017 federal tax law (the Tax Cuts and Jobs Act or TCJA) also makes this a slightly bigger deal, as noted below.

Tax-exempt bonds give tax benefits to investors, some of which they pass on the bond issuers (state and local governments) and some of which they keep for themselves.

The primary purpose for the federal and Minnesota income tax exemptions for bond interest is to reduce state and local borrowing costs. But it does that indirectly by lowering the taxes the bond investors pay.  Because investors won’t pay tax on the interest, they will accept lower interest rates on the bonds. That reduces the borrowing costs for projects. Put another way, tax-exempt bonds are intended to make borrowing to build schools, roads, bridges, and other public improvements cheaper.

The value of the exemption to an investor depends on the investor’s marginal income tax rate (the highest tax rate-bracket the investors is in); that is, the tax that buying the bond allows the investor to avoid. An oversimplified example illustrates how this works:

Assume an investor is in the top federal income tax bracket of 35% and a comparable taxable bond pays 5%.  Because the investor must pay the 35% federal income tax on that interest, the aftertax interest rate on the taxable bond is 3.25% (5% – 5%*35% = 3.25%). If all the bonds in the issue could be sold to investors in the top federal bracket in our example, the city could sell them for just a little more than 3.25% and attract buyers. The rates must be higher; otherwise investors would not go through the hassle of seeking out a tax-exempt bond. By accepting a lower rate, investors pay a de facto or implicit tax, rather than explicitly handing over money (tax) to the federal government. But this implicit tax is typically lower than the explicit tax they would pay on a taxable bond, which one of the reasons why they buy tax-exempt bonds. This differential is the public cost of providing the borrowing subsidy through the tax-exempt bond market – money that benefits bond investors, rather than the borrowing government units.

If there were enough buyers in the top tax bracket (or if the income tax had a flat rate), this effect would be small.  But it’s not.  Returning to our example, there are not enough top-bracket investors to buy the full supply of tax-exempt bonds, so some bonds must be sold to investors in lower tax brackets. This means that the tax-exempt interest rates must be higher to attract these lower bracket investors.  Assume that to sell all the tax-exempt bonds, they must be priced to attract investors in the 24% federal bracket.  In that case, the 3.25% interest rate that was the tipping point for a top-bracket investor must increase to a little more than 3.8%. But top bracket investors will also get that higher rate, because the entire bond issue must be sold to finance the project.  In effect, the lower tax bracket investors are the marginal buyers that set the price (interest rate) of the bonds. In an economist’s terms, higher bracket investors are inframarginal purchasers. A layperson would say they get a “windfall” or a premium above the price (interest rate) in a perfect world that it would otherwise take to attract them to buy – an extra 0.55% interest in our example for someone in the highest bracket.  Some of the money or benefit that is supposed help state and local governments leaks out to the taxpayer-investors.

In the real world, this leakage or windfall is quite substantial. Academic and government economists have estimated that, perhaps, up to 30% of the tax reduction from allowing the federal tax exemption for state and local bonds goes to investors (particularly those in the highest tax brackets) rather than to reduce government borrowing costs.  That is why tax-exempt bonds are not a very effective way to reduce state and local borrowing costs if the goal is to get as much of the tax expenditure to state and local governments.  (Part of the political agenda may be to allow high marginal rates while letting high income taxpayers partially off the hook under the table and out of sight of the common folk!)  Much of the benefit leaks out to investors rather than going to state and local governments.

This leakage or cost ineffectiveness is why the federal government does not exempt its own bonds from tax to reduce its borrowing costs – it would be stupid, a waste of money.  It’s cheaper to issue taxable bonds and collect tax from investors who are subject to income taxes. This expands the market for US Treasury bonds to foreigners, foundations, pension funds, and others who do not pay US income taxes, helping hold down interest rates on Treasury bonds, as well as avoiding the rate arbitrage effect noted above.

Effects are the same for the state-only tax exemption.

