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March 12, 2023
It began by lifting the state sales tax on food.
Then, it grew to an across-the-board reduction in the state’s overall sales tax rate.
Then, I started hearing about returning property tax dollars to homeowners.
And then, I heard from Neil Kashkari.
The president of the Federal Reserve Bank of Minneapolis recently spoke at the inaugural CEO meeting. While a timely speech on many levels, his comments on our state’s state budget were particularly relevant in light of what was being discussed at the same time in our state capitol.
“In general, government budgets in our region are very fast,” Kashkari said.
For example, he said his home state of Minnesota has a budget of about $50 billion and a “monster surplus” of $17 billion.
Other states continued to see a similar 30 percent gain. In South Dakota, it’s over $400 million.
“On the one hand, that’s great. State governments are doing well. Local governments are doing well,” he said.
“Some of those states are talking about returning the money to the taxpayers. As a taxpayer, this sounds pretty good to me. But as a monetary policymaker, that sounds like more stimulus.
And that’s how we ended up with inflation – and related price increases – in the first place.
Remember the government inspections related to the epidemic? People passed out, the supply chain was disrupted, and suddenly prices skyrocketed.
So now, as we all pay more, it’s a challenge for elected officials to try to ease the pain.
But will it?
“If that’s putting a lot of money in people’s pockets to go out and buy plane tickets and food and stuff, then again, it’s hard to say that’s bad, but it feels like more of an incentive,” Kashkari said. It gives me pause to say that there is probably more stimulus coming, albeit not from the federal government.
I don’t claim to be a close follower of the daily drama that can unfold during a legislative session. But every time I start hearing talk of refunding taxpayers, Kashkari’s words ring in my head.
Now, legislation that would cut the general sales tax rate from 4.5 percent to 4.2 percent through 2027 is headed to the governor’s desk for final approval.
Honestly, other than trying to score some political points and reverse some kind of weird approach to tackling internet sales, I don’t understand why.
A problem with inflation is a problem that money cannot solve. On the other hand, it’s a problem helped by too much money.
The hard truth is that there will be some pain to endure as the Federal Reserve tries to bring inflation down to its 2 percent target. Consumers begin to scale back their spending. There will be job losses. Wages do not increase quickly.
These things have to happen because the alternative is really worse. And, as Kashkari noted, “Typically when a central bank triggers a recession by raising interest rates, the recovery can be very quick.”
In South Dakota, as is generally the case, any economic downturn may not be that severe.
“The economy of Sioux Falls is basically booming. Of course there are challenges but overall business is doing very well in this community,” Kashkari said.
In short, we don’t need symbolic tax cuts. We need smart spending — or saving — from our profits to solve today’s challenges and position us for tomorrow.
Ask any business leader in this community what the most pressing challenge is today, and the answer is likely to be the same as it was three years ago or 30 years ago: human resources.
As the nation grapples with pressing issues related to the workforce — everything from people dying during the pandemic to people retiring early — in Sioux Falls, “you have a structural problem,” Kashkari told us. “Monetary policy can do nothing about long-term structural issues.”
Another problem cannot be solved by money.
In advanced economies, Kashkari continued, people are having fewer children. That’s a problem for the employee and a problem for the future consumer base.
“The only real solution to this… the only answer is immigration. This is a structural issue that we as a country need to get our heads around with a sensible immigration policy that meets the needs of our economy.
They continued saying that it is not a political issue.
“It’s simple math.
I have seen some promising examples of South Dakota businesses trying to take advantage of temporary work visas and support the workforce needs of new Americans. But there must be more, and in this case I felt little appetite to encourage it. However, we may use public dollars to train workers in those in-demand jobs or new technologies or to offset the cost of training.
One of the most interesting insights came with the last question Kashkari answered at our summit – the importance of increasing childcare.
“This affects the labor market because it affects people’s ability to work, but it also affects our future workforce,” he said. “The more our youth are educated, the more efficient our economy will be. This is where productivity comes from. It is very important. “
Kashkari compared child care funding to agriculture, which almost every country subsidizes.
“The government wants low prices for consumers and high prices for farmers. The two things are in conflict with each other. You can achieve both only with government subsidies,” he said.
“Now look at childcare. If we want good wages for childcare workers and fair wages for families, the two things are at odds. And finally we have to decide as a country: is this our priority or not? It is impossible to reconcile the two things without government support. … This is a fundamental tension that has no other solution.”
Last year, a study from the Sioux Falls Child Care Collaborative identified a gap of more than $600 million in child care capacity. I’m sure that “exact” number can be further analyzed, but Kashkari’s point is hard to argue: competitive wages for child care workers and families’ ability to pay are in conflict. And “helping all our citizens to participate in the economy” seems to be a suitable role for the government.
Money is a solvable problem.
In discussions to lower the 4.5 percent sales tax to 4.2 percent, it was stated that a 0.3 percent sales tax at the state level would generate more than $100 million in revenue. Think about that, and maybe instead of cutting the rate, even a small increase in it and how public-private partnerships could help fill that child care gap. Consider how South Dakota could lead an approach using a combination of state, federal and private dollars to do what Kashkari mentioned.
And maybe that includes eliminating the sales tax on food. I understand that moral argument. But the reality is that sales taxes are generally higher in areas with growing populations. Back in my hometown of Ohio, I don’t pay sales tax on food, but I do pay a general sales tax of 8 percent, of which 5.75 percent goes to the state. Population growth alone is not enough to cover the cost of growth for the government. But, like keeping inflation under control, the alternative—no growth—is worse.
It is undoubtedly a complex area to navigate. But as I listened to this monetary policy appointee, I realized it would help if elected officials who direct fiscal policy thought a little more about the problems money can and can’t solve.
The Minneapolis Fed will address inflation, economic conditions at the SiouxFalls.Business CEO Summit
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