Why housing and child care cost too much

On housing and child care, Minnesotans face higher costs than many other Americans.

In 2019, the average Minnesota family paid over $16,000 to keep a child at a day care center for the whole year, the sixth-highest annual cost for center-based infant care in the United States. For 4-year-olds, the average family paid over $12,000, seventh-highest.

In 2017, it was reported that “Outside coastal states like New York and California, the Twin Cities was No. 1 in housing costs among the nation’s 20 largest metro areas, according to 2014 U.S. Census data. And they have remained at or near the top of other cost-comparison surveys since then.

Statewide, Minnesotans pay an average of 26% more than residents of neighboring states. That price gap explodes when compared with southern states like Texas. A 2019 report found that an average home in Lake Elmo would cost $47,000 less in Hudson, Wis., and a new home in the Twin Cities costs as much as $82,000 more than a similar home built by the same builder in the southwestern Chicago suburbs.

The causes of these relatively high costs are largely the same: excessive taxes, fees and regulations imposed by state and local government, which make it effectively illegal to supply housing and child care at an affordable price in Minnesota.

In child care, for example, the requirement that teachers have a high school diploma raises the annual cost of center-based care by over $1,900 for infants and by over $1,300 for 4-year-olds, these costs tripling when teachers are required to have a bachelor’s degree or more.

Reducing the number of infants allowed per caregiver by one — making the ratio stricter — raises the annual cost of infant center-based care by $2,800, and reducing the number of 4-year-olds allowed per caregiver by one raises the cost by about $450.

While Minnesota requires day care centers to have 1 teacher per 4 infants and limits group sizes to 8, in South Dakota, centers can have 1 teacher per 5 infants with no limits on group sizes. Moreover, in South Dakota, center teachers are only required to be 18, while in Minnesota, they must have a bachelor’s degree or equivalent.

In housing, again for example, Minnesota’s requirement for a passive radon mitigation system to be installed in new homes adds $1,500 to the cost of foundation excavation and reparation relative to Wisconsin. Its requirement for sealing of air ducts and its balanced ventilation requirement add another $2,060 to the cost of a heating/air conditioning system.

In each case, the first line of justification for these regulations is “safety.” But data do not show that child care in South Dakota or housing in Wisconsin are less safe than in Minnesota.

If we want to reduce these costs, we should reduce the excessive burden of taxes, fees and regulations that keep them higher in our state than in others. But measures proposed by Gov. Tim Walz in his budget to deal with these problems show that he fundamentally fails to understand their causes. As a result, he offers solutions that will solve nothing.

Walz proposes to reduce child care costs by expanding tax credits so that families making under $200,000 with one child could receive up to $4,000 a year for child care costs, families with two children could receive up to $8,000, and families with three children could see up to $10,500. In housing, he proposes spending more than $950 million on down payment assistance, homelessness prevention and preservation of affordable housing, and setting aside $10 million over the next two years for rent vouchers.

In neither case does Walz propose to actually bring costs down. He simply intends to pass them on to the taxpayer. These are demand-side measures to fix a supply-side problem. Even worse, by pumping money into markets where supply is constricted, we can expect to cause costs to increase. This will, no doubt, lead to further demands for the various credits and subsidies to be expanded.

The prices are not the problem, they are a symptom of the real problem, which is that government effectively makes it illegal to supply housing or child care at affordable prices in Minnesota. We need to cure the underlying illness, not just treat the symptom.

This piece originally appeared on the opinion page of the Star Tribune on February 26, 2023.