This same set of considerations apply to the state exemption for Minnesota bond interest, but it’s worse.  That so, because the market for the Minnesota tax exemption is much narrower than the federal exemption – only Minnesota resident investors who are subject to both the federal and Minnesota incomes taxes benefit from it. If this group is unwilling to absorb or buy all the bonds when they are initially sold, the bond underwriters (the firms that sell the bonds) must price them to sell to nonresidents.  Since nonresidents are not subject to Minnesota income tax, they will be unwilling to accept a lower interest rate because of the Minnesota tax exemption.  (They might consider it to be worth a small amount because IF they decided later to sell their bonds, the Minnesota tax exemption will make doing so easier to Minnesota resident buyers. But nonresidents are unlikely to assign much value to that, if any.) Thus, the Minnesota tax exemption may result in little or no reduction in interest rates.  But some/many of the bonds will be still be purchased by residents. They will get both the higher interest rate (needed to attract nonresident investors) and the tax exemption.  In that case, the purpose of the state tax exemption fails almost totally. But those bonds will be available on the secondary market competing with new issues of Minnesota tax exempt bonds for potential buyers.

I’m not aware of any estimates of how much of revenue reduction from Minnesota tax-exempt bond interest is lost to this effect. It is likely to be much higher than the 30% or so that is lost to the federal exemption because of the much narrower market for the Minnesota bonds.

Bloomington’s choice to use an Arizona entity means there will be fewer of these bonds for Minnesota investors to glom onto, helping both other Minnesota bond issuers and the state budget – if only slightly.

The TCJA has increased investors’ appetites for tax-exempt bonds. 

TCJA placed a $10,000 cap on the deductibility of state and local taxes, increasing the effective bite of those taxes. That makes shifting your investments to double tax-exempt bonds (those exempt from both federal and Minnesota taxes) more attractive. See, for example, this New York Life investment newsletter discussing that in more detail.

Will the MOA waterpark bonds be exempt from Arizona tax?

If a Minnesota government entity had issued bonds to finance a waterpark in Arizona, interest on the bonds would be exempt from the Minnesota income tax.  (Note: I’m not sure if a Minnesota government could actually issue bonds to finance an out-of-state project; most Minnesota development authority laws limit the entities to financing projects within the boundaries of the city or county that established them, so doing extraterritorial projects may not be permitted.) Would the same be true under the Arizona income tax?

A quick look at Arizona income tax statute reveals that its taxation of state and local bond interest appears to depend (as Minnesota’s does) on the entity that issued the bonds, not where the project is located.  See Ariz. Rev. Stat. 43-1021(3).  However, without a better knowledge of the Arizona law, I would hesitate to reach a conclusion based solely on such a superficial review. The offering statement and bond counsel opinion for the MOA waterpark bonds is likely to say, though.  If so, this would seem like a pretty foolish allowance, but Arizona has not always been known for its smart tax policy. See this NY Times story about a tax incentive for alternative energy vehicle purchases that cost 100X more than the $5 million originally estimated by the Arizona state government estimators.

Note: the Strib article says that Wisconsin development agencies also issue tax-exempt bonds for projects outside of Wisconsin. Because Wisconsin is a state that does not provide a state income tax exemption for municipal bonds )(as a general matter; there are some exceptions), those bonds will be subject to Wisconsin tax if they are purchased by a Wisconsin resident.

What are possible public policy takeaways?

• The state tax exemption for bond interest is not a cost-effective way to lower borrowing costs. The state’s own bond issues are almost always done in large amounts.  As a result, they almost certainly need to be priced to appeal to out-of-state investors. It would make sense to eliminate the tax exemption for those bonds, like the federal government does with its bonds.  That would preserve the exemption for local bonds and likely make it more powerful and cost effective.
• The state exemption could be further focused on true public projects – e.g., schools, roads and similar – this would also make the exemption more cost effective. Then, it wouldn’t matter whether Bloomington used an in-state or out-of-state issuer for the MOA waterpark.
• Minnesota may wish to make sure its development authority laws do not allow issuance of bonds for extraterritorial projects, especially those located outside of the state.

A recent NBER paper (by UC Berkley economist Enrico Moretti and SF Federal Reserve Bank economist Daniel Wilson) which has attracted the attention of tax bloggers (e.g., here and here), examines whether state estate and inheritance taxes cause older members of the Forbes 400 (all billionaires these days) to change their domicile (their primary states of residence where they are subject to state estate taxation on most of their holdings).

