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Three ways to a balanced Minnesota budget

Minnesota’s budget has been in turmoil for several years now, as plunging state revenue has created more and more red ink. Political chaos resulting from the Nov. 2 election compounds the budget quagmire. New Republican majorities take over both bodies of Minnesota’s Legislature, while Mark Dayton appears likely to become the first DFL governor in 20 years.

Minnesota’s near-term fiscal future is likely to go in one of three possible directions.

Scenario #1: Gov. Pawlenty sticks around
Dayton’s narrow lead over Rep. Tom Emmer has triggered an automatic recount in the governor’s race. If Dayton’s lead holds and the State Canvassing Board certifies him the victor on Dec. 14, the Emmer camp could choose to file a petition challenging the election’s outcome. By the reckoning of MinnPost’s Jay Weiner, court challenges of the election outcome could delay Dayton’s swearing in as the next governor “deep into the winter.”

This would allow Pawlenty to remain in office into the term of the new Legislature. With Republican control of both the House and Senate, a “no new tax” resolution to the state budget deficit could be pushed through and signed into law by Pawlenty. Based on the policies supported by Pawlenty and other anti-tax politicians, this could mean:

Massive cuts in state aid to local governments in addition to what has already been endured since 2002, resulting in massive budget cuts or property tax increases or both.

State support of K-12 education’s continued erosion, causing per pupil spending in Minnesota to fall even further below the national average.

Large cuts in funding for higher education, resulting in higher tuition costs and reduced funding for post-secondary education in Minnesota.

Cuts in the safety net programs that protect the elderly, disabled, unemployed, and other vulnerable populations.

Cuts in funding for the property tax refund program, which would increase taxes on low- and middle-income families and make Minnesota’s property tax system even more regressive.

• Cuts in funding for the court system and state agencies charged with enforcing environmental regulations, protecting public safety, maintaining the state’s transportation infrastructure, and so forth.

Such an outcome might represent a fiscal nirvana for anti-government proponents, although it could be a pyrrhic victory. Eight years of “no new tax” policies have corresponded with a deterioration of Minnesota’s economic performance relative to the rest of the nation.

Scenario #2: Gridlock
Assuming scenario #1 is averted, the stage is set for a conflict between Republican legislative majorities and a DFL governor with clearly divergent approaches to resolving the state’s budget deficit. Gov. Dayton will be unable to enact a progressive income tax increase necessary to balance the state budget under the plan he proposed during the 2010 campaign.

The legislative majority will try to cut critical public investments, but won’t be able to override gubernatorial vetoes of these cuts. (The only way in which minority Democrats will have meaningful legislative input is to work with Gov. Dayton to uphold his vetoes.) The result would be gridlock.

Gridlock would probably lead to policy outcomes that will not be to the liking of either conservatives or progressives. One possibility is a government shutdown, which would be bad for the state’s economy and quality of life. In the absence of a long-term solution to Minnesota’s fiscal dilemma, state policymakers are likely to once again turn to the relatively easy short-term fixes — specifically, shifts and accounting gimmicks. Rather than paying back education funding shifts as scheduled under current law, these shifts would likely be extended and increased, producing a one-time revenue infusion for the state at the cost of additional financial strain for Minnesota school districts.

Another possibility is the sale of state assets.

These accounting maneuvers will have two distinct disadvantages. First, they will not reduce the long-term gap between state revenues and expenditures, but will only kick the problem farther down the road for future state policymakers to address; the longer the state fails to address the root cause of its structural budget deficit, the more difficult it will be to solve.

Second, it will be nearly impossible to close the entire budget deficit through accounting shifts and gimmicks. Ultimately, it is difficult to determine how a stalemate between a progressive DFL governor and a vehemently anti-tax GOP legislature would be resolved. However, Capitol gridlock will likely be chaotic and detrimental to the state’s long-term interest.

An optimal solution to the state’s budget crisis will require changes in state law. During the 2011 session, changes in state law will likely be impossible unless the governor and legislature work together.

Scenario #3: A balanced approach
The most pragmatic way to balance the state’s budget involves both revenue increases and expenditure reductions, which requires compromise.

The next biennium’s state general fund expenditures are currently anticipated to be $38.7 billion. During the 2010 gubernatorial campaign, all three major candidates proposed significant cuts to those expenditures. Dayton, the apparent victor of that contest, will have to consider spending reductions beyond the $1.2 billion he proposed during the campaign in order to reach legislative compromise. Additional cuts in state agencies, reductions in poorly targeted forms of property tax relief, and elimination of some tax expenditures should be considered.

In exchange, House and Senate Republicans must give ground on their dogmatic resistance to all tax increases. Some state tax increases are certainly in order, given that (1) Minnesota has cut real per capita own-source revenue more than any other state in the nation since 2002 and (2) eight years of extensive cuts in public budgets has coincided with deterioration in Minnesota’s economic performance relative to other states. House and Senate Republicans’ flexibility on the tax increase issue would represent the triumph of informed pragmatism over reflexive ideology.

The divisions between the new legislative majorities and the man most likely to be Minnesota’s next governor are deep. As a result, debate during the 2011 session will no doubt be passionate and intense, if not rancorous. However, policymakers will only advance the state’s best interest when they ultimately recognize the need to compromise. It’s the only way at this point to achieve a balanced state budget solution for Minnesotans.

Jeff Van Wychen is a fiscal Policy Fellow at Minnesota 2020, a nonpartisan, progressive think tank based in St. Paul. This article first appeared on its website, along with a reader-engagement query.

