Gov. Mark Dayton and the new Legislature face a projected $1.1 billion shortfall in the 2013-2014 budget. I didn’t hear much about this during the recent political campaign, yet it’s the most important issue politicians and policymakers must wrestle with over the coming six months.
The deficit is not due to the recent recession and relatively slow economic growth. Rather, policy decisions and demography work together to create a long-run gap between spending and revenue.
The first culprit is the 1999 budget deal. It’s hard to remember, but the governor and Legislature confronted a very different problem in early 1999 than they do today: how to deal with large and potentially ongoing surpluses.
In May 1999, Gov. Jesse Ventura, House Speaker Steve Sviggum and Senate Majority Leader Roger Moe agreed to a three-part solution. First, income tax rates were reduced across the board. Second, education funding was increased (via increases in the funding formula). Third, part of the surplus was returned to taxpayers via a rebate based on estimated sales taxes paid by families.
This might have been a sensible agreement had there been triggers to rescind the tax cuts and spending increases if the economic forecasts didn’t pan out. But that’s not the way the deal was made. The income tax cuts and spending increases were enacted permanently, implying that if the economy did worse than expected, deficits would be baked into the budget cake permanently as well.
The second perpetrator of our structural budget problem is an aging population. The Minnesota State Demographic Center made this very clear in its 2011 report, “The Long Run Has Become the Short Run: Budget Implications of Demographic Change,” as did the 2009 Budget Trends Study Commission report. In particular, state spending on health care will continue to grow as the baby boom moves into retirement, putting increasing pressure on other parts of the budget.
What should we do?
So far, we’ve ignored these problems. The 2011-2012 Legislature started from the premise that tax rates could not change and did nothing to reform the system to increase revenues. This meant that the permanently lower revenue stream created by the 1999 budget deal remained unchanged. The governor and Legislature then patched together budget fixes based on draining endowments (tobacco settlement funds), shifting school funding from one biennium to the next and reducing allotments to higher education.
MinnPost photo by James NordGov. Mark Dayton and the new Legislature face a projected $1.1 billion shortfall in the 2013-2014 budget.
We can’t go on like this. School funding shifts and reduced higher-education spending hurt our ability to accumulate human capital and educate our future workforce. We cannot eat our seed corn and expect to prosper.
The governor and the 2013-2014 Legislature have the opportunity and the means to consider in long-run issues and enact policies in the 2013 and 2014 sessions that address the structural problems we face. Here are four suggestions for doing this:
- Enact a 2013-2015 budget that closes the $1 billion structural gap without school payment shifts.
- Get the ball rolling so that the Legislature can pass serious tax reform in 2014. Start with the Governor’s 21stCentury Tax Reform Commission report (commissioned by then-Gov. Tim Pawlenty and then ignored) and work from there.
- Take advantage of implementing the Affordable Care Act to reform state health-care spending in particular, and health-care policy in general. For instance, are there ways that the expansion of Medicaid and the creation of insurance exchanges can be used to promote changes in long-term care costs paid for by the state?
- Think hard about our education system. Does it make sense to consider K-12 and higher education as separate entities? Shouldn’t pre-K education and post-12 education (community and technical colleges) get more attention?
None of these suggestions are catchy political slogans like “jobs, jobs, jobs” or “we took the state from a $6 billion deficit to a $1 billion surplus,” but the time for them is past. Let’s get to work.
The problem of the problem
The real mistake was deciding that surpluses were a problem that needed to be solved. The surpluses were not harming our economy in any way, and they provided a buffer for inevitable economic downturns. We created a solution in search of a problem. Imagine if we’d entered the recession with surpluses instead of deficits. We already real deficits by 2002 and we had a governor and republican legislators that would consider nothing but spending cuts no matter how large the deficit got.
Unfair Title and Picture
The title and having a picture of Governor Ventura at the top is misleading. Our problems now are not Ventura’s fault. Our budget problems sit right in the lap of T-Paw, his pledges to the far right and the damage he was willing to do to further his political ambitions. Governor Ventura had a problem with government collecting more money than it needed but he was definitely not against the government having the needed monies to pay it’s bills.