The study finds that some older members of the Forbes 400 did change their states of residence, presumably to avoid state estate taxes. This study may have tax policy implications for Minnesota, which conservative commentators have immediately picked up on.  It implies that Minnesota’s income tax revenues could go up more than its estate tax revenue would go down if the legislature repealed the Minnesota estate tax; in other words, the Minnesota estate tax reduces state tax revenues if the study is correct. That is a controversial conclusion, and I personally would not modify policy based solely on this study. I see issues with the study (a topic for another day).

The study caused me to recall when I closely watched state revenues (before retirement) and observed the widely varying effects – very striking – on estate tax revenues when two Minnesota billionaires (well, a near billionaire in one case; I’m taking a little poetic license here) died a decade ago or so.  The two individuals were James Binger (he’s the near billionaire) and Carl Pohlad. Estate tax return information is confidential (I did not have access to it), so this discussion is solely based on information that is available to the public:

• James Binger was a former CEO of Honeywell.  As far as I am aware, he was never listed as a member of the Forbes 400, but his wife, Virginia Binger who was one of the heirs to the 3M fortune, was.  She was considered the richest woman in Minnesota when she died in 2002; she likely passed on a good part of her fortune to her husband, but Forbes didn’t add him to its list after she died so who knows?  He died in November of 2004.  His Wikipedia entry reported that he had a net worth of about $900 million on his death.  The local media and Wikipedia reported that his estate paid $112 million in Minnesota estate tax.  (I personally found out about that because one of the lawyers for his estate was an acquaintance of mine and tipped me off when the check was mailed to the state – of course, without revealing the identity of the decedent.  Media stories quickly confirmed Binger’s identity.) Given his date of death, the revenue from this payment was in fiscal year 2006 (August 2005).
• Carl Pohlad is well known to most Minnesotans because he owned the Twins baseball team along with many other successful businesses.  He died in January 2009.  The New York Times obituary reported his net worth at $3.6 billion. He was a longstanding member of the Forbes 400, unlike Binger.  Given his date of death, most of the revenue from his estate should show up in state fiscal year 2010 (September 2009).

The table below shows Minnesota estate tax revenues from FY 2005 – FY 2013 and identifies the year in which most of the Binger and Pohlad estates’ payments would appear, given the requirement to pay within 9 months of the date of death.

Fiscal Year	MN estate tax revenues (000)	Comments
2005	$68,952
2006	212,881	Binger estate tax payment of $112 million (public estimate of net worth: $900 million)
2007	107,599
2008	115,498
2009	130,196
2010	148,977	Pohlad likely estate tax payment of unknown amount (public estimate of net worth: $3.6 billion)
2011	161,202
2012	165,277
2013	158,928

What is striking about these data is that Binger’s death had a dramatic effect on estate tax revenues (the $112 million reported in the press or 162% of the previous year’s total revenues), while Pohlad’s estate appears to have had little or no effect.  (Revenues went up in year his estate tax liability was paid by about 15%, but the resulting level appears to be the new normal – following the Great Recession – for Minnesota estate tax revenues.) That is so, even though Pohlad supposedly was worth four times what Binger was.  What can explain that difference?  Some possible explanations to reject:

• Both men were widowers, so their estates were unable to take advantage of the unlimited marital deduction that defers payment of estate tax until the death of the surviving spouse.
• The media’s estimates of net worth could be wildly wrong. That certainly is possible, but it seems unlikely that they could be off by anything like the apparent difference in tax payments.
• Charitable bequests could explain some of the difference, but again nothing of the magnitudes involved.  Public information, as referenced in Wikipedia, makes it clear that Binger left a large amount to charity.
• Much of Pohlad’s wealth was in privately held businesses (e.g., the Twins), while Binger’s wealth was likely more in public companies, 3M and Honeywell stock one would guess.  That allowed Pohlad more flexibility to reduce tax.  For example, discounts for minority interests in businesses is a typical tax minimization strategy that is easier with privately held businesses.  Discounts can be substantial but nothing like the amounts involved.

The best explanation is that Minnesota does not have a gift tax.  When both Binger and Pohlad died, the only extent to which a lifetime gift generated Minnesota tax was if the gift was subject to federal gift tax and was made within three years of death. In that case, the amount of federal gift tax was included in the estate subject to Minnesota estate tax.

