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MMB released its interim May budget forecast and, as widely expected, it showed an uptick in projected spending with a large reduction in state revenues sufficient to yield a shortfall bigger than the budget reserve balance (but not if you add in the cash flow account).

The following statement from the document captures the essence of the massive uncertainty the state faces:

“The shock to the U.S. economy from the pandemic is unprecedented in modern, post-war history, and the economic outlook is exceptionally uncertain and volatile. Economic outcomes will depend critically on the pandemic’s course, the prospects for an effective treatment and vaccine, government restrictions on economic activity, consumers’ and businesses’ responses as those restrictions are lifted, and the impact of fiscal and monetary policies.” (p. 2)

As if that weren’t bad enough, the Council of Economic Advisors threw cold water on the IHS (the state’s macro forecasting firm) forecast: “First, most Council members believe that a slower recovery is more likely than IHS’ fairly rapid return to economic growth. . . Second, some Council members note that IHS expects both corporate profits and the stock market to reach and exceed pre-crisis levels next year. Those Council members think a less aggressive recovery path for these variables is more likely.”

MMB adjusted it forecast variable as a result of these concerns. Quite frankly (as recognized by the forecast document), we have not experienced anything like this, so it is hard to know how individuals and firms will behave in response, much less the course the virus will take and how effective the public health and medical communities’ responses will be. Truly an awful situation and impossible to forecast with any certainty.

Some reactions:

• An important factor is the uncertainty surrounding how the federal government will respond to the needs of state and local government. To me, this is the elephant in the room. How will the Trump, McConnell, and Pelosi negotiations turn out relative to providing aid to states and locals? This isTHE factor that determines how quickly state budget adjustments should be made. I would expect it to be resolved sooner rather than later, but who knows? McConnell’s bankruptcy statement (since walked back) may seem like nothing more than a negotiating ploy to extract concessions from the Democrats. But given the current GOP and the fact that COVID-19 is perceived as disproportionately a blue state problem, that may be wishful thinking. Trump and congressional Republicans may perceive this is a chance to double down on their motivation for the $10K SALT deduction cap.
• The projected reduction in corporate franchise tax revenue seems too low to me, if only relative to the estimated drops for the income and sales taxes. I will be surprised if corporate revenues do not drop by much more than 13%. That’s based on nothing more than intuition and the fact that those revenue typically drop a lot in any recession. This one may be different.
• On a nitpicky level, I wonder if they included the effect of the CARES Act’s RMD holiday, which will automatically flow through to individual income tax revenues. MMB usually picks up those effects but I didn’t see a reference in the forecast document, which would be typically noted in a regular forecast writeup (this one is a lot shorter, though). The effect is small, so it’s not a big deal either way.
• Overall I expected things to be worse. (Media reports on the California forecast are closer to what I expected.)
• My fear is that this will be like the early 1980s (early in my career) when each quarter a new forecast was done and seemingly (my memory is probably exaggerating) showed a new deficit. That just as to the pattern – on an absolute basis, I expect the downturn to be much worse than the 1980s double-dip recession. A natural reaction by many individuals will to be increase savings for economic reasons and to eschew much consumption because of health concerns, as well as not having as much income to spend. Conversely, firms would seem to have little incentive to make investments, the cost of which they perceive they may never recover. Unlike the 1980s, real interest rates are zero or lower. So, cutting interest rates won’t unleash investment and consumption unlike in the early 1980s. I expect a very slow recovery, but I’m a Cassandra, typically, and have no macro-economics expertise (zero).

Some thoughts on what the governor and legislature should do:

