While laws passed during the 2010 regular and special legislative sessions left a gaping $7 billion budget deficit for the upcoming fiscal year (FY) 2012-13 biennium, at least they balanced the state’s budget in the current FY 2010-11 biennium, right? As it turns out, even this modest accomplishment may be illusory.

Governor Pawlenty noted that the state could again be facing a new deficit within the current FY 2010-11 biennium resulting from the fact that “final income tax payments (final payments minus refunds) for tax year 2009 will be more than $150 million below February forecast estimates.”  This observation appeared within Pawlenty’s announcement that Minnesota will not participate in the early Medicaid enrollment expansion that is part of federal health care reform.

Presumably, a similar shortfall will persist into tax year 2010, leaving a net decline in revenue of approximately $300 million for the entire biennium relative to what was anticipated in February.

Ordinarily, a relatively modest revenue decline could be dealt with by tapping into the state’s budget reserve, but this reserve is currently zero.  Because the budget reserve is depleted, Pawlenty could once again unallot if a new deficit emerges in next November’s forecast.  There is no telling precisely what the Governor might do.  For example, if a new deficit does emerge, Pawlenty could go after one of his favorite targets: state aid to local governments.  Another alternative would be for Pawlenty to leave the new deficit for his successor to deal with.  Any new deficit would have to be resolved by the end of the FY 2010-11 biennium (June 30, 2011).

This whole mess could have been avoided if Minnesota had taken a balanced approach to the state’s budget morass that involved a reasonable mix of spending cuts and revenue increases.  However, because the prospect of a revenue increase is off the table for Minnesota’s “no new tax” leadership, the state’s budget reserve is empty and we are once again looking at the possibility of more cuts in public services, higher property taxes, and even greater fiscal uncertainty.

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Today’s release of the February forecast did not appreciably change the state’s budget situation.  We are still confronting a very large deficit (about $1 billion) within the current biennium and a humongous deficit (approximately $7.8 billion) in the next.

The good news is that the size of the projected deficit in the current biennium has shrunk from $1.2 billion to $1.0 billion.  This good news is tempered by the fact that 40 percent of the improvement is the result of a previously unanticipated increase in federal reimbursements for state Medicaid spending.  While these dollars are booked as a reduction in state spending, they actually represent a temporary infusion of one-time federal dollars as opposed to a permanent improvement in the state’s fiscal situation.

The rest of the $200 million reduction in the deficit in the current biennium is the result of small changes in projected state revenue and spending.  In addition to the spending reduction due to the increase in federal reimbursements, other projected state spending fell by $101 million, which is just 0.3 percent of total state spending projected for the current biennium.  Projected revenues increased by an even smaller amount—$25 million.  A slight decline in projected individual income tax and “all other” tax collections were offset by a somewhat larger increase in projected corporate income and sales tax collections to produce a tiny net revenue improvement.

While the $200 million improvement in the state’s budget situation during the current biennium is not huge in comparison to total state general fund spending (projected to be $31.1 billion), it could be helpful in mitigating cuts.  For example, $200 million would be sufficient to reduce the Governor’s proposed FY 2011 cuts to county and city aids (which would be paid in calendar year 2010) by nearly 47 percent.

The bad news in the forecast is that the official state budget deficit projected for the next biennium (FY 2012-13) has swelled from $5.4 billion to $5.8 billion.  The growth in the projected deficit is the result of a $311 million decline in projected revenue and a $51 million increase in projected spending relative to the previous November forecast.

Furthermore, this $5.8 billion figure understates the true size of the deficit by ignoring the impact of inflation on most state spending and by failing to include the cost of General Assistance Medical Care (GAMC).  While the Governor has vetoed and unallotted funding for GAMC in the current biennium, the program remains in law and should be considered when calculating the deficit for the next biennium.  After properly adjusting for inflation and the cost of GAMC, the state deficit grows to $7.8 billion.

