Trimmed $5 billion budget deficit prompts Dayton to drop surcharge, but GOP legislators aren’t budging

Tom Stinson
MinnPost photo by Craig Lassig
Tom Stinson

Even Tom Stinson expressed surprise.

Minnesota’s state economist started seeing the numbers come together last week. In the end, those numbers showed that the state would collect $1.160 billion more than previously expected.

“I was surprised by the billion, but not that it was a lot of money,’’ Stinson said.

So did Stinson dance on a table, pop champagne and burst out in song over the newest forecast?

“We were all so tired,” said Stinson of the team that puts together the forecasts. “We said, ‘Gee, that’s nice,’ and then we went to sleep.”

Nice as the new forecast was, it only cut — it didn’t solve — the state’s budget deficit.

Following the announcement of the new revenue projects, Gov. Mark Dayton and Republican legislative leaders still had $5 billion to fight about.

Dayton revises his budget plan
Dayton, who is attending a governor’s conference in Washington, greeted the new forecast with a promise to “revise” his first budget proposal.

The big change is his decision to drop the proposed surcharge for Minnesota’s highest wage-earners. That move,  Dayton said, would keep Minnesota from having the highest income rate in the nation, a status that appalled Republicans in the Legislature.

But Dayton still seems intent on creating a fourth income tax tier on the wealthiest.

The new numbers, Dayton said, means that he can restore $200 million in cuts previously made to the Department of Human Services. The most controversial of those cuts — even among Republicans — was Dayton’s plan to make cuts in state payments to nursing home and in-home care.

 Republicans were only mildly impressed with Dayton’s dumping of the surcharge, which would have added a 3 percent tax charge on incomes of more than $500,000.

“Very pleased with the rollback,” said Senate Majority Leader Amy Koch, a hint of sarcasm in her voice. “Now we’d have only the second-highest tax rate in the country. But at least we’re going in the right direction.”

Republicans insist that the improvement in the forecast is all the result of to the private sector.

“Thank you to the employers and employees of Minnesota,” said House Speaker Kurt Zellers. “You allowed us to be in a lot better shapes.”

Different views on assessing changes
But that’s only one way of looking at the improved numbers.

According to Stinson, it was a federal government decision — the compromise between congressional Republicans and President Obama to extend the tax cuts across the board — that is largely responsible for the rosier picture. That compromise included the decision to extend unemployment benefits, which create more revenue in Minnesota.

Additionally, revenue from capital gains was higher than forecast in November, thanks to the improving stock market. 

There’s no doubt among the vast majority of economists, Stinson said, that the controversial Obama stimulus plans have worked to bolster the economy.

What still lags is employment, Stinson said.

Corporate profits, he said, have risen “to very high levels,” and everything should be in place for hiring.

“But who will ring the bell to start hiring?” he asked.

Zellers said that if Minnesota government can “create stability for job creators,” that will ring the bell and put Minnesotans back to work.

He said that if the federal tax decrease created some economic improvement, perhaps the Minnesota Legislature also ought to look at tax cuts.

At the least, Republican leaders said Minnesota still must live within its means. What changes is that the budget number no longer is $32 billion for the next biennium. Now, they are talking in terms of living with a $33 billion budget.

The Republicans “live within means’’ talk set up a predictable response from DFL legislative leadership. With the new forecast numbers on hand, the leadership said Republicans must stop taking potshots at Dayton’s budget proposals and come forward with their own “cuts-only’’ approach to dealing with what is now a $5 billion problem.

“No more excuses,’’ said House Minority Leader Paul Thissen. “It’s time for them to put their property-tax raising, all-cuts budget on the table.”

That will happen on March 25, Republicans say.

So the principles surrounding the debate haven’t really changed.

What caused the numbers to change, and how fragile is that change?

The big $500 million bump came in predicted income tax collections. Sales tax collections are now projected to be $285 million higher than previous forecasts. Corporate taxes are projected at $41 million more.

“There is more upside than downside,’’ said Stinson of the forecast.

Mideast turmoil looms over state finances
But there potentially is a big cloud looming on the Mideast horizon.

The just completed forecast was based on an assumption of oil prices of less than $100 a barrel.

“Clearly,” Stinson said, “that is a little optimistic.”

For every $10 a barrel increase in the cost of oil, Stinson said that gas prices rise 25 cents a gallon. For each penny gasoline increases, discretionary spending in the country is reduced by a stunning $1 billion.

The mild optimism of the day could be deeply affected by events far from Minnesota borders.

Or, as Jim Showalter, the director of Minnesota Management and Budget put it, “volatility happens.”

Also volatile are the positions of the state’s political leaders, because there’s still $5 billion of budget negotiations for them to battle over.

Doug Grow writes about public affairs, state politics and other topics. He can be reached at dgrow [at] minnpost [dot] com.

Comments (5)

  1. Submitted by Paul Landskroener on 02/28/2011 - 04:29 pm.

    “According to Stinson, it was a federal government decision — the compromise between congressional Republicans and President Obama to extend the tax cuts across the board — that is largely responsible for the rosier picture. That compromise included the decision to extend unemployment benefits, which create more revenue in Minnesota.”

    How exactly does extension of the Bush tax cuts increase Minnesota’s tax revenue? Aren’t state and federal taxes based on the same taxible income? He isn’t saying it’s the unemployed who pay a few dollars on the pittance they get in unemploment compensation that makes up the difference, is he? I don’t understand what he means.

  2. Submitted by Neal Rovick on 02/28/2011 - 04:43 pm.

    …“Clearly,” Stinson said, “that is a little optimistic.”…

    That was in reference to oil prices, which were not supposed to be above 100 until the end of the forecast period. But, of course, oil is very volatile and may fall significantly in the next few months from its high level.