You are correct
You are right on in how this was mishandled by T-Paw. With the fact that Tim Pawlenty was looking at a higher office, Pawlenty could not allow a sensible tax policy be initiated for fear of not having a reasonable shot at the Republican nomination. Unfortunately, Minnesotans were left out in the cold and the result was what we have today.
While I agree in principle
to what you are advocating, I find it a bit ironic that the tax reduction in 1999 needs to be rescinded but not the increase in the base educational funding formula. So the 1999 spending decisions are just fine – just not the revenue decisions.
Education continues down the path of individualized learning for each student. Individualization is an expensive proposition in just about any field. (Healthcare, construction, manufacturing) Education is no different. Which would be fine, I guess, if there was any data to support that it is working.
Sign me up for more taxes if the money is going toward longer class days, more class days, and a more focused curriculum on basic reading, math, language and science skills. Count me out if the money is headed toward an iPad for each student so teachers can have students look up information on websites at home. (As was recently suggested by the St. Paul superintendent)
Excellent article
Unfortunately some on the right – former legislator Sieben and talk radio host/blogger Mitch Berg – have already been calling for the remaining GOP members of the state house and senate to continue stonewalling on these suggested reforms.
This is probably the last chance for the GOP to be reasonable. Otherwise they will be forced into super minority status during the next election.
Hopefully those with political and practical sense will help to right the GOP ship before then. It is time to squeak up.
Scapegoating Ventura
Why put Ventura in the headline and have an unflattering picture of him as the artwork?
As the copy correctly notes, each of the three entities–Repub House, DFL Senate, Independent Gov–divvied up the surplus equally, in ways that equally prevented it from going into a rainy day fund to ward off future deficits.
If Ventura weren’t around, the money would have been divvied up according to two priorities, and not quite as evenly, but I can’t imagine that any more of it would have been socked away for future priorities.
In fact, as the story notes, the changes enacted by the House and Senate permanently changed the formulae, whereas Ventura’s impact was not permanent. Thus, it can be reasonably argued that having Ventura be able to put his priority in the mix prevented the future deficit from being even greater than it is now.
Our former Gov has some ideas I don’t agree with–including being a 9/11 conspiracy theorist. But he was a very moderate Governor and was the only one who offered a balanced approach to the deficit–some tax increases, some spending cuts–his last year in office, proposals that were jointly rejected in favor of kicking the can down the road by the House Republican and Senate Democrat who both happened to be running for Governor in the upcoming election.
Finally, someone is saying we must address the revenue side of our budget problem!
We need to go back to the tax situation that existed before the 1999 tax cuts. One is so tired of the simplistic anti-tax mantra we’ve been hearing for more than ten years.
long term planning?
You have to be kidding to ask politicians to think about long term planning. Look at the federal government with the impending fiscal cliff in another month. Several government agencies have siad if Congress does not act soon the fiscal cliff could put the US into a recession. Long term? Try to resolve the immediate problems. In regards to aging population, the tax code at the state and federal level should encourage the purchase of long term care insurance and this has never made it into any bill at any level. Long term for politicians is their next election cycle.
The real issue is health-care spending–it’s eating the budget at all levels of government, it’s one of the main reasons why governmental spending for almost everything is going up in cost and service delivery is going down.
Medicare, Medicaid, welfare, health benefits for government workers, health benefit costs passed through to the government by private sector subcontractors, on and on. All of those rising at twice or three times the rate of normal inflation, all paid for by the government (read taxpayers).
One of the primary (but mostly hidden) functions of all levels of the government has become mitigating the cost of healthcare for clients, employees and subcontractors through the subsidy of a notoriously out of control health-care system.
THAT is the real crisis in budgets.
Health care cost containment should be the primary concern of every fiscally responsible person and of every person concerned with the level and quality of government services.
All four deserve serious consideration
Good piece, Mr. Johnston. As an an old, broken-down history teacher, the 4th one, in particular, is one I’d like to see receive some serious thought and effort. It’s a division I’ve long thought was artificial and, in some ways, counterproductive, especially at the funding end, and the society gets far more bang for its educational buck at the preschool end of the process than it does in later stages. That part, especially deserves quite a bit more attention than it’s been getting.
As a retiree on a fixed income, I’m just as eager to see higher taxes as Michele Bachmann, but we simply cannot cut our way to prosperity, and I’d like to live out my declining years in a state where the infrastructure still works and people can still be civil to one another because we’re not fighting for scraps occasionally tossed our way by the affluent.
