Federal and State Fiscal Responses to Coronavirus

Due to the pandemic, the legislature is in a one-month hiatus but not before beefing up the state’s COVID response capabilities.    That is likely to be just the start of a variety of different policy measures to address the state’s health and economic fallout.    Policy makers remain “on call” to address both additional response measures as well as the high priority business of the state -- specifically a bonding bill and a supplemental budget.   What all this eventually translates into program-wise and budget-wise is wait and see as circumstances develop.  In the meantime, it’s clear damage to the state economy and the resulting impacts on the state budget is well underway.

To no surprise, the $21 million signed last week to directly address the state’s public health response to the virus was quickly followed up by a $50 million appropriation this week.   In addition, before adjourning, the legislature unanimously passed a health care grant fund of $150 million to give health care providers additional financial resources to meet the forthcoming demand for supplies, equipment and overtime.  

With respect to state economic fallout, the near-term focus is simply enabling small and medium size businesses to survive in the face of a potentially severe economic contraction.  Liquidity to get through the ordeal is the primary concern, and the Minnesota Chamber of Commerce has offered the following recommendations for lawmakers’ consideration:

  • Match the expected federal extension of the April 15 income tax filing and payment date for Minnesota income taxes including a waiver of interest and penalties
  • Provide a 90-day extension for the May 15 property tax payment with a waiver of interest and penalties
  • Allow for an extension in the sales tax remittance for February and March payments.  (The Department of Revenue has announced a 30-day grace period to businesses on the payment of March sales and use taxes or businesses identified in Executive Order 20-04.)
  • Waive or delay other state-imposed fees like annual licensing fees until the end of the year
  • Allow any unemployment claims related to COVID-19 to not be counted against employers’ experience ratings
  • Establish a state fund to help defray out of pocket costs for Minnesotans with high deductible plans
  • Request SBA low interest federal disaster loans for small business working capital needs

Meanwhile in Washington, the federal government’s support for states has (so far) focused on three initiatives:

Round 1:  State preparedness and response – The $8.3 billion emergency response bill recently passed and signed into law designates $1.05 billion for grants to state and local governments to be used to reimburse state and local costs already incurred.  The Department of Health and Human Services has announced an initial award of $605 million to state and local jurisdictions of which Minnesota will receive $10.5 million.

Round 2: “Families First Coronavirus Response Act” -- This wide ranging collection of policies and programs, just signed by President Trump, is designed to address both health and economic impacts.  It covers diagnostic testing costs, nutrition assistance for low-income and elderly populations, emergency unemployment insurance grants, emergency paid sick and family leave (with a refundable tax credit equal to 100% of the qualified paid sick leave taken against the employer portion of Social Security taxes), and a 6.2 percentage point temporary increase in the federal match for Medicaid programs.  (For Minnesota the federal match increases from 50% to 56.2%.)    According to Federal Funds Information for States, the estimated Minnesota allocations for selected grants areas are as follows:

  • Emergency Food Assistance: $12.1 million
  • Elderly Services:  $3.8 million
  • Emergency Unemployment Insurance Administration: $35.7 million

Round 3: Stimulus and Relief -- The Treasury Department has floated the outline of a $1 trillion stimulus and relief package comprised of $300 billion for small-business loans, $200 billion for loans to airlines and other distressed industries, and $500 billion for direct payments to consumers.   Pushback exists in both the House and Senate with respect to several of the specifics.  But even though technicalities need to be worked out, a round or two of supersized income-tested checks to taxpayers courtesy of the federal government seems much more likely than not.

Will all this be adequate?   Who knows.   In a television interview, Federal Reserve Bank of Minneapolis President Neel Kashkari noted the relevant lessons he learned from the 2008 banking crisis were “not to be late and not to be timid.”  He observed no one really knows how long controls will need to be in place and that this could be longer crisis with profound economic implications.

The state’s budget reserve level is designed to cover 95 out of 100 biennial deficits generated by revenue volatility.    It’s difficult to identify a tax stream that will not be heavily impacted by current developments.    JP Morgan has already revised their GDP estimates now projecting the economy to shrink 4% this quarter, 14% next quarter, and 1.5% for the year.    Combined with the epidemiological uncertainties and corresponding increases in state health and economic welfare spending, it wouldn't be too surprising to see circumstances evolve to test that 95% confidence interval.