• I’ve never been a fan of kicking the can down the road, but this probably a time to do that (to a limited extent) until we have a better fix on what Washington is going to do about aid to states and local governments. Only the federal government has the legal and financial ability to effectively borrow to maintain government services. One hopes and expects that Congress will recognize that responsibility as it has in the past. You can’t, however, wait too long. If the feds do not come through, it is much better to begin making budget adjustments ASAP.
• I would give MMB expanded unallotment power (e.g., up to each dollar drawn out of the budget reserve or something like that) providing more flexibility to cut spending without fully draining the budget reserve. Cutting sooner, rather than later, will allow more gradual cuts.
• If the feds do not allocate a generous amount of aid, everything will need to be on the table. In days of yore, the time honored method was 1/3 cuts – 1/3 tax increases -1/3 shifts (payment deferrals or revenue accelerations). The reality that Democrats will need to recognize is that 21st century Republicans (at least in a purple state like Minnesota) are unlikely to ever agree to a tax increase. I think it is fair to say that would cast them as RINOs. [My view of the politics: In a deep red state, Republicans will bow to the inevitable reality that taxes are necessary to fund basic government services and will vote for tax increases – gas tax and sales tax increases typically – when necessary. But that’s an intrafamily matter, where their identity as Republicans is not at stake. In a purple state like Minnesota, the game plan is to force Democrats to be responsible for any and all tax increases and to remain the party defined by tax cutting in any and all situations. The days when Al Quie and Arne Carlson would add some Republican imprimatur to modest tax increases are long gone.]
• If the feds fail to pass meaningful state aid, some possible budget fixes include:
  • Reopening state employee contracts as Senator Gazelka has suggested. That will minimize layoffs as compared to straight cuts. It’s true, as some elected Democrats have stated, that cutting public employee compensation won’t “help” the economy. But that is wrong frame of reference if the alternative is lay-offs and cutting public services, in my view.
  • Rescind parts of the 2019 tax cuts. Clearly, the legislature would not have enacted them if it had presciently known the current state of the budget. If the state is going to cut back spending authorized by the 2019 legislature, some of the tax cuts (e.g., the individual rate cut and the working family credit increases) should be undone as well.
  • Similarly, if the legislature and governor are going to review direct state spending to find low priority items or programs that are performing poorly to cut, efforts should not stop there. The host of state tax expenditures (e.g., the surfeit enacted in the 2017 and 2019 tax bills, but I would not limited it to only those) should be evaluated for effectiveness and many likely repealed as wasted efforts to change people’s behavior that either don’t work or aren’t worth whatever small effect they have. Direct and tax expenditures should be treated equally. Protecting poorly designed or low priority tax expenditures because repealing or cutting them can be characterized as a “tax increase” is simply stupid, in my view. But I’m not a politico, so this is probably little more than wishful, wonk thinking.
  • Reinstating some of the state school aid “shift” (i.e., increasing the fiscal year aid hold back). This is bad policy but it is one way the state can indirectly borrow to finance a deficit – i.e., by compelling schools to do so by delaying their state aid payments. If the feds won’t borrow to help, the state will practically need to do so to buy time for budget adjustments. Appropriation bonds are the other option (probably a worse option because the state’s use of deficit financing will be more transparent to Wall Street, dinging the state’s credit reputation).

Of course, no such canon of statutory construction exists, except as imagined by law professors (e.g., in this Harvard Journal of Legislation article by Jesse M. Cross, a University of South Carolina law professor and former congressional drafter).

As a long-time legislative drafter who made more mistakes than I care to admit, I would have welcomed such a canon. It might have helped me sleep better. Unfortunately, it’s only a professor’s pipe dream – one no textualist judge will likely ever buy. I suppose one could codify it (e.g., in chapter 645). It might be interesting to see if one could craft bill language to do that, but I won’t try. That is not what Cross proposes, but rather that courts adopt it as an expansion of an old, infrequently used canon, the scrivener’s error doctrine – a canon used to correct obvious transcription or typographical errors.

It’s worth reading the article if you are interested in the legislative process, statutory construction rules, or (my prime reason) details about how members of Congress actually find out what is in the bills they vote on.

The article has three parts:

• Cross’s description of how Congress has come to heavily rely (exclusively, for all intents and purposes) on staff to draft bills and how members rarely read them – even bits and pieces of them (no surprise to someone who has worked in Minnesota legislature – one assumes Congress is a more extreme version of state legislatures);
• Discussion of the Supreme Court’s “fixing” of a drafting error in the ACA in King v. Burwell, rather than bringing down much of the law’s superstructure by slavishly following a simple “plain language” reading of the provision – this is his “hook” for expanding the scrivener’s canon; and
• Cross’s proposal for the new canon and how he tries to justify it as consistent with statutory construction rubrics, including textualism.