Comments (6)

  1. Submitted by Greg Kapphahn on 11/17/2010 - 06:47 am.

    Since our Republican friends’ attachment to minimizing taxes is not based in rational fact, but, rather is an article of “faith,” to which they have attached themselves in the same way some older folks I’ve known attached themselves to the idea that, despite their worsening symptoms, they didn’t need to see a doctor, there will be NO compromise.

    Despite their protestations to the contrary, given a time in which King Timmy hangs on as governor, they will take actions that pour salt on the already very painful wounds being suffered across Minnesota due to Timmy’s previous actions (which our Republican friends wholeheartedly supported).

    If King Timmy hangs on and is finally able to ram policies based on his one true faith: “no new taxes” down the throats of the citizens of Minnesota we will wake up to a “hangover” beyond anything we have ever experienced before.

    If there is no Timmy hangover, we will still be faced with the reality that to meet Governor Dayton in the middle will make our Republican friends “feel” like losers, something which they absolutely, totally cannot tolerate. (For them “win-win” scenarios feel like losing.) There will be no compromises.

    They will press their case for no tax increases loudly and vehemently, Governor Dayton will spell out the effects of what they’re trying to do and refuse to go along (we can hope). The Republican devotion to their misguided hatred of taxes will cause them to overplay their hand and they’ll self-righteously force a state government shut down, believing, by the creeds of the low-tax faith to which they’ve sworn themselves that they are “doing what’s right” no matter what its effects, and finally making it crystal clear to the vast majority of the state’s citizens that they care for nothing but the bloated bank balances of themselves and those to whom they’ve sworn fealty.

    It’s going to be a very bumpy ride, but hopefully it will educate the citizens of Minnesota to what the current crop of “Republicans” are really all about and lead to better election choices in the future.

  2. Submitted by Richard Schulze on 11/17/2010 - 07:17 am.

    The Republicans will have to cut taxes very harshly to generate enough new revenue to balance the budget.

  3. Submitted by Paul Brandon on 11/17/2010 - 09:26 am.

    Richard–
    What makes you think that the GOP really wants to balance the budget?
    They’ve got more immediate political gain from having a deficit to campaign against. To actually balance the budget they’d either have to raise taxes or make unpopular program cuts.

  4. Submitted by Thomas Swift on 11/17/2010 - 09:31 am.

    Jeff is back kids…and he’s brought his bag of word tricks with him.

    Jeff says that “Eight years of “no new tax” policies have corresponded with a deterioration of Minnesota’s economic performance relative to the rest of the nation.” (oh, noes!)

    But let not your heart be troubled, thoughtful reader, the “report” he links to provides some interesting statements and insights…

    “On taxes and state and local general revenue (non-federal), also known as “own-source” revenue, Minnesota has dropped from approximately nine percent above the national average in 2002 to less than two percent above in 2007.”

    “A 2008 Revenue Department analysis concluded that Minnesota is “just about average” in terms of its combined state and local tax burden. The above analysis shows that this is true for other categories of revenues and expenditures as well.”

    So, our tax burden is either 2% above, or just about average (depending on where you happen to be reading from the “report”), but our economic performance has been deteriorating relative to the rest of the states.

    That leads the thoughtful reader to reasonably conclude that we’re not under taxed, we just do not make as efficient a use of our taxes as other states. Shocking!

    Jeff worries that “Gov. Dayton will be unable to enact a progressive income tax increase necessary to balance the state budget under the plan he proposed during the 2010 campaign.”…but has forgotten that Dayton’s budget plan (or plans), failed to balance the budget.

    The thoughtful reader may recall Dayton’s last best effort coming in just short of $1 billion dollars. (cue sad trombone)

    Jeff, full of angst, continues with the dire prediction that if Dayton is seated as governor, gridlock will result and, “Rather than paying back education funding shifts as scheduled under current law, these shifts would likely be extended and increased”…forgetting, in his grief, that Dayton has already conceded (in one of his plans or another) that the funding shifts could not be paid this year in any case.

    Jeff wraps it all up by concluding that “House and Senate Republicans must give ground on their dogmatic resistance to all tax increases. Some state tax increases are certainly in order, given that (1) Minnesota has cut real per capita own-source revenue more than any other state in the nation since 2002 and (2) eight years of extensive cuts in public budgets has coincided with deterioration in Minnesota’s economic performance relative to other states..”

    …but leaves the thoughtful reader with the same troubling questions he started with.

    Jeff, if Minnesotans are paying 2% more, or about average (depending on you happen to be reading from the “report”), why are we suffering more economic hardships than everyone else?

    Will MN2020 produce an in-depth analysis of where our taxes are being squandered and why our government is 2% less efficient?

  5. Submitted by Paul Brandon on 11/17/2010 - 10:07 am.

    Note that we are not really talking about NEW taxes;
    we’re talking about restoring taxes to their levels during the early ’80’s when Minnesota’s economy was healthy;
    before the Republican tax cuts.
    I’m not sure this is really counts as a ‘structural’ problem.

    And the gorilla in the room is the fact that part of the reason that State revenues are down is the economic downturn — restoring taxes to their previous levels will not by itself restore revenues until the economy improves.

  6. Submitted by Thomas Swift on 11/17/2010 - 11:21 am.

    “…restoring taxes to their previous levels will not by itself restore revenues until the economy improves.”

    Right. And of course, for every dollar of new, or new/old taxes collected, there is one less dollar available to the private sector upon which the economy depends.

    Hey, did Paul just learn something?

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