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Neither a 'Naughty' nor 'Nice' Holidays for Minnesota

December 23, 2008 By Lee Egerstrom, Economic Development Fellow Lee Egerstrom

Community leaders all across Minnesota are making lists, checking them twice, and it hasn't anything to do with Christmas or Hanukkah.

This holiday season, city and county officials are looking at what services can be cut, what human needs can be ignored, and what ongoing budget items can be made to look like "projects" to qualify for hoped-for federal funds early in the new year.

Such list-making exercises have nothing to do with determining who's been naughty or nice, as one song of the season would lead us to believe. And, it certainly has nothing to do with fairness. It has everything to do with hopes that a "Santa Claus" will arrive on the scene on Jan. 20 and infuse local services with funds we lack the political will to provide at the state level.

Two recent newspaper stories show the dilemma facing local public officials.

Jessica Fleming, writing in the St. Paul Pioneer Press on Sunday, summarized the "wish lists" put together by Duluth, St. Cloud and several metropolitan Twin Cities communities ("Cities let Obama know what's ready to go"). This list making was part of a survey instituted by the U.S. Conference of Mayors intended to identify projects that could start quickly if a federal economic recovery stimulus package also comes quickly next year.

Then on Monday, Larry Oakes of the Star Tribune reported on how the nation's economic woes are quickly spreading to the Minnesota Iron Range ("Iron Range's fast fall follows boom"). Layoffs at mines and taconite plants have become widespread as industrial demand of ferrous products dwindles. Labor leaders warned that more plant shutdowns and employment layoffs are coming in January.

Except for the lumber and construction material manufacturers, Minnesota's resource based economic sectors have held together pretty well for most of the past year when most of the state's economy dived into the tank. The mining sector is now sinking fast. Oh, and agricultural commodity prices have fallen in half since hitting peaks in June, raising series questions about the profitability of corn, soybeans and small grains in 2009.         

Against this bleak economic outlook, local officials are threading needles, darning socks and patching well-worn work pants trying to keep their communities together and meeting most local needs while state aid and local revenue fall with the slumping economy.

Gov. Tim Pawlenty used his authority on Friday to cut $110 million from local government aid, $73 million from health and human services and $40 million from higher education as a start in rectifying state budget deficits. With the exception of the higher education budget, most of these cuts will place greater burdens on local units of government that cannot pass along spending responsibilities for meeting human needs and public safety.

Ultimately, it means adding greater burdens to homeowners and business people who pay regressive property taxes.

That's what makes this holiday season so painful in Minnesota. There is no discriminating between who's been naughty or nice. Rather, we are institutionalizing an unfair tax and budget system that harms people where they live - in their homes - without regard to their ability to pay taxes. Moreover, the unfairness can only get worse.

The bailout that most Americans and Minnesotans now hope for will come from federal responses to the severe national recession. That means more federal deficits, which states like Minnesota cannot constitutionally do, with the federal costs eventually paid by a flawed but fairer federal tax system keyed to incomes and people's ability to pay.

The wish lists now being put together by cities involve identifying public works projects and programs that would stimulate jobs and provide public good works for when federal funds might come rolling in. It is probably good public policy, given the current economic crisis. But it cannot be fair.

Just as the state passes down the cost of meeting human needs to local governments and taxpayers under the pretense of not raising taxes, local units of government have a checkered past in meeting local needs. Some communities tax themselves to better their cities, county services and schools. Others have waited for moments like now, perhaps, when federal funds might be on the way.           

Can such a system be fair? Of course, not.

So how should community officials proceed in drafting wish lists? Two approaches seem important up front.

First, what projects might produce the greatest immediate bang for the buck? That is, prioritize those projects that will create or retain jobs for the community. Second, state policymakers should look at the projects for what they might do to stimulate entrepreneurship and economic development down the road. Without the latter, there will be no fix to our problems of creating a sustainable tax revenue base at any level.

Federal stimulus assistance is only one part of a potential state economic recovery. Rejecting it out of hand is foolish and shortsighted. As policymakers build the next biennial budget, they shouldn't take any option off the table. Instead, they should focus on moving Minnesota forward.

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