Two budget thinkers with different political views try their hand at closing Minnesota’s deficit gap

MinnPost gave a sneak preview of the budget calculator published here today.

It was completed in advance by two Minnesotans who share deep experience in state fiscal issues but approach those issues from very different political perspectives: Ember Reichgott Junge, a former DFL state legislator and frequent commentator on public policy issues, and Peter Nelson, a policy fellow at the conservative think tank, Center of the American Experiment.

Their overall reactions and their specific choices define the philosophical chasm that separates DFL Gov. Mark Dayton and the GOP-controlled Legislature as they struggle to close the state’s $6.2 billion budget shortfall.

“I was pleased to look at this and see that there are so many options and ideas,” Reichgott Junge said. “There are many different ways to look at this. None of them is easy. All of them involve some pain. But at least there are a variety of options that we can use.”

Her key point is that the full range of options — from tax increases to tax breaks to spending cuts — should be considered, not only in response to the current crisis but also in Minnesota’s long-term interests.

“For the first time, we have a situation where everything really needs to be looked at,” she said. “I think that’s where there is an opportunity to make the long-term budget more stable.”

Nelson was more tentative, more focused on spending cuts.

“There are a lot of options, yes, however I don’t see a lot of big-ticket options that will definitely save us money,” he said. “There are a lot of ideas out there for redesigning and reforming government. In the short-term those probably are not going to save us a lot.”

Still, he said, Minnesota needs to try reform ideas for the long haul in addition to making the short-term tradeoffs presented in MinnPost’s budget calculator.

“Right now, you are talking about $6.2 billion, but it seems to me that what you are doing here is getting at the serious long-term problems beyond that $6.2 billion,” he said. “They are almost two different conversations. But we have to have them both at the same time. …. Your sidebar asks the right questions.”

How to think about the crisis
I asked both how Minnesotans should think about moving forward from this crisis.

Reichgott Junge: “We should think about this as an opportunity to make some much needed changes that have been neglected over the last few years, tough decisions that really are needed to restructure our budget for the long-term good, as opposed to the quick fix or the next election. At some point you get to the place where you have no more short-term fixes, and that’s where we are right now. So if we are going to make changes let’s make them in a way that creates long-term stability.”

Nelson:  “Moving forward, there is no way that we can pay for the current system.. .. We have run the course on being able to rely on our more highly-trained and well-educated work force, our greater workforce participation and our high income level relative to other states. We have run the course on being able to use that to expand services and pay for services in a way that is not really all that accountable. We need to recognize that our workforce is changing that our demographics are changing. We need to accept that fact and accommodate it.”

Realistic expectations
I also asked both to reflect on the choices in MinnPost’s budget exercise and then gauge what’s realistic to expect from the budget showdown at the Capitol.

Reichgott Junge: “Given what you have put before us, I don’t know where you ever would find it with all cuts and no revenue increases…. I served in the 1980s and 90s when we actually compromised to make things happen in the best interests of all Minnesotans. [former GOP Gov. Arne] Carlson and the DFL Legislature came together.  . . . Today, if people are really firm in their particular positions, if there is no compromise, then I think we are heading for a train wreck. There is no way you can balance this budget without some compromise.
Nelson:  “Realistically, [the Republicans] have made such a substantial point to say that they won’t raise taxes, I do find it hard to believe that they will be able to go back on that statement. I think they will be able to get substantially there with the cutting options. … I have a hard time believing that revenue will be on the table. But if it is, there could be some creative ways to be able to count revenue . . . in a way that is budget neutral, so that they can say with a straight face, ‘We are not raising taxes.'”

Other perspectives
Those responses jibe with everything I heard from other close observers of the budgeting process.

Phil Krinkie, president of the conservative Taxpayers League of Minnesota, is pressing legislators to stand firm against the pressure to raise taxes.

“Most families and most small businesses have already undergone this process,” Krinkie said. “When the recession hit, they didn’t have any other options. If you’ve got a two-income household and one member loses the job, you don’t have easy choices: Max out credit cards? Go to a family member or friend and ask a loan? They don’t have good options but to reduce expenditures. In the political arena, reducing expenditures is the avenue of the last resort, unfortunately not the first resort.”

Sure, these are tough decisions — cutting services that have been available to citizens, whether they involve public safety, health care, education or transportation.

“The shoe is going to pinch more in this next biennium more than it has in any previous time in the state,” Krinkie warned.

