March 12, 2023
It started with eliminating the state sales tax on food.
It then proceeded to cut the state’s general sales tax rate across the board.
Then I started hearing stories of property tax refunds for homeowners.
And then I got a call from Neil Kashkari.
The Governor of the Minneapolis Federal Reserve Bank recently spoke at the inaugural CEO Summit. It was a timely speech on many levels, but his comments on our state’s state budget were particularly important in relation to what was being discussed at the same time in our state capitol.
“Generally in our region, the state budget is very generous,” Kashkari said.
For example, his home state of Minnesota has a state budget of about $50 billion and a “monster surplus” of $17 billion.
Other states are in a similar situation, he continued, seeing 30% surpluses routinely. In South Dakota, it’s over $400 million.
“On the one hand, it’s great. State governments are doing well. Local governments are doing well,” he said.
“Some of these states are talking about giving that money back to taxpayers. As a taxpayer, that sounds pretty good to me. But as a monetary policymaker, it’s more exciting. It seems like something.”
And that’s in large part what led to this level of inflation, and the associated price rises, in the first place.
Remember the pandemic-related government checks? People ran out of them, supply chains crumbled, and suddenly prices skyrocketed.
So now that we’re all paying more, it’s tempting for elected officials to try to ease the pain.
But is it?
“If it puts more money in people’s pockets and spends it on buying plane tickets and food and stuff, it feels like more stimulation, although it’s not bad.” And I pause to say there may still be additional stimulus, even if it’s not from the federal government.”
I do not claim to be a staunch follower of the daily drama that can take place during a legislative session. But every time I heard the story of returning money to taxpayers, the words of Kashkari rang in my head.
A bill to reduce the overall sales tax rate from 4.5% to 4.2% by 2027 is now on the governor’s desk for final approval.
To be honest, I don’t see any rationale for it other than to stifle political arguments and undo the kind of weird approach to justifying a tax on internet sales.
Inflation-related price pressure is a problem that money cannot solve. Conversely, it is a problem caused by excess money.
It’s a hard truth that while the Federal Reserve attempts to bring inflation down to its 2% target, there will be some pain it will have to endure. Consumers will start spending less. There will be unemployed people. Wages won’t go up any time soon.
These things have to happen because the alternatives are actually worse. And, as Kashkari pointed out, “normally, if a central bank raises interest rates and triggers a recession, the recovery can be very fast.”
In South Dakota, as is generally the case, any recession is likely to be less severe.
“The economy in Sioux Falls is basically booming. Of course there are challenges, but overall business is doing very well in this community,” Kashkari said.
In other words, we don’t need symbolic tax cuts. Surplus must be spent or saved wisely to meet today’s challenges and prepare for tomorrow’s challenges.
Ask nearly every business leader in this community what their most pressing challenges are today. The answer is likely the same as it was 3 or 30 years ago. It’s the workforce.
The country is experiencing serious problems related to its workforce, but “there are structural problems” in Sioux Falls, from those who died during the pandemic to those who retired early, Kashkari said. “Long-term structural problems are beyond the control of monetary policy.”
Another problem that money cannot solve.
Kashkari continued that fewer people are having children in developed countries. This is both a workforce issue and a future consumer base issue.
“The only real solution to this … the only answer is immigration. It’s immigration policy.”
It’s not a political issue, he continued.
“It’s just math.”
I’ve seen promising examples of companies in South Dakota using temporary work visas and trying to reach out to new Americans to support their workforce needs. is needed and there is little incentive to encourage it in this state. can be offset.
One of the most interesting insights was also in the last question Kashkari answered at our summit. It’s about the need to increase access to childcare.
“This affects the labor market because it affects people’s ability to work, but it also affects the workforce of the future,” he said. “The more educated young people learn, the more productive the economy will be.
Kashkari then compared the challenge of childcare financing to agriculture, which nearly every country subsidizes.
“Governments want low prices for consumers and high prices for farmers. is,” he said.
“Now think about raising children. If you want childcare workers to be properly paid and families to be affordable, those two things are at odds. There’s no way to square those two things without some form of government support… It’s a fundamental tension that there’s no other way to deal with.”
A study by the Sioux Falls Childcare Collaborative last year revealed a gap of more than $600 million in childcare affordability. Whether that is the “correct” number, I suppose, can be analyzed further, but Kashkari’s claim is difficult to dispute. Competitive wages for childcare workers and the ability of families to pay them are at odds. And “enabling all citizens to participate in the economy” seems like a fitting role for government.
It’s a problem that money can solve.
In the debate to reduce the 4.5% sales tax to 4.2%, it was reported that a 0.3% statewide sales tax would generate more than $100 million. Think about it. Perhaps instead of lowering fees, raise them a little and consider how public-private partnerships can help close that childcare gap. and think about how you could try an approach to achieve what Kashkari said.
And maybe that includes eliminating the sales tax on food. But the wider reality is that sales taxes are generally higher where populations are growing. Back home in Ohio, I pay no sales tax on food, but I do pay 8% general sales tax, of which 5.75% goes to the state. Population growth alone is not enough to cover the growth costs that governments must meet. But just like controlling inflation, the no-growth alternative is even worse.
It’s definitely a complicated environment to navigate. But listening to this appointed official in charge of monetary policy, I realized that it might be helpful for the elected official in charge of fiscal policy to think a little more about the problems money can and cannot solve. I noticed.
Minneapolis Fed President Talks Inflation, Economic Conditions in Sioux Falls.Business CEO Summit