    However, the other elements of the forecast may prove to be optimistic also.

    The economic conditions leading the revised budget forecast include GDP increase of 3.2% in 2011, 150K to 200K more jobs per month on a national basis and 2.5 to 5.0 jobs per month on a state basis, 1.9% CPI, productivity growth under 2.0%, and a housing price bottom this year after falling another 5 or 10%. The capital gains from a continued strong stock market is also a key part of the difference.

    The potential weak points?

    The potential for the actual fall by a percent or two of the GDP growth will determined in large part by the actions of the federal government in addressing the national deficit. 150 to 200K of consistent job growth hasn’t been seen yet in the ‘recovery’ from the recession. Inflation, as it affects the disposable income of ordinary people, has been well above 2% for years. Productivity (doing more with fewer workers) has been significantly higher that 2% for years. There are credible predictions of up to 25% further fall in house prices. And, the stock market has had a very anomalous climb in the last year or so in comparison to actual technical increases in stock valuations–more ‘normal’ valuations reflecting margin squeezes by commodity increase would reduce capital gains significantly and lower capital gains tax revenue.

    The final direction of the economy remains to be seen. We aren’t out of the woods yet because all of the positive trends that make up this revised report haven’t been seen yet.

    And, unfortunately, this recession has been a graveyard of optimistic projections and economist’s consensus.

  3. Submitted by will lynott on 02/28/2011 - 11:34 pm.

    I’m wondering if our governor has yet cottoned on to the idea that he’s dealing with ideologues who are not interested in facts or rationality or compromise. He is not dealing with legislators who are interested in the kind of governance that leads to balanced budgets that require contributions from everyone (including rich people, the sole economic demographic that has not been asked to sacrifice in this crisis, except by Mr Dayton),and result in fully funded schools,a safety net that provides help to desperate people who have nowhere else to turn, and the investments in infrastructure, education, and human resources that, until recently, made our state exceptional. He is instead dealing with legislators who brought long festering resentments with them to St Paul and are determined to act on them regardless of the state’s real needs. I would think that a republican caucus that trumpets “jobs, jobs, jobs,” and then forgets all that in favor of loosening the gun laws, making English the state’s official language, ramming through a misbegotten “alternative teacher licensure” bill when hundreds of qualified teachers are out of work, trying to eliminate the state employee pension system, trying to “fix” a nonexistent “voter fraud” issue, ignoring a bonding proposal that would put thousands of Minnesotans back to work–oh man, I could go on–and instead presenting the governor with a slash and burn piecemeal spending cut package that he rightfully vetoed–I would think they would feel some shame, if I weren’t so sure that they and shame are complete strangers. Okay, he’s dropped the surcharge idea, which was a mistake, but whatever. I fervently hope he’s made his last concession, because he’s not likely to get anything in kind from them. Our President has shown us that the more concessions you make, the more republicans demand on behalf of their rich friends. It’s time for him to draw a line in the sand and, like tp and Bush before him, demand that they send him a bill he can sign. That must include revenue increases from the very people who have benefited so greatly from the last decade of tax cuts, and who are even now hoarding their windfalls, not hiring the very people who would immediately put their earnings back into the economy and create the demand that our economy depends on–which, by the way, gives the lie to the idea that if you just let the rich become even richer, they will start hiring and create jobs. We’ve had ten years of tax and spending cuts. Unemployment is approaching Depression levels. The republican model is not working, though they’ve had years to try it. Will they ever admit their beliefs don’t stand up in the real world? Doubt it.

    Wealth has been concentrating for years in a very few bank accounts. It’s time to tap it.

  4. Submitted by Paul Landskroener on 03/01/2011 - 08:48 am.

    An answer to my question is offered in this morning’s Morning Glean, quoting MPR’s Elizabeth Dunbar:

    “So let’s say you’re thinking about cashing in on stock or other investments you own. If the income tax you’ll have to pay on the profit you make from cashing in is expected to rise, that might make you cash in early — before the tax hike kicks in. That’s what Stinson said happened — more people cashed in their investments. The reason it helped the state is because Minnesotans cashing in their profitable investments had more income, and therefore had to pay more income tax as a result, bringing more revenue to the state.”

    http://www.minnpost.com/dailyglean/2011/03/01/26194/big_day_for_wisconsin_as_walker_prepares_to_play_his_hand

    I’m not sure I’m satisfied with the answer, though. Wouldn’t the extension of the tax cuts (i.e., taxes on capital gains lower than for ordinary income) encourage me to hold on to those stock longer — and thereby not realize any capital gains to be taxed? Or is he saying that taxpayers sold their stocks to lock in the lower tax rate on their gains in early December before the lame-duck tax cut extensions were agreed to? That seems like a LOT of selling — which presumably would have happened across the nation since the lower capital gains rate is for US income tax — that, if true, should have seen stock prices drop as the market was flooded, but they didn’t. This explanation still doesn’t sound quite plausible to me, though if Tom Stinson says so, it’s probably true.

  5. Submitted by Paul Scott on 03/01/2011 - 08:53 am.

    Thank you for the accurate headline.

    MPR — Tom Scheck’s piece this morningspecifically — is depicting this episode through the lazy lens: “No signs of compromise despite smaller deficit forecast” reads the headline.

    Then, amazingly, he ends with an actual falsehood:

    “For now it sounds like both the governor and legislative leaders are sticking with their original positions, and signs of compromise seem as hard to spot as signs of spring.”

    The governor cut a massive tax increase from his proposal. How is that “sticking with his original position.”?

    Lazy lazy lazy. The problem is it advances a narrative that poisons the water. If you ever want to know why people throw up their hands and blame everyone in government, then go vote “independent” which to me is code for uninformed, it’s thanks to pieces like this.

    Would it kill them to say that its the GOP who won’t compromise?

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