Minnesota expects to finish this fiscal year with a budget surplus, but will face a $700 million deficit in its next budget ? a deficit that could grow to $1.375 billion once inflation is factored in, the state Finance Department announced Dec. 1.
The anticipated deficit is $302 million worse than earlier projections and reflects a continuing structural problem in state finances, finance commissioner Peggy Ingison acknowledged during a news conference at the Capitol.
Put simply, the state is not bringing in enough revenue to match even its current spending commitments. If the state tries to increase spending and investment ? such as enacting a significant bonding bill or by increasing funding for public education, nursing homes or state employee salaries ? the projected deficit would grow even worse. ?A structural gap goes away only by increasing revenue or reducing spending,? Ingison said.
The state can?t count on an improving economy to bail it out, warned state economist Tom Stinson. ?We?re not going to grow our way out of it,? he said. Economic growth in the past year has been the strongest in almost 20 years, he noted, and the budget forecast relies on the economy remaining strong. ?There is no recession or slowdown in this forecast,? he said.
Surplus can?t be used
It is within this framework that the Legislature must work when it returns in January to draft a budget for the 2006-?07 biennium. It is the third straight budget in which the Legislature must attack a projected deficit.
Even though the surplus for this fiscal year ? anticipated at $495 million ? is ?pretty good news,? in Ingison?s words, it is also somewhat misleading, she said. By state law, all that surplus must be diverted to replenish budget reserves and to offset accounting ?shifts? in which the state delays sending money to local school districts. In fact, Ingison said, the state would need an additional $800 million surplus to completely eliminate the accounting shifts, and roughly $600 million on top of that to bring reserves up to the level recommended by the state?s Council of Economic Advisers.
Rising health costs drive increase
The deficit in the next budget cycle occurs because projected revenue increases of $254 million will be wiped out by projected spending increases of $556 million. Most of the revenue increase comes from higher income tax collections; revenue from corporate income taxes, motor vehicle taxes and sales taxes actually are expected to decrease.
The increases in spending ? which are projected based solely on current law ? occur primarily in higher education (where enrollments continue to rise) and in state health insurance plans (where costs are expected to increase 27 percent).
The structural problem remains evident in the Finance Department?s initial forecast for the 2008-?09 budget. That two-year projection foresees a similar deficit of $1.35 billion if inflation is included.
Fewer potential solutions
Ingison refused to make recommendations on how to close the budget deficit, but did call it is ?highly inadvisable? to raid budget reserves. She also pointed out that many of the tactics used to erase earlier budget deficits ? spending cuts, accounting gimmicks and one-time resources such as depleting the state?s tobacco endowment ? no longer exist. In fact, she said, ?significant use of one-time items is the reason we?re still dealing with this.?
Representatives of labor and non-profit organizations said it was time for Gov. Tim Pawlenty to give up his ?no new taxes? approach and take a realistic approach to the state?s budget woes.
?The state revenue forecast demonstrates the fact we can?t run government by slogan,? said Eliot Seide, executive director of AFSCME Council 5, which represents 40,000 public employees in the state. Noting that ?we have insufficient revenues,? he said: ?We need real solutions to real problems.? We badly need investments in transportation, education, public safety, and health care.?
Who pays the price?
Wayne Cox, executive director of Minnesota Citizens for Tax Justice, which is supported primarily by unions, said the state needs to close corporate tax loopholes, raise the cigarette tax, and restore previous tax rates on the wealthiest 1 percent of Minnesota citizens.
?The answer to this structural deficit is to return to the tax system that we had in past years,? he said. ?Why should those people continue to get $5,000 a year in tax cuts when in order for that to continue, we?ve got to deny health-care services to people, we?ve got to continue to have these overly congested highways, we?ve got to continue to price people out of the University of Minnesota? That?s the price we pay for continuing those types of tax cuts.?
Pawlenty likes to claim that no one can argue Minnesota is taxed too little, Cox said. "In fact, Minnesota is taxed too little to provide for its basic services." Under the current tax system, he noted, the state "has no capacity to weather any downturn in the economy. We're extraordinarily vulnerable."
Seeking long-term solutions
The Minnesota Council of Nonprofits said the projected budget deficit proves previous tax reductions ?went too far? and that it?s time to return to ?fiscal responsibility.?
Among a number of proposals, the council repeated its suggestion of a temporary, 10 percent income-tax surcharge, which it says would raise $1.2 billion.
?We?ve already done too much on the spending side,? said Nan Madden, director of the council?s Minnesota Budget Project. ?We need to start looking at the revenue side.?
She said a tax surcharge should be part of broader tax reform, including recognizing that the state?s current tax system isn?t keeping up with changes in the economy and technology. For instance, Madden said, the economy is shifting away from goods toward services.
?Goods largely are taxed, services largely are not,? she said. ?I think we need to start looking at changes in those areas.?
In addition, she noted, most of the projected increases in state spending are in health care. ?When we look at most other areas of budget, those areas actually are going to spend fewer dollars than they did in the 2002-2003 budget cycle,? Madden said.
