Deep Fed Spending Cuts Won’t Hurt MN Like Other States
Early on in his Tuesday State of the Union address, President Obama encouraged Congress to try one last time to stop the automatic spending cuts set to kick in at the end of the month.
The cuts, called the “sequester” in Washington-speak, would cut more than $85 billion in federal spending this fiscal year and eventually trim more than $1 trillion from defense and discretionary programs over the next decade. There’s little optimism in Washington that the sequester will be avoided, and lawmakers are girding for an economic drain when it kicks in. But because Minnesota doesn’t rely as heavily on federal government spending as other states, the effects will be more muted than in other areas of the country.
Minnesota gets back only 71 cents for every federal tax dollar collected in the state, according to Minnesota Management and Budget, one of the lowest figures in the country. Spokesman John Pollard said the state has relatively few federal employees, and not many defense contractors, two factors that tend to funnel federal funding to states. Federal employees make up just .6 percent of the state’s workforce, according to a Pew Center study, among the lowest levels in the nation.
Last fall, MMB asked state agencies to compile lists of their federal grants and determined the state stood to lose about $117 million due to the sequester this year (that was before Congress delayed the sequester for two months: spending cuts will be lower now). As a share of state government spending, that’s well below other areas of the country: federal grants make up only about 5 percent of Minnesota’s budget, the third-lowest total in the nation, according to Pew.
Potential Sequester Impact on Minnesota
Source: Pew Center on the States.
The sequester would have deeply negative effects on the economy at large, though. The Congressional Budget Office estimates it will slow down economic growth this year, and could cost up to 750,000 jobs nationwide (Pew’s Stateline has a good overview of the various spending cuts states would encounter under the sequester, and which ones will be hit especially hard.)
If the sequester comes down, as scheduled, on March 1, Pollard said its impact will be included in the March fiscal forecast the governor and Legislature use to write next biennium’s state budget. It would only complicate matters if Washington lawmakers delay the sequester again, he said.
Congress Looks to Find a Solution
Unfortunately for state-based budgeters, that’s exactly one of the proposals on the table.
Last week, Obama said lawmakers should look to postpone the sequester while working on a longer-term deficit reduction package to take its place. He pitched the details of such a plan in the State of the Union: trim some discretionary spending, take steps to reform Medicare (details here) and raise revenue through closing tax loopholes.
“Most Americans . . . understand that we can’t just cut our way to prosperity,” he said. “They know that broad-based economic growth requires a balanced approach to deficit reduction with spending cuts and revenue, and with everybody doing their fair share. And that’s the approach I offer tonight.”
The Minnesota delegation, as Congress as a whole, is divided on how to avoid the sequester—after Tuesday’s speech, the state’s Democrats largely sided with Obama’s plan while Republicans criticized what they consider a lack of cooperation from the White House. With few exceptions, no one was ready to pitch any real ideas of their own.
“We need the president’s leadership in addressing the deficit and the debt and fiscal issues. The sequester was proposed by the president, it’s in law now,” Republican Representative Erik Paulsen said. “There’s absolutely a way out of it. We are going to need his leadership to step in. If his speech tonight laid the groundwork for him entering into discussions with the House and Senate, then we’re good to move forward.”
Paulsen and Republicans note the House GOP has passed two sequester replacement bills, but neither won support from Democrats. The GOP has flatly opposed any plan that raises new revenue and has worked to tie the sequester—and the economic pitfalls it brings with it—to Obama.
Bachmann Blames the President
“The sequester is the president’s idea,” Representative Michele Bachmann said. “So it was really kind of shocking to hear the president try and paint it as Congress’s idea. This was the president’s idea. I’d be happy to take a look at it, but the problem is the president has been saying yes, yes, yes to deficit spending.”
Representative Keith Ellison’s Congressional Progressive Caucus has introduced an alternative deficit reduction plan consisting of new revenue through closing tax loopholes and $300 million in Pentagon spending cuts. Most liberals have objected to cuts in entitlement programs, but Ellison said Tuesday was open to some of the Medicare reforms Obama proposed.
Most Minnesota Democrat backed at least the outlines of what Obama pitched.
“I think the president made the exact right point,” Senator Al Franken said. “We need to do this in a balanced way, and that means with some cuts and with some revenue.”
But time is running out, and bipartisanship in short supply. Congress has two weeks to either replace or delay the sequester, and both chambers leave for a week-long recess at the end of the week. By the time they return, they’ll have three legislative days to pass something, or accept the spending cuts they’ve long rallied against.
“I don’t see how you get anyplace,” Democratic Representative Collin Peterson said. “I think we’re going to end up with the sequester, I think we’re going to end up with a [continuing resolution] for the rest of the year. I don’t see this changing.”