Some congressional Republicans are taking heart from Minnesota’s recent budget showdown: Republicans in the state legislature rebuffed the Democratic governor’s request for tax increases, the state government closed, the public grew incensed, and eventually, the governor caved. He dropped his demand for tax hikes, and Republicans won the day. Now, the House GOP can do the same.
The argument is alluring — and false. Minnesota’s budget impasse caused nowhere near the pain a limited federal-government shutdown on the federal debt would.
First, Minnesota already had a plan in place to service its debt throughout the shutdown. By law, the state holds 18 months’ worth of debt payments in reserve. “Even if the state government didn’t have sufficient funds to pay its debt, under the state constitution, it is required to levy a property tax sufficient to cover it,” Tom Stinson, Minnesota’s state economist, tells National Review Online.
Although Fitch downgraded Minnesota’s credit rating from AAA to AA+, Standard and Poor’s and Moody’s have so far declined to change their ratings. In Moody’s case, their analysts felt confident that the state’s debt payments were secure, noting in a report that “local governments are required to levy 105% of debt service payments providing additional cushion.”
Yes, some Republicans believe Treasury Secretary Tim Geithner could prioritize debt payments over other federal obligations. But it’s unclear what exactly he’ll do.
“Money isn’t going to go out to some people and we don’t know who they are,” Donald Marron, director of the Tax Policy Center, warns.
Second, a state-government shutdown has nowhere near the impact a federal-government budget impasse does. When the state government closed, “Minnesotans said, ‘Yeah, rest areas aren’t open.’ But most people got through their day with no problem whatsoever,” says Rep. Kurt Zellers, speaker of the state house. Even when people began to feel the shutdown’s footprint — when MillerCoors almost lost its liquor license because of the state’s inefficient bureaucracy — they saw the problem as one of lumbering, big government, Zellers argues.
The federal government, on the other hand, handles national defense, border security, Medicare, and Social Security, along with a host of other programs that directly affect Americans’ daily lives.
And even Fitch’s downgrade might not be that harmful. In an interview with local-news outlet MinnPost.com, Peter Sausen, the former manager of Minnesota’s debt, estimates that the cost difference on a $500 million issue of 20-year bonds for a state with a rating one notch below AAA is about $125,000 more in interest. “It’s not earth-shattering,” he says.