I found the most interesting part to be his description of how Congress has done its drafting – from members drafting in the 19^th century, relying on executive branch personnel in the mid-20^th century, and ultimately on staff by the 1970s – and how members get information about what’s in the bills they vote on.  Some interesting tidbits:

• He presents details on the explosion in offices and staff numbers in the 1970s, when CRS, CBO, etc. were created, as well as the doubling and tripling central agency, committee, and member staff.
• Cross conducted (or had others conduct) interviews of 75 or so congressional staffers as to how members (and higher level staffers such a chiefs of staff and similar) learn about bill text, confirming what we all know: members rarely read bills, relying instead on short documents and oral briefings. These documents are typically staff distillations of more detailed summaries prepared by other staff of the actual bill language. The same pattern generally applies in the Minnesota legislature, based on my experience. Very few members (“outliers” is how Cross describes them) read bill language. Most members understand bills only at the conceptual or purpose level.
• Members of Congress often have 2-page (or shorter) limits on the length of these documents. (Some Minnesota legislators have similar impulses – I remember one Speaker who had a strict 1-page rule and my efforts to pare and condense, as well as to narrow margins, decrease font size etc to bend the rule.)  Many members of Congress apparently use “vote rec” memos (short written recommendations on how they should vote on the floor) (p. 105). They can be as short as index cards that are handed to the member shortly before floor votes.
• As Cross puts it, members’ understanding of bills is almost always “conceptual not text based” (p. 108).
• Cross makes the point that this limited engagement with bill text is not just because members do not have time or are too busy (making campaign finance fund raising calls?) to read bills. Rather, the nature of federal legislation makes it impossible for generalist members to consider and deliberate over bill text – (1) the world/problems being addressed are too complex, (2) the statutes themselves are too specialized and labyrinth, and (3) agency administration of the programs adds another layer of complexity.  The system expects members to be generalists who simply cannot have the specialized expertise necessary to understand the details of what they’re voting on (i.e., to be held responsible for the staff mistakes, apparently), even if they had or could make time to do so.
• Cross reports that the Senate and House bill drafting offices consider that it takes between 2 and 6 years to train drafting staff in subject areas (pp. 113 -114).  That’s longer than in the Minnesota legislature, where I would guess the expectation is closer to 1 to 2 years.  It may be a little longer in specialized areas.
• His bottom line: By necessity, this has resulted in a legislative bureaucracy to which members have delegated responsibility for drafting and making sure that the text of bills is consistent with members’ purpose in passing legislation. Of course, much of detail of policy development has also been delegated, since making many smaller policy choices requires descending into the details of the problem, the statute, and administrative practices that members have not mastered.

This delegation or “division of labor,” as Cross puts it, is crucial to his theory for expanding the scrivener’s error doctrine. Drafters are now the scribes from days of yore (Scalia’s term, not Cross’s) whose obvious mistakes can be corrected by the courts. Aside from that similarity to mistakes made by scribes, he thinks it is inapt to hold elected members responsible for mistakes made by their agents (staff). In his view, doing so would undercut democratic theory. I am not sure that I agree – Harry Truman’s the “buck stops here” and all that.  It’s not clear why a legislature should be different. More on that is below under my reaction.

The second and third part of the article were less interesting to me, so I won’t spend much time describing them.  Cross argues that the Court’s resolution of the dispute in King v. Burwell could be used as a template for generalizing the scrivener’s error doctrine into a broader staffer’s error doctrine to correct drafting mistakes (“isolated snippets of statutory text” as he puts it) that are manifestly contrary to the purpose of the legislation.  He contends that doing so would be consistent with either of the two schools of statutory interpretation – intentionalism or textualism.

The Burwell hook. To grossly oversimplify, in King v. Burwell the Court was faced with a drafting error in the ACA that would have denied the federal subsidy for those purchasing coverage through the healthcare.gov website (i.e., in states that did not set up their own exchanges), if the Court followed a simplistic reading of the language of the law.  (It could have resolved the matter by deferring to the agency interpretation under Chevron principles, but it did not want to do that – a different story.) That reading would have denied the subsidies to residents of many states, undercutting a central feature of the ACC: clearly not what anyone thought they were voting on.  Apparently, that was too much for Chief Justice Roberts (but not for Justice Scalia who dissented joined by Thomas and Alito), because it was so clearly contrary to what Congress intended. Thus, he deviated from the “natural reading of the pertinent statutory phrase” as he put it and instead read it (“unnaturally”?) to avoid thwarting Congress’s intent.