At the progressive think tank, Growth & Justice, President Dane Smith agreed with the “let’s get real” introduction to MinnPost’s budget puzzle.

Getting real involves three “huge” principles, Smith said.

“We must have balance, at long last,” Smith said. “Every governor for 30 years before Pawlenty used a balanced approach and all three tools [cuts, shifts, tax increases, and in roughly equal proportions] to do the job. The imbalanced ‘starve the beast’ approach has not stimulated the economy, has diminished the quality of life in almost every realm except perhaps for the top earners, and has contributed mightily to the long-term ‘structural’ imbalance.”

Further, Smith said, there must be shared sacrifice.

“Minnesota state income tax rates have not been raised since the early 1980s, and then only temporarily, and the rates paid by the top income [earners] haven’t been lower since before Watergate.”

Finally, he said, Minnesota must start now to redesign government, even if that can’t be completed in this budget year.

“We need to open up a window and work in a split-screen mode, to improve and properly fund what we have on one screen, and on the other screen to aggressively and creatively try to revolutionize how we deliver services and do government,” Smith said.

In short, most DFLers insist we must pick and choose from a full list of options while also revamping programs to save money down the road.

For their part, Republicans focus on reigning in spending in order to meet the current crisis and also set the state on a more austere fiscal course for the future.

The specific choices made by our two experts reflect those perspectives.

Nelson’s choices
Nelson didn’t close the gap by the full $6.2 billion.

“I came up with $5.047 billion in cuts, which is higher than I expected,” he said.

After listening to his explanation of some nuanced ideas, I still gave him credit for completing the exercise.

First, let’s look at his specific choices, beginning with the category he did not chose: He did not check any tax increases. (That’s where the nuances begin, so I’ll get back to that point.)

Nelson would eliminate one tax break by ending the JOBZ program, thus closing the budget gap by $68.9 million.

He went for most of the listed spending cuts: Extend shifts in state aid to K-12 schools. Reduce state workforce by 15 percent. Scale back health and human services. Extend reductions in renters’ credit refund. Revamp school transportation. Coordinate state purchasing. Freeze state employees’ pay. Collectively, that closes the gap by another $1.75 billion.

He also chose to extend cuts to higher education for a savings of $185 million.

“Anything education related is tough to cut because obviously education is central to job growth and having a trained workforce in the future,” he said. “However when you look at higher education, it’s hard to make sense of why costs keep escalating.”

His explanation is what he calls the “third-party payer problem.” Because the state foots part of the bill, “consumers” of education, don’t see the full cost, and they have less reason to demand lower costs or better value for their money.

Still, Nelson said, “I would be concerned about cutting more without doing something else, without adding some reform or redesign effort to higher education. Ultimately, if you just tell people ‘cut, cut, cut,’ that might not lead to reform.”

The “third-party payer” problem also prompted Nelson’s choice to slash aid to cities and counties. He chose both items in this category, although the exercise called for picking one of two. I decided to respect his emphasis. (But I don’t encourage readers to try this as they do the exercise.)

Taxpayers get a warped picture when counties and cities draw some of their funding from the state, he said.

“People get their property tax statements and think that is what they are paying for their services,” he said. “If people knew what the whole bill was, there would have probably been some greater calls for doing things differently.”

So give him credit for $1.043 billion in that category.

Nelson’s biggest spending cut came in choosing to replace health-care and related services with insurance subsidies.

“This is where the money is [going] and this is where cuts will need to be made,” he said. “If cuts are coupled with redesign, then hopefully we can substantially mitigate service reductions.”
A good share of the services could move to “premium-support” programs such as a long-term care plan explored in a recent Citizens’ League report. The League proposed to revamp Medicaid (or Medical Assistance as it is called in Minnesota) into a type of co-insurance plan with the state paying premium incentives for individuals to buy their own insurance.
There’s a catch, though. The federal government pays a hefty share of costs in this category. And the state would need a federal approval to change the program rules.

Assuming the feds came through, the state could save some $2 billion, Nelson estimated.
Add up Nelson’s choices, and he is more than $1 billion short of closing Minnesota’s budget gap. This brings us back to the nuances, and to an idea that could well surface in the Legislature.

While Nelson opposes tax increases, he would consider restructuring the tax code — expanding the sales tax in exchange for cutting or eliminating corporate income taxes. The idea reflects recommendations in a 2009 report by The Governor’s 21st Century Tax Reform Commission.

This idea could yield a substantial short-term surplus of sales taxes.

