Better-than-expected revenue will shrink Minnesota's 2006-'07 budget deficit by $234 million, but not come close to wiping the deficit out, the Finance Department projected Monday.

"It's improvement," finance commissioner Peggy Ingison said. "It's good news that we're moving in the right direction."

The forecast now predicts a deficit of $466 million for the state's next two-year budget. That is the number the Legislature and governor must erase before that budget takes effect on July 1.

However, the projected deficit could be $700 million worse, reaching nearly $1.2 billion, if calculations actually included inflation when figuring expenses.

"It's slightly good news from the standpoint that it's up, but we're still looking at a $1.2 billion deficit overall," said Julie Bleyhl, legislative representative for AFSCME Council 5, which represents about 41,000 public employees in the state.

"We're glad that things aren't any worse," said Marcia Avner, executive director of the Minnesota Council of Nonprofits and a leader in the Minnesota is Watching coalition of labor, faith-based and nonprofit organizations. "But as the commissioner and the state economist state, they're only marginally better. We don't think this makes any difference in the landscape of this legislative session.? We're still facing a really dire situation."

Revenue continues to fall short
Avner pointed out that Gov. Tim Pawlenty proposes to reduce the budget deficit, in part, by eliminating access to health insurance for 41,000 working Minnesotans, and through what she calls "further erosion in the social and physical infrastructure of the state."

"I think we're still facing a budget that means further erosion ? and erosion in health care that's going to be unacceptable to the people of Minnesota when the understand what it means.

Bleyhl said the governor's budget doesn't address the current needs of the state, the long-term needs of the state, doesn't allocate money for pay increases for state employees, and probably will result in further job cuts in state agencies.

Avner and Bleyhl both said that, given those realities, the state must consider tax increases as part of the solution to eliminating the state's ongoing revenue shortfall. "At this point, we're looking at various proposals and options that may have some potential of making it through the process," Bleyhl said. "It's very difficult when we have a governor that's locked into a ?no new tax' pledge."

"We would argue that we've got to have taxes as part of the solution," Avner said. The Council of Nonprofits, for example, has proposed a temporary, 10 percent income-tax surcharge that would raise $1.3 billion in the 2006-'07 biennium ? enough to erase the projected deficit and give the state time to find a more permanent solution to its revenue problems.

Projections based on huge increase in jobs
The smaller deficit projection is entirely the result of higher revenue forecasts, said state economist Tom Stinson. The state expects $115 million more in sales tax revenue, $89 million more in corporate income taxes, and $71 million more in individual income taxes than was forecast in November. Those increases offset $41 million in decreased revenue from the motor vehicle sales tax and other sources.

Increases in sales and income tax revenues rely primarily on expectations that the state will add more than 44,000 jobs this year, Stinson said. That would nearly twice as many jobs as the state added in 2004, and a sharp reversal of a trend that saw Minnesota add only 5,000 jobs in the last eight months of 2004.

That lethargic job situation continues even though the economy grew by 4.4 percent in 2004, the second-highest rate in the last 15 years.

Stinson said it remains unclear why a strong economy is not generating more jobs. But the forecast's optimism in employment comes from recent decreases in new and continuing claims for unemployment insurance, which suggests that fewer Minnesota workers are losing the jobs they have, he said. However, there are no clear indicators that sizeable numbers of new jobs are being created, he acknowledged.

Inflation expected to be cut in half
Similarly, projected increases in corporate income taxes are based on an increase of estimated payments made during the last quarter of 2004. How accurate those increases end up being may not be known until late summer.

The improved budget projection also relies on an average inflation rate of 1.7 percent over the next two years, compared with 3.4 percent in 2004. Stinson said lower oil prices are expected to offset price increases in other areas.

Stinson also emphasized that the forecast is just that ? a forecast. "Can we do better? Yes. But we can also do worse." He said the declining value of the dollar on world currency markets, the continuing U.S. budget deficit and the growing U.S. trade deficit all pose potential problems for the national and state economies.

The budget projections also improved for the 2008-'09 biennium, by $214 million overall. That would leave the state with a budget surplus of $704 million, based on spending required by current law. However, after factoring in the effects of an estimated $2 billion in inflation, that surplus actually turns into a $1.3 billion deficit.

Michael Kuchta edits the St. Paul Union Advocate, the official publication of the St. Paul Trades & Labor Assembly. E-mail him at advocate@mtn.org