Minnesota’s improved economic outlook for the next two years doesn’t appear to have tamped down Democrats’ ambitious plans to invest in education, property tax relief and job growth.
The state’s projected $1.1 billion shortfall for the 2014-15 budget cycle dropped nearly half a billion dollars to $627 million Thursday, when the state announced its latest economic forecast.
The state’s take for the current biennium increased $295 million. That money will be used largely to pay back borrowing from Minnesota’s school system.
Budget officials said the improved outlook is good news but said structural stability is still elusive and that the federal budget stalemate could hurt the state’s economic growth.
“The simple story is that the economy continues to get itself out of the recession,”
Minnesota Management and Budget Commissioner Jim Schowalter said.
“We continue to chug along, but it’s not nearly enough to solve the public policy questions that we have hanging over us from recent years. That’s true at the state level. That’s true at the federal level.”
DFL, GOP disagree on next step
Democrats and Republicans alike agreed that the economic forecast represented good news for the state, but disagreed sharply over where to go from here.
Gov. Mark Dayton, who proposed a $37.9 billion budget last month, would have filled in the then-$1.1 billion deficit and funded new priorities with an overall $2.1 billion tax hike.
Capitol watchers expected Dayton’s budget to be a placeholder until the February forecast was released, giving state lawmakers an updated picture of the economic situation they face.
Dayton called today’s forecast “very good news for Minnesota” and said the executive branch and revenue agencies are revising his proposal to reflect the improved economic picture. He hopes to release updated recommendations the week of March 11.
But the governor didn’t back away from the ambitious tax or spending plan that he released at the end of January, parts of which are generating significant blowback from the business community and Republican lawmakers.
“The result is harm to economic growth, jobs and competitiveness,” state Chamber of Commerce President David Olson said in a statement after the forecast was released.
If Dayton has his way, the short-term economic improvement will serve to fund his long-term aims, rather than take the pressure off of upper-income tax hikes and sales taxes on business-to-business transactions and many consumer services.
Dayton didn’t take any tax increases off the table at a news conference after the budget forecast was released.
In fact, the governor said the $463 million improvement would allow him to move forward with two tax relief priorities that were left “in the queue” when he was crafting his budget proposal – an upfront sales-tax exemption on business capital investment purchases and an increase in the renters’ tax credit.
The cost of those two tax expenditures could reach up to $300 million.
Dayton stresses need for investments
Dayton told reporters that an improved economic climate in the next biennium doesn’t make any of the key investments he’s proposed any less pressing if Minnesota wants to achieve long-term success.
“I believe we have made progress in this state because we have made investments in things like education, and I know … those investments have been declining,” Dayton said.
“If you’re going to say we’re not going to invest anything more in education, we’re not going to do early childhood, we’re not going to do all-day kindergarten. We’re going to just be on this glide path of less commitment and expect better results? I don’t think that’s realistic.”
DFL legislative leaders, for the most part, seemed to match Dayton’s sentiment. Although they have declined to outright endorse the governor’s tax proposals, Senate Majority Leader Tom Bakk and House Speaker Paul Thissen said now is the time for visionary investments in the state.
Bakk told reporters that DFL legislators might support even higher spending targets for education and economic development than the governor has proposed.
Thissen said an income tax hike, which is included in Dayton’s budget, is a likely option for lawmakers but stopped short of endorsing the sales tax expansion that’s the key to the governor’s budget.
Still, Democrats said now is the time to focus on long-term growth and visionary investment rather than on the piecemeal improvement that today’s forecast provided.
Revised budget targets coming
The DFL leaders said they hope to release their budget targets by the Easter legislative break.
“We really have an opportunity even better now to get out of the cycle of continued budget deficits that we’ve suffered over the last 10 years and really restore some structural stability to our state budget,” Thissen said.
“This really is an opportunity for us to look forward for the first time in a long time,” he added. “There are investments that we need to make. We don’t need to just deal with the problem immediately in front of our noses right now. We can look five and 10 years out and start making the kind of investments we need to make in the state of Minnesota.”
Budget officials noted that although current projections show a budget surplus in the 2016-2017 biennium, a lot could change before then.
Current state law also doesn’t account for inflation in estimating expenditures. If it did, the budget surplus would flip to a deficit.
Republicans criticized the DFLers for keeping many of the same policies on the table despite the improved economic outlook. They called for Dayton to go back to the drawing board with his budget.
“I don’t think they’re going to go backwards. I don’t think they’re going to give in and do less spending,” House Minority Leader Kurt Daudt said. “The governor has proposed these taxes, but I’m not certain that those taxes quench the thirst for spending that the Legislature is going to have.”
Sen. Dave Thompson, an assistant minority leader, echoed many Republicans in claiming credit for much of the economic improvement reflected in Thursday’s forecast.
The forecast’s only negative area concerned lackluster electronic pull-tab revenues.
“We are in an awful lot better shape today than we were two years ago because of the policies that have been implemented,” Thompson said.