Here’s how that would work: In the wake of the Great Recession, corporate taxes are at a low point and that is factored into state budget estimates. But this idea must be “budget neutral” for the long run, so the sales-tax expansion must be set at a level that could offset the corporate taxes after full recovery when companies are reporting peak incomes.

In short, the sales-tax collection in the early years would exceed the loss of corporate taxes. And that excess could help balance the budget.

If expanding revenue is going to be on the table in this GOP-controlled Legislature, Nelson said, “I can’t see it being on the table in any other scenario.”

Reichgott Junge’s choices
Like Nelson, Reichgott Junge opted for revamping school transportation, coordinating state purchases and eliminating the JOBZ program.
She also agreed to extend the shift in payments to K-12 schools, saying the state “must buy time on this until the economy turns around and our finances are more stable.”
And she went along with extending previous cuts to higher education.
“I don’t want tuition to increase, but I do want some closure of campuses and consolidation of institutions,” she said. “The time is right with new leaders of both systems and a new governor. My suggestion: cut $185 million this year with agreement to restore dollars next biennium if significant reforms are made in structure.”
She chose three spending cuts that Nelson had bypassed: setting up health-care savings networks, pooling health insurance purchasing for school districts and cutting $15 million in spending for prisons.
The prison choice is “very difficult politically, unless everyone agrees, but it must be done,” she noted.
This closes the budget gap by $2.054 billion.
Noticeably missing from her list were further cuts to health and human service programs.
“I truly believe that social services have already taken a huge hit,” she said.
Reluctantly, she agreed that the state may need to extend some of the previous cuts in aid to counties and cities. But she couldn’t go along with the full measure of the cuts proposed in the GOP bills. So she settled on $200 million in that category.
“Local government aid has taken huge hits in the past,” she said. “Property taxes already are increasing, and we haven’t begun to see all of the increases yet. Some of the past cuts still are going through the system, so people haven’t even felt the impact. Then to have more cuts on top of that before you even know the impact is going to be rough.”
Not surprisingly, her greatest difference from Nelson was in choices to increase revenues and close some tax breaks.
The sales tax should have been extended to clothing when former Gov. Jesse Ventura proposed it years ago, she said. But she also would lower the overall sales tax as we expand the base to clothing.
She’d extend the sales tax to some services too, with the caveat that the state should focus on services least likely to go out of state like car repairs and haircuts.
As for adding an income tax bracket for the top earners, she opted for the more modest of MinnPost’s two choices — a 9 percent bracket for couples earning over $250,000 — rather than the higher tax hike Gov. Dayton had proposed in his campaigns.
“I wish we could go for more on this, but it just won’t fly with Legislature,” she said.
Further, she would enact a 5 percent temporary surcharge on income tax.
“It took years of budget shifts and gimmicks to get us here,” she said. “We have to be reasonable and use some temporary measures to help us get back to stability in the long-term.”
Increasing taxes on alcoholic beverages is a “no brainer,” she said, given the many health costs the state incurs because of chemical dependency. The same goes for raising tobacco taxes.
Adopting the corporate throw-back rule also was a “no brainer” on her list.
When it came to closing certain tax breaks or tax expenditures, she said: “I don’t think we’ve really had strong discussions on those before. This might be the time to have those discussions.”
What she would do is cap the home mortgage interest deduction at “some reasonable amount” — say, $15,000 a year. By the same thinking, she would cap the property tax deduction.
All of this brings Reichgott Junge within $500 million of closing the budget gap.
That last sum should be spread across the board so that all state programs — including K-12 education — suffer some pinch.
“Everyone in the state needs to share in the solution,” she said.

Sharon Schmickle reports on science, international affairs, Greater Minnesota and other subjects.

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Comments (2)

  1. Submitted by Josh Williams on 02/09/2011 - 11:01 am.

    Thanks for this article, Sharon. It was actually quite encouraging to see two folks on more or less opposite sides of the ideological spectrum come up with fairly reasonable solutions that resolved what seems to be an unsolvable problem.

    I hope our legislators can take the same common sense approach.

  2. Submitted by Eric Schubert on 02/09/2011 - 06:59 pm.

    The Citizens League report has some really good ideas to transform long-term care financing and preserve a safety net. That’s the fastest growing part of the HHS budget, and it’s centered around costs that people don’t think about until they need the services. We need to think and act now. It’s really on the boomers and GenXers to start teeing up solutions as we’re next in line as huge consumers of government dollars that will be taken from education and other things we need for this state to thrive.

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