All in all, the February forecast reveals no significant change in the state’s budget outlook relative to the previous November forecast.  If anything, the situation has gotten slightly worse insofar as the projected long term imbalance between the state revenues and expenditures has grown.  State policymakers have been infinitely inventive and concocting shifts and gimmicks to resolve the state’s budget problem in the current biennium.  They have been considerably less adroit in addressing the long term problem.

The sad fact is that there is no shift or accounting maneuver that will solve the state’s long-term fiscal conundrum.  A lasting solution to the state’s fiscal mess will require difficult decisions regarding spending cuts, spending reforms, and revenue increases.  In tackling the state’s $7.8 billion deficit, all of these options need to be on the table.

Official February forecast documents from Minnesota Management & Budget can be found on-line.  For the February forecast summary document, click here.  For the full February forecast document, including summary tables for the FY 2008-09, 2010-11, and 2012-13 biennia, click here.  For presentation materials used during today’s forecast release press conference, click here.  For complete state general fund line item detail for FY 2010-11 and FY 2012-13 based on the February forecast, click here.

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Based on the most recent e-mail from the Taxpayers’ League of Minnesota, one might conclude that State Senator Tom Bakk of Cook is on board with the TLM in opposing all increases in the state income tax.  This is a distortion from the folks who have become affectionately known as the Fact Slayers’ League.

In recent comments before the Senate Tax Committee (which he chairs), Bakk said that income tax increases on the wealthiest Minnesotans alone will not be enough to balance the state’s budget deficit.  He’s right.  If combined state and local taxes paid by the wealthiest five percent of Minnesotans were increased to the same rate paid by the rest of us, somewhere between $2.5 and $3 billion of new public revenue would be generated.  Given that the state’s deficit for the next biennium is expected to be $7.4 billion, it is clear that taxes on the richest Minnesotans will not by itself be enough to close the budget gap.

However, there is no reason why tax increases cannot be part of a balanced approach that involves both revenue increases and spending cuts.  This is the position taken by Minnesota 2020 and every pragmatic policymaker in the state, including Bakk.  For example, Bakk supported the 2009 Senate budget proposal, which cut state general fund spending more than the Governor’s proposal.  In addition, Bakk was chief author of SF 2074, which increased state income taxes in order to balance the state’s budget without the accounting shifts that the Governor relied on.

The TLM’s views on Senator Bakk are somewhat schizophrenic.  While they praise Bakk in their e-mail, elsewhere they label him as a “foe of the taxpayer” and “a big time tax-and-spender.”  On the TLM’s legislative scorecard, Bakk scored 14 out of a possible 100.

Bakk should not be disconcerted by his poor reviews from the TLM.  The TLM slams any policymaker who favors tax fairness—that is to say, taxing households based on their ability to pay.  A principal goal of the TLM is to protect the favored status enjoyed by the wealthiest Minnesotans; currently the wealthiest five percent of Minnesotans pay 9.7 cents of each dollar of income in state and local taxes, while all other Minnesotans pay 12.1 cents.

The Fact Slayers’ League would have us believe that there are two schools of thought when it comes to dealing with the state’s budget deficit: (1) increasing taxes or (2) cutting expenditures.  This is a false dichotomy.  The real distinction is between those who favor a balanced approach to the deficit and those who, like the TLM, would remove half the tools from the toolbox.

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Earlier this week, the Senate Tax Committee met to discuss the Governor’s proposal to amend the constitution to cap state spending.  The state already has a constitutional requirement to balance the state budget; all Pawlenty’s amendment would do is require that general fund spending in the current biennium equal the revenues generated in the last biennium.  Thus, if there’s a deficit, the problem could only be solved by cutting spending, not increasing revenue, thereby reducing the options open to state policymakers, restricting the ability of government to respond to the demands of the public, and ensuring that the “no new tax” tribe win every dispute on deficits.

At one point during the Senate Tax Committee discussion of the amendment, Senator Tom Bakk (Cook) said that income taxes and the overall “price of government” (i.e., total state and local own-source revenue as a percent of statewide personal income) has declined over the last decade.  To this point, Senator Warren Limmer (Maple Grove), an amendment supporter, argued that sales taxes and property taxes have increased in recent years.

