If dollars and cents were the only barriers to reaching a deal on the two-year Minnesota state budget, two pieces of financial news Monday did nothing to put an agreement further out of reach.
Long-awaited guidance from the U.S. Treasury on how states and local governments can spend the $350 billion in direct aid from the American Rescue Plan appears to clear the way for tax breaks on paycheck protection loans and expanded jobless benefits. The guidance also provided a nice surprise for the state: Rather than getting $2.577 billion in direct cash from the federal government, Minnesota will get $2.833 billion, $256 million more than what was already an unprecedented amount of aid.
More generally, the federal money can be used to respond to COVID-19, including the costs incurred to fight the virus and respond to the economic impact of the pandemic. As the law says, money can be used “to respond to the public health emergency with respect to the Coronavirus Disease 2019 (COVID–19) or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality.”
In Minnesota, that could include covering reduced tax collections, reimbursing the state for money it spent to combat the health and economic effects of the pandemic, and refilling the state unemployment insurance fund drained during the recession. The latter could partially temper unemployment insurance premium increases expected to hit employers starting next year.
The direct aid is only one piece of what will eventually flow to Minnesota under the ARP, and much of the money can be allocated in the pending budget. But if it is not, Walz can spend it after giving a special committee, the Legislative Advisory Commission, time to comment. Yet the commission can’t veto spending unless the law governing it is changed.
The second piece of Monday news came from the state budget office. Tax collections for the month of April were less than the February forecast. But that decline appears to reflect timing rather than a lowering of economic expectations. All taxes except the individual income tax are still exceeding what was forecast just three months ago, and the decline in income tax payments are likely due to the decision to move tax day from April 15 to May 17.
Collections from the various types of taxes in Minnesota are still $374 million above the February forecast. While those dollars can’t be used to build the 2021-23 state budget, they can give confidence to lawmakers, since higher collections suggest that the dollars they expect to come into the state treasury over the next two years will not be lower than predicted, at least in the short term.
A positive step — amid many disagreements
Dollars and cents, however, are not the only factor in whether a budget deal can be reached in time for the Legislature’s deadline for adjournment next Monday. The DFL and the GOP disagree on whether tax increases are needed to pass this session.
There is also disagreement over how much the paycheck protection plan money should be free of taxation. And there remain disagreements on how much money each area the state budget should receive. A hoped-for deadline to agree on those so-called targets came and went on Friday without agreement from Walz, Senate Majority Leader Paul Gazelka and House Speaker Melissa Hortman.
There also are disagreements over which police reform measures should pass this session, if any. And Republicans still want changes in how Walz and future governors can exercise emergency powers.
Walz Monday said that the federal guidance was a positive step, partly to let lawmakers know what the money can and can’t be used for. A proposal by Senate Republicans last week suggested that $1 billion of the rescue act allocation be used for roads and bridges.
“It is good that this says, ‘No, you can’t build that with this money,’” Walz said. “That will help.”
Walz compared the exchanges of offers toward budget target agreements with bargaining for a new car or house. “A first offer is made. Somebody shoots a low offer. Somebody is insulted by the low offer. And then you go back with a little more,” he said.
The conversations among him, Hortman and Gazelka are still about dollar amounts, not about the policy contained in the omnibus bills. The federal guidance, Walz said, puts negotiations “in a positive spot. Now we have to make sure we don’t leave people behind.”
Gazelka spoke on the Senate floor Monday and said there were exchanges between the House, Senate and Walz over the weekend. “There is a working toward trying to get a budget done from sides that are very different,” the East Gull Lake Republican said. “It is never easy, but people are putting their best foot forward as we try to navigate through.”
In a statement issued later Monday, Gazelka said the U.S. Treasury guidance supports Senate GOP positions on key budget disputes over the Paycheck Protection Program and unemployment insurance. “With the announcement today, the Governor and House Democrats have run out of excuses to delay passing PPP and UI tax conformity,” he said. “The tax deadline is Monday. If the House passes PPP and UI conformity, it will give Minnesotans the clarity they need today. Plus, we are getting $200 million MORE than initially expected. There are zero reasons, absolutely none, to ask for more money from Minnesotans.”
DFL leaders, in turn, said the guidance and increased federal funding makes their spending positions more affordable. “Republicans have no reason to continue to advocate for budget cuts that will result in teacher layoffs at a time when our children need the most help,” said Hortman. “In addition, we can and should invest in our health care providers as they help Minnesotans get vaccinated so we can get back to normal economic and social interactions. We can and should invest in families’ economic security after a year filled with economic challenges.”
Hortman’s statement said nothing about the $1 billion in tax hikes passed by the House. But that plan does not provide additional spending for this next budget; instead, it uses the money to fund the tax cuts for PPP loans and jobless payments. The tax hikes would then flow into increased spending in the following two-year budget, beginning in July 2023.
Delay in tax deadline leads to a decline in collections
The tax collections report is for money that has already arrived in state accounts while the forecast is a predictor of future tax collections. The monthly collections, therefore, can serve as an indication as to whether the forecast is too optimistic or too pessimistic.
The decline in the monthly collections in April, of $189 million, were attributed to delays in individual income tax receipts due to the one-month delay offered federal and state taxpayers. The new deadline is May 17.
In a report issued Monday, Minnesota Management and Budget attributed the decline to that deadline change. “Normally, most tax year 2020 individual income tax payments would be made in April, however, this year taxpayers may delay final and extension payments until May 17,” the monthly report stated. “The negative income tax variance for April is indicative of that delay, not of lower than forecast income tax liability for tax year 2020.”
Other state tax sources, especially the sales tax and the corporate franchise tax on profits continue to outpace the February forecast. The state will get a better idea of individual income tax collections once the May collections report is issued June 10.