Pohlad likely took extensive advantage of the lack of a gift tax, while Binger probably did not.  Binger’s decision in his last years to leave substantial money to a female friend, contrary to his children’s wishes, likely also played a role.

Making lifetime gifts is an effective way to reduce federal transfer (estate and gift) tax.  Although the two taxes have the same exemptions and rates, the gift tax is tax exclusive, while the estate tax is tax inclusive. Translated that means the estate tax applies to the tax on the transfer, not just the transfer itself. The gift tax does not. That significantly reduces the effective tax rate: to make a $1 million transfer costs $1.4 million for a lifetime gift ($1 million gift + $400,000 gift tax at the 40% rate), while it would cost $1.67 million for a bequest (tax applies to full amount or $1.67 million * 40% = $666,666 tax with the residual $1 million going to the heir). To be successful, the lifetime gift must be made at least 3 years before death or the federal tax pulls the gift tax liability back into the taxable estate and imposes tax on it.  So avoiding federal tax requires some planning.  Media reports indicate, for example, that Sam Walton (once the US’s richest person) and his wife Audrey (as well as other family members) used aggressive gifting strategies to avoid federal transfer tax.  (The Moretti and Wilson NBER paper discusses the Arkansas state tax on Walton’s brother, Bud, whose estate paid $165 million.  Because of the timing of Sam’s death and his gifting strategies, I’m sure his estate escaped any significant Arkansas tax – like Minnesota, Arkansas had no gift tax and by the time his wife died, the Arkansas estate tax had been repealed. Bud must have missed the family seminar on gifting.)

In 2009 in Minnesota (and many other states), even deathbed gifts could avoid Minnesota estate tax; a Bench & Bar article touted this option (I could not find an internet link for the article).  As noted above, if the gift was subject to federal gift tax and made within the three-year period, the federal gift tax would be subject to the Minnesota estate tax, but the gift itself would not.  In 2013, the legislature enacted a rule that pulls back gifts made within 3 years of death into the taxable estate, ending the deathbed strategy.

It is likely that gifts kept substantial property out of Pohlad’s taxable estate, while that was not the case for Binger. There doesn’t seem to be any other reasonable explanation for the large discrepancy.  Assume the Pohlad estate was worth $3 billion and a 5% tax rate applied (well below the 16% that applies above $10 million), the tax would be $150 million, illustrating the hole that the absence of a gift tax creates for the Minnesota transfer tax regime. Subsequent litigation in the US Tax Court, as reported by Forbes, where the Pohlad estate challenged the IRS’s valuation of the Twins baseball club, confirms that much of his wealth had been given away at little state tax cost because Minnesota does not have a gift tax.

Of course, making lifetime gifts requires having enough money left to meet your own needs and desires – not an issue for members of the Forbes 400, unless they don’t trust their families or simply want to maintain direct control over most of their assets. Tax aversion, plans to give nearly all your wealth to charity like Warren Buffett (no need to worry about estate tax avoidance then because of the unlimited charitable contribution deduction under the estate taxes), and a desire to maintain complete, hands-on control probably dictate whether billionaires use lifetime gifts to avoid federal and Minnesota tax.

Policy takeaways

• Tax averse billionaires can easily minimize their state estate tax liability by using aggressive gifting strategies, unless the state has a gift tax.  Only Connecticut does.  They don’t need to change their domiciles to achieve this; they just have to consistently give it away to children or others more than three years before they die.
• If states want their transfer taxes to apply evenly to billionaires and other very wealthy individuals, they should consider enacting a gift tax.  This may trigger tax averse billionaires to change their state of domicile or residence, if the Moretti and Wilson study is correct, so that may be self-defeating.
• The current limited Minnesota estate tax (without a gift tax) applies unevenly – hitting the merely rich (families with more than $6 million or so), while allowing the very rich (those with tens or hundreds of millions), particularly those who are tax averse and willing to use gifting strategies, to skate.

Minnesota’s state tax collections have consistently exceeded the February MMB forecast amounts. The most recent update reports that revenues for the last quarter (July through September) were up over $200 million or 4.4%. Corporate franchise tax revenues were an exception; they were down $47 million or 9.5% below forecast.