Both senators were correct.  While specific taxes have increased, others have declined and the overall size of government relative to statewide personal income has declined.  Sadly for low and moderate income families, regressive taxes (sales and property taxes) have increased as a share of total public revenue, while progressive taxes (the income tax) have shrunk.  These trends have shifted a larger share of state taxes on to those families with the least ability to pay.

While Senator Limmer is certainly correct that property taxes have increased, Pawlenty’s constitutional spending amendment will only accelerate this trend.  During the “no new tax” era, state government has solved its recurring budget problems largely by cutting state dollars shared with counties, cities, and schools, thereby compelling local governments to simultaneously cut budgets while increasing property taxes.  The fiscal straightjacket imposed by the amendment will constitutionally guarantee similar outcomes in the future; the state will not be able to solve any portion of its deficit problem through an increase in state taxes, so it will of necessity continue to chop away at the property tax relief dollars that the state shares with local governments.  This will cause even more public costs to be shifted on to low and moderate income families.

Pawlenty’s constitutional spending cap falls under the broad category of proposals known collectively as “taxpayers’ bill of rights.”  Dane Smith, President of Growth & Justice, hit the nail on the head when he told the Senate Tax Committee that the proposed constitutional amendment could be more aptly called a  “taxpayers’ bill of goods.”

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A recent string of Dilbert cartoons featured a character called “the Topper.”  No matter what you did or proposed, the Topper would do or propose something bigger, better, or more extreme.  The current Topper among anti-tax gubernatorial hopefuls is Rep. Paul Kohls.

As reported in MinnPost, Rep. Kohls has taken the “no new tax” pledge to the next level by proposing to roll the state’s budget back to the FY 2004-05 level.  After adjusting for inflation, per capita state general fund spending during the current biennium (FY 2010-11) is already projected to be 14 percent less than in FY 2004-05.

In fairness, it should be noted that part of the decline in general fund spending from FY 2004-05 to FY 2010-11 is due to the governor’s school funding shift and a one-time $500 million cut in state general education aid.  However, even after adjusting for these events, real per capita FY 2010-11 spending is still expected to be about 8 percent less than it was in FY 2004-05.

If the budget for FY 2012-13 (the first biennium under the next governor) is set at the FY 2004-05 level with no adjustment for population growth or inflation, the real per capita purchasing power of the resulting state budget would be about 26 percent less than in FY 2004-05.

In order to accommodate this budget cut, how many more people will have to go without health insurance?  How much more will funding for public schools be cut?  How much higher will fees and college tuition go?  How much higher will property taxes have to go, as more public costs are shifted on to the property tax?  How many more accounting gimmicks will the state resort to?  If the next governor achieves his or her budget goals in the same way that Gov. Pawlenty did, this is precisely what we can expect.

According to the MinnPost article, Rep. Kohls argued that the state must manage its budget “just like families and businesses have to.”  With rising costs for health care and energy costs, how many growing families are spending the same amount today as they did in 2004 and 2005?  Rep. Kohls’ comment is yet another example of how anti-tax politicians apply the family metaphor without thinking about how families actually behave.

The plan to roll the state budget back to the FY 2004-05 level could be the opening round in a game of budget brinksmanship in which anti-tax Toppers attempt to out-do each other with increasingly extreme proposals.  This pattern is predictable given the logic of the anti-tax philosophy: if less government revenue is good, than a lot less is even better.

True fiscal conservatives should be skeptical of this philosophy.  Largely thanks to the “no new tax” mentality, Minnesota is facing a whopping $6.4 billion budget deficit, escalating property taxes, and diminished public investment.  These trends have coincided with a deterioration in Minnesota’s economic performance relative to the rest of the nation.

Rather than trying to top each other through anti-tax brinksmanship, gubernatorial candidates should be discussing a balanced solution that will address the state’s budget mess while maintaining worthwhile public investments.  In crafting this solution, both spending cuts and tax increases should be on the table.

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