Expanding scrivener’s error doctrine. Cross runs with the facts and resolution of Burwell to formulate a doctrine that addresses similar situations by expanding the scrivener’s error doctrine to a broader class of staff drafting errors that are clearly inconsistent with a statute’s purposes.  To apply Cross’s canon, a court would go through three steps, to:

1. Identify the overarching policy goal of the statute.
2. Determine if an “isolated snippet of statutory text” (i.e., the error) would “sabotage those overarching policy goals.”
3. Make sure it really is error (not just the court’s misperception of the policy or intention).

He goes on to make good arguments for its adoption by intentionalists and plausible arguments for textualists.

My Reaction

As usual, reading an article like this gets my mind to running off on tangents.  The following is a distillation of a few of my off-the-cuff reactions for whatever they may or may not be worth.

Burwell is probably not a good case to use as a foundation for a new statutory construction canon.  I’m skeptical of the prospect for Cross’s idea (much as I might like it) being adopted by federal courts. Burwell is a unique case; a “hard” case that a textualist would likely consider made “bad” law because of its extreme circumstances, probably not something to generalize and go back on textualist principles (more on that below).  Specifically, I have two observations about the decision:

• If a more ordinary law had been at issue (e.g., a securities regulation or something similar) and the “natural” reading of the language would have benefited business, I doubt Roberts would have hesitated about going with the “natural reading” no matter how inconsistent it was with an overarching and obvious purpose of the law.
• I would guess it was only the highly politicized situation in Burwell that made him unwilling to go there: doing so would have vitiated the signature policy of the Obama administration (and a goal that generations of Democrats identified as one of their highest priorities) and would have created a perception by many that the Court had essentially played a game of gotcha with the president and congress.

Textualists will not be impressed or sympathetic, I think. Reading the article reminded me (as an intentionalist) how much I dislike textualism, especially in its more rigid versions (mainly because I think relying on dictionaries and grammar rules divorced from consideration of purpose and extrinsic evidence enables judges to do more mischief than text anchored by a beacon of legislative purpose).  I cynically have thought that the infatuation with textualism (over the last 25 years or so) was driven by largely an anti-government, “conservative” ideology (gum-up government to express it even more cynically). If that is at all accurate, that underpinning will be inhospitable to a canon whose prime attraction is help the wheels of government keeping moving as intended, notwithstanding unintended staff drafting errors. I doubt Cross’s canon would appeal to committed textualists, like Scalia’s textualist acolytes.

I have suspected that there is more of a political and philosophical agenda at stake in rigid textualism.  To put a slightly finer point on it, my perception is that the textualist movement is heavily driven by two elements:

• Distrust of liberal or expansive-government supporting judges who, by resorting to effectuating “legislative intent” as evidenced by legislative history or their imaginations of what was intended, recast/rescue/remold statutes to achieve their ends (more government). Requiring strict adherence to the dictionary meanings and rules of grammar (obvious inconsistent purpose be damned) limits that discretion and prevents them from doing mischief.  This can be cast as supporting democratic values, because (federal) judges are not elected and judges (elected or not) are not supposed to “make policy.” In reality, applying “plain language” rules (dictionary and grammar meanings divorced from intent and extrinsic evidence of what the legislature intended) are remarkably malleable and can allow surprisingly unintended interpretations in the hands of ideologically motivated judges.
• A desire to hem in or limit legislation – a preference for thwarting legislation rather than effectuating or helping to faithfully implement its purposes.  To me it seems almost inevitable that slavishly following the text will frequently make it more difficult to effectively legislate (a good result for someone who favors small and constrained government). This is so because it will require more runs through a legislative process that favors playing defense (preventing change). One might assume that strictly binding courts to the rigid text would be equally probable to break either way – i.e., in favor or against bigger government.  I think that is unlikely to be the case, because impractical and egregious mistakes that disadvantage private actions are often ignored by the executive on grounds of impracticality. It’s more than ties go to those favoring limited government – short of drafting very general provisions (and investing a lot discretion to the executive, which may not be favored for a host of reasons), it is very hard (impossible) to anticipate the multiplicity of fact situations and future developments.  Thus, I see the attraction of rigid textualism to those who favor more limited or less effective government.  As a result, it undercuts the power of the legislative branch by raising hurdles that must be cleared by staff drafters – getting the text exactly right (anticipating the unforeseeable) as well as avoiding mistakes.

