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Three Ways to a Balanced Budget

November 14, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

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 November 2nd election compounds the budget quagmire. New Republican majorities take over both bodies of Minnesota's legislature, while Senator Mark Dayton appears likely to become the first DFL governor in twenty years.

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

Scenario #1: Governor Pawlenty Sticks Around

Sen. 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 December 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 Sen. Dayton’s swearing in as the next governor “deep into the winter.”

This would allow Governor 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. Governor 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 Governor 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. Senator 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.

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4 Comments:

  • Greg Kapphahn says:

    November 16, 2010 at 10:11 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 Pawlenty hangs on as acting governor, they will take actions that pour salt on the already very painful wounds being suffered across Minnesota due to Pawlenty’s previous actions (which our Republican friends wholeheartedly supported). 

    If Governor Pawlenty hangs on and is finally able to ram his “no new taxes” faith 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 Pawlenty 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.  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, finally making it crystal clear to the vast majority of the state’s citizens that they care for nothing but themselves. 

    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 elections choices in the future.

  • dennis rud says:

    November 16, 2010 at 11:32 pm

    Norther Mn


    # 1 ....cut state sudsidized misc programs that should stand on their own. If the public doesn’t support them, then they weren;t supposed to be there. Ex.Recreation areas(snowmobile trails,etc) 100’s of items in Mn

    #2 luxery tax on all casinos in Mn. Funds for infrastructure , roads etc…. This is common sense.

    #3 Administration overload in all universities…need to set a standard protocol…

    #4 Reduce State employment and salaries should be in line with the independent business salary averages. State pension and retirements need to be re addressed for a sustainable future. ( No benefits until a minimium of 25 years service)

    #5 Audit accountability trail of all money from state to entities. Strict oversight

  • Bernice Vetsch says:

    November 17, 2010 at 10:44 am

    Depressing though it may sound, I believe Greg Kappahahn is correct in all his forecasts. 

    Those Republicans who have signed the infamous Taxpayer Protection Pledge have signed on heart and soul to the gospel preached by Grover Norquist and his two organizations, Americans for Tax Reform and the Leave Us Alone Coalition.

    We’ve seen the result of the no-new-taxes philosophy here and nationally. The Leave Us Alone folks exist to oppose the Takings Coalition, which “consists of the Trial Lawyers, the corrupt Big City Machines, the Labor Union Bosses and the two wings of the Dependency Movement—those who remain trapped in dependency and those who make $80,000 a year managing the dependency of others and making sure they don’t get jobs and become Republicans” (Grover Norquist op-ed at www.haciendapub.com/norquist.html.

    Talk about a program based in the kind of hatred spewed by Limbaugh, Beck et al., but this is what many Republicans believe in their hearts.  Well, maybe in their guts, their hearts being quite damaged from exposure to Norquist. 

    Poor Minnesota.  Poor America.

  • Bernie Bauhof says:

    November 19, 2010 at 11:31 am

    There appears to be traces of denial flying around this site like “we need to educate the citizens of Minnesota”, “if only the DFL had gotten their message out” or my favorite “We don’t need more failed conservative public policy initiatives or distractions” (that one is used often). Who controlled the legislature? Not conservatives. The last two years the DFL has enjoyed majorities in both houses of the legislature, and the Senate had the ability to override Pawlenty vetoes without any GOP votes and they were still unable to advance their agenda. They were simply out maneuvered by Pawlenty. Now the GOP has the majority. Dayton is no Pawlenty. He does not possess the political wherewithal to advance his agenda against a GOP controlled majority. You can continue to believe that the voters are uneducated and if only the message got out things would be different. The truth is that people understand the choices and want a change both here in Minnesota and across the country. Their vote clearly demonstrates that fact.