A similar, but longer-term and more striking, trend in federal corporate tax revenues has been occurring.  An August 2019 CBO letter on the 2017 federal tax act’s (TCJA’s) effects on federal revenues reports much larger drops in federal corporate tax revenues, compared to forecast (18% for FY2018 and 20% for FY2019). The letter says it cannot attribute that to the effects of TCJA, rather than other causes such as Trump’s ongoing trade wars.

The federal trends are ominous, if you are (like I am) concerned about the federal budget deficit which is running at record levels for an economic expansion. This TPC blog post by Benjamin Page speculates that it may be a sign that TCJA’s big corporate tax cut was even bigger than Treasury and congressional estimators thought it would be. If so, that may also be a bad sign for Minnesota’s corporate tax revenues, since Minnesota conformed to most of TCJA’s corporate and business base expansions, other than its international or foreign provisions.

If the federal estimates of the TCJA are off, Minnesota’s corporate revenues will be adversely affected.  Minnesota uses federal taxable income as the starting point for its corporate franchise tax calculations, so dips in federal revenues tend to be mirrored in Minnesota corporate revenues.  The relationship is not perfect because the Minnesota economy does not exactly mirror the national economy and Minnesota corporate tax law modestly deviates from the federal calculations. But the relationship is close.  Even more important, when Minnesota conformed to most of TCJA’s corporate and business changes, the state used the federal estimates to score its revenue gain that would also result.

Minnesota choose not to conform to TCJA’s foreign provisions – specifically by not taxing GILTI or the deemed repatriation of deferred foreign income. The estimates of those provisions (as discussed below) were probably among the most difficult for federal government economists to estimate.  Shouldn’t that immunize the state from the risk those federal estimates are off?  On the surface one would think so, but that ain’t necessarily so. Even though the legislature rejected adopting these federal provisions and, thus, the tax bill’s score did not reflect any increase (or decrease) in state tax revenue as a result, there still might be a not insignificant effect on Minnesota’s corporate revenues.

To understand why that could happen, one needs a rudimentary understanding of the federal estimates and how Minnesota uses them in making its own estimates.  TCJA dramatically restructured how the federal government taxes the foreign operations of US multinationals, as well as the US operations of foreign businesses.  These changes may be the most consequential changes since those made during the Kennedy administration when subpart F imposing federal tax on US multinational’s foreign operations. As with any estimate but especially here because of the scope of the changes, the federal economists needed to forecast two different things:

1. The direct effects of changes in law, i.e., the changes in tax base and rates made by the law.  Doing this is more or less a matter of complicated arithmetic mainly using data from tax returns.  That grossly understates the complexity, since in many cases the necessary data is not on the tax returns and must be inferred or imputed, if it cannot be matched from other records. That requires economic modeling and making assumptions.
2. How those law changes will affect the behavior or decisions made by the owners and managers of the multinational businesses.  These behavioral changes have two basic components – i.e., the extent to which corporations:
   1. Artificially shift or recharacterize income to reduce their taxes (these are largely accounting and legal maneuvers that change where or how income is reported and taxed, but not where the corporation’s actual operations are, in response the legal changes); and
   1. Make substantive operational changes (e.g., by moving factories or other facilities into or out of the US).

TCJA’s changes in the taxation of foreign operations were intended by its architects to reduce the artificial income shifting to low tax foreign jurisdiction, while not affecting actual operations or to encourage multinational businesses to increase their US activities.  The effects of both #1 and #2 above are typically embedded in a single number in the federal estimates for each federal change or in some cases for multiple changes.

Making these estimates in an accurate manner is extraordinarily challenging, even with regard to #1 because of the data challenges, but especially #2 because of the unpredictability of how the key deciders will act when there is no precedent for changes in the law. That was the case particularly for TCJA’s foreign changes.  Economists, of course, rely on the assumption that individuals and businesses act as profit maximizers in forecasting behavior – i.e., they will do whatever minimizes their taxes and increases their after-tax incomes. But given the complexity of the provisions and the myriad of different business situations, that doesn’t always provide clear guidance. Moreover, having read just a small sample of the analyzes of the TCJA international provisions, there is little consensus among the experts on what their effects will be.  Thus, there is a lot of uncertainty about what will happen – there’s a good chance the estimators could be wrong by more than the typical expected error.  (Estimates always miss somewhat; one just hopes by not too much.)