So much for my ranting.

How much would it matter? Assessing that is key (for a judge considering adopting the canon or for a legislature thinking of codifying it). The key point would be the fuzzy step 3 (and to a lesser extent step 2), I think, and how that is expressed and applied. I don’t have a good feel for that. I think the current system (before the advent of rigid textualist) coped pretty well.

Would staff evidence of their mistakes be considered? Focusing on Burwell may make it easy to overlook that there will be inevitable questions of whether or not provision really was drafted in error. (Of course, for Cross that’s not enough – a mistake needs to thwart an overarching purpose.) Since I was many times asked to attest to legislative intent, one naturally assumes that staff would be pressed to admit/testify to having made a mistake contrary to what the author/committee/etc wanted. That raises some interesting questions. I assume that evidence for the existence of the mistake and its contravening an overarching purpose would need to be contemporaneous with passage, so it could not be ginned up or augmented after the fact. Cross does not mention any of that as far as I can remember.

Division of labor and should it matter? As noted, Professor Cross relies heavily on the idea that it is not appropriate to hold generalist legislators responsible for the drafting errors of their staff agents. As a former drafter, that sure resonates with me personally. But the actual logic is less clear to me. Would he apply the same rule to regulations that have the force of law and go through an executive branch approval process? The same division of labor probably exists there (drafter versus higher up that ultimately must sign off)? Because of the practice of explicitly stating purposes of regs and administrative rules (typically anyway), a clearer understanding of purpose would seem to be present to test against. Entity based intent also seems less of a synthetic concept for regulations than legislation, making it an easier choice to invalidate an inconsistent drafting error. Would the result be different in a parliamentary system (e.g., the UK) where the executive and legislative branches are unitary and legislation could be considered a product akin to an administrative regulation? Is the problem that in America each legislator is considered more a free agent and that drafting and review is typically done by central agency staff who are not directly responsible to or supervised by the members (Cross doesn’t discuss this element of the process)? Lots of interesting questions to me that the article does not plum.

Polarization makes this a bigger problem. Anyone involved in the legislative process knows that drafting errors regularly occur. Everyone makes mistakes and some of them slip through even the best of quality control systems. Moreover, as the old proverb says, “haste makes waste” and the legislative process is characterized by much haste. So, no surprise, drafting errors are not an uncommon occurrence – if only because there is not enough time for several layers of carefully checking, even if that is what operational protocols call for.

A recent WaPo article provides what appears to be a good example of a recent mistake in a relatively high profile federal law, the December budget deal, which granted parental leave benefits to federal employees.  According to the article, the benefits were not extended to a fair number of employees as a result of what appears to be a cross reference error (i.e., not listing all the relevant statutes to cover the intended employees). That is a classic type of error that can easily occur.

Traditionally, this sort of thing was not a serious problem with a collegial legislature that recognizes errors occur and routinely corrects them, even if doing so cedes a modest advantage to the other side. In the federal tax legislative process that was regularly done by enacting technical correction legislation. In Minnesota, similar technical correction fixes were also routinely done in omnibus tax bills.  Both of those practices occur less commonly now, if at all, unfortunately.  In the past, most members recognized that fixing unintended (staff) mistakes was the right thing to do to honor legislative intent and/or agreements on deals (even when there was change in control after the bill’s enactment).

Polarization and a “take no prisoners” warfare approach to the legislative process has made it increasingly unlikely that errors are corrected in controversial legislation. Elections that empower an “out” party to block legislative fixes by taking control of one house or the executive are a factor too. The ACA is, of course, the high-profile example. For the ACA the depth of the Republican opposition caused years of litigation that attempted to use a drafting error/oversight to invalidate a core part of the legislation. Two of the Supreme Court conservative majority stepped back from a talismanic commitment to plain language and textualism as an excuse to bring down a generational change in how America provides health benefits to a large segment of its population.  I doubt that can be generalized to less high profile example, much as it might be good idea.