Michael Kuchta edits the Union Advocate, the official publication of the St. Paul Trades & Labor Assembly, AFL-CIO. E-mail him at advocate@mtn.org
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Minnesota expects to finish this fiscal year with a budget surplus, but will face a $700 million deficit in its next budget ? a deficit that could grow to $1.375 billion once inflation is factored in, the state Finance Department announced Dec. 1.
The anticipated deficit is $302 million worse than earlier projections and reflects a continuing structural problem in state finances, finance commissioner Peggy Ingison acknowledged during a news conference at the Capitol.
Put simply, the state is not bringing in enough revenue to match even its current spending commitments. If the state tries to increase spending and investment ? such as enacting a significant bonding bill or by increasing funding for public education, nursing homes or state employee salaries ? the projected deficit would grow even worse. ?A structural gap goes away only by increasing revenue or reducing spending,? Ingison said.
The state can?t count on an improving economy to bail it out, warned state economist Tom Stinson. ?We?re not going to grow our way out of it,? he said. Economic growth in the past year has been the strongest in almost 20 years, he noted, and the budget forecast relies on the economy remaining strong. ?There is no recession or slowdown in this forecast,? he said.
Surplus can?t be used
It is within this framework that the Legislature must work when it returns in January to draft a budget for the 2006-?07 biennium. It is the third straight budget in which the Legislature must attack a projected deficit.
Even though the surplus for this fiscal year ? anticipated at $495 million ? is ?pretty good news,? in Ingison?s words, it is also somewhat misleading, she said. By state law, all that surplus must be diverted to replenish budget reserves and to offset accounting ?shifts? in which the state delays sending money to local school districts. In fact, Ingison said, the state would need an additional $800 million surplus to completely eliminate the accounting shifts, and roughly $600 million on top of that to bring reserves up to the level recommended by the state?s Council of Economic Advisers.
Rising health costs drive increase
The deficit in the next budget cycle occurs because projected revenue increases of $254 million will be wiped out by projected spending increases of $556 million. Most of the revenue increase comes from higher income tax collections; revenue from corporate income taxes, motor vehicle taxes and sales taxes actually are expected to decrease.
The increases in spending ? which are projected based solely on current law ? occur primarily in higher education (where enrollments continue to rise) and in state health insurance plans (where costs are expected to increase 27 percent).
The structural problem remains evident in the Finance Department?s initial forecast for the 2008-?09 budget. That two-year projection foresees a similar deficit of $1.35 billion if inflation is included.
Fewer potential solutions
Ingison refused to make recommendations on how to close the budget deficit, but did call it is ?highly inadvisable? to raid budget reserves. She also pointed out that many of the tactics used to erase earlier budget deficits ? spending cuts, accounting gimmicks and one-time resources such as depleting the state?s tobacco endowment ? no longer exist. In fact, she said, ?significant use of one-time items is the reason we?re still dealing with this.?
Representatives of labor and non-profit organizations said it was time for Gov. Tim Pawlenty to give up his ?no new taxes? approach and take a realistic approach to the state?s budget woes.
?The state revenue forecast demonstrates the fact we can?t run government by slogan,? said Eliot Seide, executive director of AFSCME Council 5, which represents 40,000 public employees in the state. Noting that ?we have insufficient revenues,? he said: ?We need real solutions to real problems.? We badly need investments in transportation, education, public safety, and health care.?
Who pays the price?
Wayne Cox, executive director of Minnesota Citizens for Tax Justice, which is supported primarily by unions, said the state needs to close corporate tax loopholes, raise the cigarette tax, and restore previous tax rates on the wealthiest 1 percent of Minnesota citizens.
?The answer to this structural deficit is to return to the tax system that we had in past years,? he said. ?Why should those people continue to get $5,000 a year in tax cuts when in order for that to continue, we?ve got to deny health-care services to people, we?ve got to continue to have these overly congested highways, we?ve got to continue to price people out of the University of Minnesota? That?s the price we pay for continuing those types of tax cuts.?
Pawlenty likes to claim that no one can argue Minnesota is taxed too little, Cox said. “In fact, Minnesota is taxed too little to provide for its basic services.” Under the current tax system, he noted, the state “has no capacity to weather any downturn in the economy. We’re extraordinarily vulnerable.”
Seeking long-term solutions
The Minnesota Council of Nonprofits said the projected budget deficit proves previous tax reductions ?went too far? and that it?s time to return to ?fiscal responsibility.?
Among a number of proposals, the council repeated its suggestion of a temporary, 10 percent income-tax surcharge, which it says would raise $1.2 billion.
?We?ve already done too much on the spending side,? said Nan Madden, director of the council?s Minnesota Budget Project. ?We need to start looking at the revenue side.?
She said a tax surcharge should be part of broader tax reform, including recognizing that the state?s current tax system isn?t keeping up with changes in the economy and technology. For instance, Madden said, the economy is shifting away from goods toward services.
?Goods largely are taxed, services largely are not,? she said. ?I think we need to start looking at changes in those areas.?
In addition, she noted, most of the projected increases in state spending are in health care. ?When we look at most other areas of budget, those areas actually are going to spend fewer dollars than they did in the 2002-2003 budget cycle,? Madden said.
Michael Kuchta edits the Union Advocate, the official publication of the St. Paul Trades & Labor Assembly, AFL-CIO. E-mail him at advocate@mtn.org