Minnesota’s estimators use these federal estimates to score how much adopting or conforming to the federal change will affect Minnesota revenue. This is done by a variety of formulas that convert the federal estimates to approximate the effects of the federal law change on the Minnesota tax base if the state adopts or conforms to them.  In most cases, as noted, all the state estimators have is a federal number that reflects both direct computational and behavioral effects.  But the behavioral changes – because they are caused by enactment of the federal law – will occur whether or not Minnesota adopts or conforms to the federal change.  These changes are automatic and don’t depend on the actions of the legislature to adopt or conform to the changes.  Ideally, the Minnesota state government estimators would like to use estimates that reflect only amounts attributable to #1 above, but they typically are stuck with one number (per fiscal year) for the federal changes.  In some cases, the federal estimators may not even know what the separate effects are because of the models they use to estimate data parameters and even when they do, they are often reluctant to disclose to state officials what the breakdown is between the two components.

The bottom line, even though Minnesota did not conform to TCJA’s foreign provisions (which would have increased revenues – varying based on how that was done), Minnesota may still experience increased or decreased corporate tax revenues as a result of those provisions. If the behavioral effects of TCJA’s federal changes are to increase or decrease the amount of income reported by US based corporations that will flow through to Minnesota.

So, where does that leave us in judging what effects of the deviations – both federal and Minnesota – from the estimates are? I think it is largely good news, but because it is so preliminary, I would not put much stock in it. The reason I think it may be glimmer of good news is that if the federal estimates are wrong because they misjudged the behavioral effects (what Minnesota picks up without conforming to the federal foreign changes), then Minnesota’s revenues should be off by more than the federal estimates.  The exact opposite appears to be the case, suggesting that the big drop in federal revenues must be due to other factors – other parts of the estimates (e.g., the direct computational effects) or the trade war, which are not affecting Minnesota as much as the nation.

As an aside and to provide context, there is yet a third part of the federal estimates – the macro-economic effects of the tax cut, which typically are not done but were for the TCJA because of coercion by the Republicans in Congress. This element of the estimates garnered a lot of media attention and public debate. These are different than the micro economic behavioral assumptions to individual tax parameters, which I described above, and which are routinely made when the federal estimators have a good empirical basis for doing so. These macro-economic feedback or overall effects of tax cuts or increases are very problematic and uncertain. To be reductive simplistic, they essentially must be premised on the idea that government spending, when financed by borrowing, is a smaller drag on economic growth than when financed with taxes – ignoring the details of the tax cut.

The estimates of the revenues from GILTI and the repatriation tax, neither of which Minnesota adopted, may have been too high or the cost of the federal export incentive (foreign derived intangible income) may turned out to be more costly than expected. A big word of caution, though, needs to be expressed: behavioral effects generally take a while to manifest themselves because businesses take time to assess the new law, see how other countries will react, and then develop appropriate strategies.  The federal estimates undoubtedly took that into account and behavioral effects in the first couple of years are likely small.  As time goes by, the behavioral effects will be picked up by the state’s economic forecasting firm’s macroeconomic forecast, reducing the state’s exposure.

Addendum

After writing this post, I spoke with a former colleague who confirmed (I had heard a rumor) that a drafting error in the conformity bill had unintentionally exempted the cash dividends paid under the repatriation tax.  (I personally am not sure whether this should be called a drafting error, an estimating error, or some combination. The Senate bill when I was still working full time – i.e., in 2018 – proposed exempting the cash dividend portion but apparently that was not the intention. This same language was incorporated in the 2019 Senate bill and was included in the final version that became law.  The revenue estimates for both 2018 and 2019 Senate bills must not have reflected that intention, but rather only the cost of exempting deemed dividends. Had the estimates reflected both effects, the bill drafts probably would have been clarified.) That error may explain part of the drop in state revenues, which would be even more good news from the perspective that is not the underlying tax base that has declined.