Daily Digest: Surplus shrinks by a half billion dollars

Good morning, and welcome to Friday and the start of a new month. Here's the Digest.

1. Budget surplus decreases by a third. Minnesota lawmakers still have a surplus to work with this session as they craft the state's two-year budget, but it's much smaller than what was expected just a few months ago. The state's revised economic forecast released Thursday shows about a $1 billion surplus on the bottom line — one-third less than the nearly $1.5 billion budget surplus projected in November. The state budget office blamed the lower number on slower projected economic growth and lower-than-anticipated tax collections. Previously released data showed the state had collected $375 million less in tax revenues than it expected since the last economic forecast. Officials also noted taxpayer responses to the new federal tax cut bill, slowing growth in the labor market and uncertainty over how tariffs and other trade issues will impact the economy helped drive the surplus projection lower. "It's a cautionary tale, clearly, when you take a half a billion dollars out of the projection for 2020-21," Myron Frans, the state's budget commissioner, told reporters following the forecast's release.  Walz on Thursday said the drop in the projected surplus was not a surprise and that he'll consider of revisions to his budget over the coming weeks. Still, he said it was important that Minnesota "make investments" to continue driving economic growth. "This is not a recession," he said of the economy. "This is a  slowdown." Senate Majority Leader Paul Gazelka, R-Nisswa, said that if his household budget forecast dipped as the state's did, "What we would not do is immediately go out and binge spend." (MPR News)

2. Tax changes could hit some Minnesotans hard. The biggest change coming out of the federal tax bill is the $10,000 cap on the deduction that taxpayers filing itemized returns can claim for paying state and local taxes. The new law also doubled the standard deduction from $12,000 for a married couple to $24,000, making it less likely middle-income taxpayers will itemize at all.  But the cap on state and local taxes, known as SALT, leaves more income exposed to both state and federal taxation and is more likely to impact higher earners. Mark Haveman, the executive director of the Minnesota Center for Fiscal Excellence, says the federal tax reform “effectively raised the top marginal rate of every state with an income tax. But I think the magnitude of that change may come as a surprise to many.” “The SALT deduction repeal in effect raised the tax price of progressive state income taxes by almost 40 percent for taxpayers in the highest bracket,” he said. In Minnesota, according to legislative tax staffers, that would have the effect of raising its top rate from 9.85 percent to 16.3 percent. The cap on SALT has led some governors of other high tax states to urge changes. New York Gov. Andrew Cuomo, for example, met with President Trump this month and has claimed the impact of the cap is causing high-earners to flee the state. (MinnPost)

3. What else could stress future budgets? Health care. The overall cost of health care in Minnesota grew at a relatively low rate during 2016, according to a new state report, but the broader trend points toward a likely doubling of expenses over the next decade. Total health costs in 2016 came in at $47.1 billion, a 4 percent increase over the previous year, according to the annual study by the Minnesota Department of Health. The report cited relatively low payments to health insurers that manage care in state public health insurance programs as contributing to the low growth rate. Long-term projections, however, suggest annual health care spending over the next decade will double to $94.2 billion in 2026. That means Minnesota would be spending $1 out of every $6 generated by the state’s economy on health care. “While growing health care spending could be a feature of economic growth that we as a society accept, indications are that stakeholders virtually across the board worry about the sustainability of trends,” the report states. “Cost containment will be challenging: there appears to be no single solution to effectively curtail health care spending growth.” (Star Tribune)

4. Study: Removing lead from water expensive, but would pay off. It would cost more than $4 billion to get the lead out of Minnesota's drinking water, but it could bring a 2-for-1 return on the investment. That's the chief finding of a new report by the Minnesota Health Department in conjunction with the University of Minnesota. It's the first time health officials have put a price tag on the two most expensive parts of the undertaking: removing 100,000 lead service pipes run into Minnesota homes decades ago, and removing plumbing and fixtures in homes that contain lead. Environmental Protection Agency studies from 2008 indicate lead service lines contribute about half to the lead contamination in drinking water from public water systems. "As we see in many other areas of public health, preventing a health problem is more cost effective than waiting for a health problem to develop and then treating it," Minnesota Health Commissioner Jan Malcolm said in a statement that accompanied the report released Thursday. The study looked at a 20-year time frame for the abatement effort and its resulting benefits. It was ordered by the Legislature in the wake of the scandal in Flint, Mich., where the city's water supply became tainted with lead. (MPR News)

5. Klobuchar and medical device makers. In her more than two terms as a U.S. senator representing Minnesota, Amy Klobuchar has built a reputation as an effective champion for consumer safety, sponsoring bills that improve swimming pool safety, ban lead in children's products and tackle the nation's opioid crisis. "Consumers deserve products that have been tested and meet strong health and safety standards," her website declares. But Klobuchar, who announced two weeks ago she will contend for the 2020 Democratic presidential nomination, has also forcefully advocated for the medical device industry — a huge employer in her home state — in ways that complicate her reputation as a consumer defender. During her time in the Senate, Klobuchar has advanced proposals championed by the medical device industry that some consumer advocates claim would put patients' safety at risk, a review of her record by The Associated Press and the International Consortium of Investigative Journalists found. Safety and regulatory concerns relating to medical devices have come under scrutiny since the AP, ICIJ and other media partners began publishing a series of investigative stories about the industry in late 2018. Klobuchar defends her record on regulating medical devices, telling the AP in a statement, "Patient and consumer rights have always been a major focus of mine." (AP)

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