Possibility of state adoption. Cross’s article focuses on how congress drafts and reviews bill text. As a result, it has strictly no application for state courts interpreting state statutes. I suspect that his arguments would apply almost as well to larger and more sophisticated state legislatures (certainly the New Yorks and Californias). And it is courts in some of those states who are more likely to be open to his ideas, unfortunately. Just a thought.

Bottom line: the article provides some good background information about the Congressional processes and folkways, as well as raising some interesting questions, even if its proposal is unlikely to be adopted.

My uninformed monitoring of the daily flow of COVID-19 data generated the following observations and questions:

Efforts to increase testing. Governor Walz’s effort to ramp up Minnesota’s testing is showing results. But Minnesota (as of 4/28) remains mired in 42^nd place (out of 50 states and DC) in testing rates on a population-adjusted basis, not that much different than before Walz’s announcement. The “moon shot” program was unveiled on April 22^nd. We have six reported days of testing data since then.  (To be fair, they said it might take up to two weeks to see results. So, a bigger surge may be coming.) During April before the announcement, the average daily number of tests was 1,344. Since the announcement, the average daily test rate increased to 2,414, an impressive 79.6% increase.   In the same period, the average daily testing in the US also increased by 18.5%.  Minnesota remains 55% below the national rate.

Troubling trend in the percentage of tests that are positive.  As testing ramps up, one expects the percentage of positive tests to decline. That naturally follows from the idea that when testing was scarce, medical professionals using the state’s testing rubrics would administer tests to individuals with the high probability of being infected. As testing increases the percentage of positive tests should drop.  The reverse appears to have occurred.  During the April 1^st to 22^nd period, 7% of tests were positive, while for the following days with the higher testing levels (noted above), 10% were positive.  With my amateur background, I cannot think of an explanation for that and have not heard a rationale for it reported. The 6-day period of higher testing, of course, may simply be too small a sample to mean anything.  But eyeballing the data, even before the big ramp-up, the percentage of positives was increasing even as the number of tests increased. Weird.

Minnesota’s low case rates are probably misleading.  Minnesota continues to have low numbers of detected cases (only 6 other states have fewer on a population-adjusted basis).  But among the ten states with the lowest detected numbers of cases, Minnesota has the second lowest testing rate (only North Carolina is lower). Most of the states have much higher testing rates; Minnesota’s rate is about 40% lower than the 10-state average. The most reasonable conclusion is that Minnesota likely has proportionately more undetected cases than the other states with low numbers of reported cases.

Minnesota’s extremely high case fatality rate (CFR).  Perhaps most puzzling to me, Minnesota’s CFR (deaths from COVID1-19/positive cases) is the third highest in the nation.  Only Connecticut and Michigan, hot spot states each with more than 2,000 deaths, are higher.  Oklahoma, the number 4 state, has a CFR quite a bit lower than Minnesota’s.

The anomaly can be illustrated by comparing Minnesota with our sister state, Wisconsin.  Both states have similar populations (Wisconsin has about 200,000 more people than Minnesota) and similar numbers of COVID-19 deaths (Minnesota had 301 and Wisconsin 301 as of April 28^th).  But Wisconsin has many more cases (6,289 compared to 4,181 for Minnesota).  Thus, although Wisconsin has more than 50% more cases than Minnesota, both states have about the same number of deaths. 

I have not seen a discussion of Minnesota’s unusually high CFR; much less a rationale for it. I can come up with conjectures, but I have no idea as to their potential validity:

• It is possible that Minnesota’s SARS-CoV-2 exposures have been concentrated in places with many more individuals who are particularly susceptible to dying from the virus (think nursing homes and assisted living facilities) more so than in other states.  Residents of these facilities are older and have health conditions (heart disease, high blood pressure, etc.), which make them more susceptible to the virus.  That is true nationally and the media have reported large outbreaks in nursing homes and assisted living facilities in Washington, New York, New Jersey, and so forth.  Why would Minnesota’s exposure be particularly concentrated in those facilities? I can’t think of a good reason.
• Minnesota’s elderly care facility management practices may have contributed in some way – i.e., more Minnesota nursing home or assisted living facility residents are allowed to be exposed and/or when they are exposed succumb than in other states.  This is just a wild conjecture on my part.
• Minnesota’s lower testing rates probably contribute – particularly if the state has targeted testing to those who have the highest potential fatality rates (again those in the facilities). I think that has been the case. We are likely testing fewer individuals with low mortality risks than other states that are either (1) running more tests or (2) not targeting their tests as narrowly to high risk populations as Minnesota is.  But no other low testing state has a high CFR like Minnesota’s.
• Maybe Minnesota’s suppression techniques have been more successful in preventing those who have lower mortality risks from being exposed.  More low risk individuals (e.g., those who are young and highly active or mobile) will likely be exposed in states with no or looser stay-at-home orders or cultures of respecting those directions. This conjecture also seems improbable to me.

