Legal Wrangling Threatens Progress
The 2018 Minnesota legislature kicked off at noon yesterday with no solution to the legal standoff in the Minnesota Senate over whether a Republican state senator can legally hold both her Senate seat and be lieutenant governor. State Sen. Michelle Fischbach (R-Paynesville) was automatically installed as lieutenant governor after former Lt. Governor Tina Smith was appointed to replace U.S. Senator Al Franken after Franken resigned amid sexual misconduct allegations. A lawsuit to remove Fischbach stalled in the courts last week when a district court judge threw out a lawsuit seeking to remove her as a senator, saying the suit was premature. The suit could become active again if Fischbach attempts to perform duties as a senator. If the move to unseat her succeeds, it will leave the body with a 33-33 partisan split and no clear majority to get the 34 votes required by Minnesota's constitution to pass legislation. The Minnesota Senate has 67 members.
To complicate matters further, the legislature is convening without an operating budget, which Governor Mark Dayton line-item vetoed last May in the waning hours of the contentious end to the 2017 legislative session. The Minnesota Supreme Court ruled this past fall that the line-item veto was within Dayton's legal authority. That leaves the Republican-controlled Minnesota House and Senate without an operating budget and having to rely on cash reserves to keep operating. Republican leadership and Dayton have been in deliberations for purposes of passing an operating budget bill during the first few days of session, but the DFL has vowed to block any attempts to pass a budget bill if it is not tied to the ratification of new collective bargaining agreements for state employees.
Does the legislature have a lot on its plate this legislative session and does it really need to get anything done? The answer depends on who you talk to. State government is already operating on a two-year budget passed last year, and revenues seem to be stable. Therefore, there are not significant budget surpluses or deficits that need correcting. Although there are significant needs for more capital bonding dollars, one could argue that last year's big bonding bill would seem to suffice, for now.
The elephant in the room is federal tax conformity due to the massive federal tax overhaul passed by Congress seven weeks ago. Although some would prefer to put this off until next year, there is a growing consensus at the Capitol that Minnesota must pass federal tax conformity now. The fear is that without conformity, taxpayers (i.e., constituents) will be left with a confusing mess of paperwork that would overwhelm the Minnesota Department of Revenue. Conversely, early calculations show that if Minnesota passes a bill that conforms to all federal changes, many taxpayers will be left with a state tax increase and revenues will increase by about $800 million. Republicans are trying to come up with a package that would pass conformity, be revenue-neutral and hold taxpayers harmless from any tax increases.
Let's not forget that Minnesota has an election coming up in November. At stake will be all 134 seats in the Minnesota House, two U.S. Senate seats, all constitutional officers including the governor and eight congressional seats, four of which will probably be targeted by the national parties and special interests.
Federal Tax Conformity Top Priority
As stated earlier, the federal overhaul of the tax code that Congress approved in December could have serious consequences for Minnesotans, depending on how state leaders react to the changes. Like many blue states, Minnesota is considered a high-tax state. Personal tax deductions matter to Minnesota taxpayers. With the limitations placed on the deductibility of state and local taxes and mortgage interest, many middle class taxpayers in Minnesota may very well see their taxes increase as a result of the new federal tax code. In exchange for cutting tax rates and doubling the standard deduction for individuals and families, Congress modified or eliminated many popular credits, exemptions and deductions.
If Minnesota lawmakers do nothing, the state’s tax laws will be vastly different than the new federal rules, complicating filers’ returns. Complicated tax forms lead to frustrated taxpayers and ugly headlines for those who hold election certificates. If Minnesota strictly conforms to the federal changes, some residents could see an increase in their taxes. State lawmakers agree the most palatable response lies somewhere in the middle. Exactly what it looks like will be the subject of much debate over the next few months. Tax experts at the Capitol are grappling with an 1,100 page piece of federal tax legislation that is complex, with huge financial implications to the state budget, not to mention taxpayers.
The good news is that it appears that both Republican legislative leaders and the Dayton administration believe getting federal tax conformity done sooner rather than later is the right solution. The problem is timing and the amount of resources it will take to get it done during the regular 2018 legislature, which must conclude its work by May 20, 2018—13 weeks from now.
Health care will again be under the spotlight, particularly issues dealing with opioids, the elder care system, and public health care programs. Gov. Dayton has announced a bipartisan effort to put more funding into opioid addiction treatment and prevention, and recent media coverage of abuse and neglect in some senior living facilities has created a strong desire for legislative action. Across the country, states have also begun looking at Medicaid reform proposals via federal waivers to create new eligibility requirements; as one of the continually growing pieces of the state budget, Minnesota will likely have those conversations this year as well.
Last year’s transportation win was bittersweet. The legislature successfully passed a funding bill that captured existing taxes on auto parts and leased vehicles, and transferred that money from the state’s general operating fund to the highway fund. Advocates argued that the money, like fuel taxes and registration fees, are vehicle-related and as such should be used to fund road construction and maintenance. However, in end of session negotiations, the full allocation was pared down to roughly two-thirds the original amount.
We anticipate transportation advocates will seek to capture the full amount this year, particularly if the February forecast shows a healthy surplus. Beyond that, there may be an effort to add a constitutional amendment to the ballot this November asking voters if the auto parts and vehicle lease taxes should be permanently dedicated to roads and bridges. Legislative leaders seem open to that course of action, but it is unclear among stakeholders if the ability to raise the funds sufficient to pass a constitutional amendment exists.
Preemption of Local Law
The Minnesota Legislature joined a growing number of legislatures nationwide when it passed a bill to prevent local governments from adopting their own wage and benefit ordinances, though it ultimately did not become law in 2017. The move by legislative Republicans to nullify existing ordinances and block any that might come in the future, known as preemption, is part of a national effort to stop city ordinances on workplace and environmental matters. Minneapolis and St. Paul adopted paid sick time ordinances in the last few years, and other Minnesota cities are considering doing the same.
Minnesota is relatively permissive when it comes to local ordinances, and many cities are more liberal than the current Minnesota legislature, making the politics of issues, such as pay and benefits, different at the local level than at the state level. As a result, interest groups seeking to change wage, hour and FMLA regulations that have been losing at the state level, have turned their attention to local governments, where they have better odds of winning.
We anticipate business groups pursuing this legislation again in 2018, though the odds of success do not seem to have materially changed. However, closing out a biennium with a bonding bill, a likely surplus, and a significant tax bill, could offer the GOP majorities the bargaining leverage they need to get preemption across the finish line.
The even-numbered year of the biennium is traditionally the year the legislature passes a bonding bill. Although the legislature passed a bonding bill last year, Gov. Dayton has proposed a $1.5 billion public works bill. In the bill, Dayton is focusing on infrastructure at state colleges and universities, clean water, and state buildings.
Minnesota Management and Budget released a November forecast that accounted for an $800 million bonding bill this session. An updated February Forecast will be released on February 28, and will provide a more accurate picture of the state's debt capacity. The Legislature will use the February forecast to produce a supplemental budget and bonding bill before session adjourns in May.