High-Beta Rich
Robert Frank’s book warns that as more wealth is accumulated at the top, the wealthy will be paying a bigger share of the tax burden (they’re the ones with the money, that’s who you have to tax). But if government entities are relying on the wealthy for a greater share of taxes, they will have larger deficits during recessions. When the economy drops 10%, 10% of a $15 million income really is a big chunk of taxes to lose.
Restore the across the board tax cuts
This cut reduced 4 billion dollars out of the state treasury. They did not reduce the size of government by this much. So, when the economy cooled down the budget was 4 billion dollars short each year. I propose to add the 1/2 percent reduction to each tax bracket and fund government the way it was intended to be.
who created this mess? Pawlenty!
Louis, I hate to disagree with your fine analysis, and surely there was damage done during the Ventura years, but the chief villain of this mess is our former governor Tim Pawlenty. It was this religiously-impaired Republican who served at the altar of Grover Norquist and killed our state’s chances to remain competitive in K-12, Higher Ed etc.
Cleaning up the mess is at least in competent hands now, with the Senate passing from the nightmare of Amy Koch and David Hann to people who have their heads screwed on.
— John Milton, former DFL Senator
High Noon
It was noon and sunshine was pouring through the windows. “We won’t be needing these anymore,” we said as we threw away our light bulbs.
It was shocking when the sun set.
There is an alternative route to the same goal that does not require higher rates, and it comes courtesy of Mr. Romney, he floated a cap on deductions. The appeal for Republicans is that no one’s rates go up, and the preferential rate for capital gains and dividends is preserved. The appeal for the DFL is that it is highly progressive. The capping of deductions would be very magnaminous and a good way to lay the groundwork for negotiating real tax reform.
I’m still seeing a lot of denial here.
While it’s true that Pawlenty rather than Ventura ultimately bares the blame for our fiscal train wreck, the decision to treat surpluses as a problem converted an asset into a liability.
Now I see these calls for “balanced” approaches that ignore the fact that we’ve had nothing but unbalanced approaches for almost 12 years now. We’ve been cutting spending and services for 12 years, what more do you think we can cut? The deficit was never a product of government wast or inefficiency, it was a product of tax cuts. Everyone pretends that until we started cutting taxes someone somewhere was a big champion of inefficient government. The truth is that everyone has always tried to make government efficient with more or less success and tax cuts have nothing to do with efficiency. You’re not gonna save a billion dollars by buying your paper clips from a different vender or hiring efficiency consultants. The whole notion that we need to deliver some kind of fiscal “discipline” is based on the absurd notion that government is doing something WRONG when it delivers services authorized by legislation. You want a “balanced” approach? That train left the station at least 4 years ago when we had a manageable debt. Now we have records debt levels caused by structurally damaged fiscal machine. We need revenue, and a lot of it. We started out with no problem at all. The we created a problem that at one point could have been managed by a 50-50 mix of spending cuts and revenue. We refused to generate any new revenue, the real problem grew, and now the only solution that will actually work has to rely on more revenue than cuts. But don’t worry, we’ve done this before as a nation and a state and it’s always worked and it’s always strengthened the state, nation, and economy.
High Beta Rich?
Never have soooo many people generated sooooo many alternative descriptions of “Trickle Down”. These so-called analysis are simply incoherent. The wealthy indeed will always put the majority of actual dollars into government coffers, even if we had a flat tax rate that would the case, it’s math not class warfare. The issue is weather or not revenue pays for expenses, it’s that simple. We once had a top tax bracket of 94% in the country and it didn’t crash the economy, on the contrary we had sustained growth. Trickle down produces Gilded Ages, and low taxes produce deficits, it’s that simple. If you want a more equally balanced distribution of wealth, you don’t build a trickle down economy. If you don’t want huge deficits, you pay taxes, and you get the money from those have the most, and from those who arguably are benefiting the most from living in your community, i.e. the wealthy.
Governments would be wise to tax retained earnings rather than profits to discourage cash piles. A healthy tax will make cash piles perishable, and encourage their movement
Wise or foolish
The wise choice is not always the wise choice. Imagine the firestorm if we had a savings tax. Of course, that will never happen.