In any case, it’s a mystery to me and I hope someone with actual expertise comes up with a good explanation that is published.

General media sources, such as the NY Times, have started posting population-adjusted COVID-19 case and testing data. So, I’m no longer going to do it.

The big question I have, which so far I have not seen addressed by media coverage, is why Minnesota’s testing rate is stagnant (slightly dropping, actually). As I track the data, many other states are ramping up testing, while Minnesota testing rate is not. Minnesota continues to have low case numbers (fourth lowest state on a population-adjusted basis, only Montana, Hawaii, and Alaska are lower), but that ranking is probably meaningless given that Minnesota is testing at about 2/3 the national rate. (Three weeks ago it was close to the national average.) The natural conclusion is that Minnesota’s low case numbers are too low, compared with that in other states with higher testing levels.

The graph below shows the daily number of tests reported by MDH for April, which reveals – despite the day-to-day fluctuations – a consistent, slight decline since the first part of the month.

This is particularly troubling because robust testing is crucial to further loosening of the stay-at-home order and allowing more normal economic and social activity. Something needs to change and the sooner the better.

A popular provision of the CARES Act is the Paycheck Protection Program (PPP), which makes forgivable loans to small businesses and nonprofit entities. The $349 billion appropriation for the program has, according to media reports, already been exhausted and Congress is haggling over appropriating another $250 billion. Democrats are insisting that money for hospitals and state and local governments be included, but no one appears to be arguing not to allocate more money to the PPP.

So what is the paradox? These loans are intended to allow the recipient businesses and nonprofits to continue paying their employees. The law requires loan proceeds to be used for payroll, rent, utilities, and mortgage interest to qualify for forgiveness. Public Law, 116-136, sections 1102 – 1106. Hence, the name “paycheck protection” I assume. Under standard tax law principles, loan forgiveness is taxable. That follows from the fact that the loan principal was excluded from income because it was exactly offset by an obligation to repay. So when that obligation is forgiven, the proceeds become taxable. The CARES Act, however, provides that forgiveness of PPP loans is excluded from taxable income. Section 1106(i).

So, the paradox is why did Congress include this exclusion? To me it seems unnecessary and simply a complication of tax administration and compliance. That is so because the law requires the loan proceeds to be used exclusively for deductible items – payroll, rent, and so forth. So, if Congress had left matters alone, the loan forgiveness would have been exactly offset by deductible expenses. Does that mean that these businesses will be able to both exclude the income and deduct the expenses as a result, thereby getting a nice tax spiff? No, because the IRC section 265 explicitly disallows that. (Minnesota law contains a comparable provisions, Minnesota Statutes, section 290.10.)

I assume Congress thought it was making matters easier by adding the exclusion. My instinct is that the reverse is the case. True, it makes it easy for the taxpayer to exclude the loan proceeds from taxable income when the loan is forgiven. But then the business must take care to exclude the expenditures of the proceeds from its business expenses, which may have occurred in a prior tax year. It’s not clear to me why that is simpler than excluding the loan proceeds from income. (As usual, I could be wrong and there is some simplification I’m missing.)

What happens if a business cheats and takes out a forgivable loan that it does not use for a qualifying purposes and SBA does not catch the violation, but the IRS does? I assume that the IRS can compel the business to recognize the loan forgiveness as taxable income, but I would guess that could lead to wrangling, potentially in tax court, about the terms and intent of the statute and IRS authority under it.

In any case, this is a provision for which a failure by Minnesota to promptly adopt conformity legislation won’t make much difference in actual tax liability (if any), but rather will create compliance headaches for taxpayers. Conformity legislation on this should be scored a zero, as it apparently was federally (nothing appears in the JCT estimate, so they must have concluded there was no timing effect).