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DocumentNews Forum: How should the state cut the deficit?

Budget deficit expected to hit $4.5 billion over next 2.5 years
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Members of the Welfare Rights Coalition picketed outside the room where the budget shortfall projection was unveiled. They say they fear the deficit will be balanced "on the backs of poor people." (MPR Photo/Laura McCallum)
State finance officials say that Minnesota's budget deficit over the next two-and-a-half years is expected to top $4.5 billion. The deficit is larger than any legislative leaders had predicted, and is the biggest challenge facing Gov.-elect Tim Pawlenty, who says he won't raise taxes to fill the budget gap.

St. Paul, Minn. — Finance officials have been warning for months that the projected deficit could top $3 billion, but the actual number is much worse. It's about 13 percent of the state budget.

"The deficit that's facing state government can only be described as massive, and it could get worse," according to Gov.-elect Tim Pawlenty, who says he knew he was walking into a big deficit, but admits the size is larger than he thought it would be.

Several factors led to the higher-than-expected number. At the top of the list is the plunging stock market, which affects capital gains taxes collected by the state.

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Image Gov.-elect Tim Pawlenty

State economist Tom Stinson says Minnesotans had $9 billion in capital gains taxes from the stock market in 2000. "It now appears that capital gains have fallen from $9 billion to about $4 billion in 2001. It's one of these gifts that keep on giving, it extends onto 2003, 2004 and 2005," according to Stinson.

Other factors are an economy that has been slow to recover from the recession, and higher spending by the state, particularly on education and human services.

About half of the education increase comes from the property tax reforms of last year, which shifted the entire cost of the basic education formula to the state. Another chunk of the increased spending comes from rising demand for state-funded health care programs due to the recession.

It's the largest deficit Minnesota has faced in two decades. The deficits of the early '90s were smaller as a percentage of the state budget. The current budget hole is similar in size to the deficits of the early '80s. Back then, lawmakers used accounting shifts and raised the sales tax to balance the budget.

Finance officials say there aren't many accounting shifts that can be used now. Already, lawmakers have virtually eliminated inflation in the forecast. If that were taken into account, the deficit would be even higher.

"So for the average household, just imagine about 20-percent of your paycheck disappeared," said House Minority Leader Matt Entenza, DFL-St. Paul, who says now Gov.-elect Pawlenty will have to come up with a way to plug the budget hole.

Pawlenty says Minnesota faces an enormous challenge, but one that can be solved. "This big budget deficit is now my problem. And it is now my responsibility. And we intend to fix it," Pawlenty said.

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Image Delivering the bad news.

Pawlenty says he stands by his "no tax increase" campaign pledge. He says the budget he delivers to the Legislature will not include a tax increase.

"The situation does not call for tax increases. That is not on the table. But nearly everything else will be. And we're going to ask everybody to contribute, and the solution is going to be about leadership and it's going to be about teamwork," he said.

Pawlenty says he'll ask the Legislature to agree with him not to raise taxes. DFL leaders aren't willing to do that at this point. Senate Majority Leader John Hottinger, DFL-Mankato, says Democrats will work with Pawlenty, but it's Pawlenty's job to come up with a balanced budget.

"The campaign's over, and now it's time for the governor to deliver," Hottinger said.

Advocates for low-income Minnesotans say they're worried that at a time when more people need state services, Republicans will want to slash government programs.

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Image Gov. Jesse Ventura

Members of the Welfare Rights Committee protested outside the budget forecast release. They worry that the budget will be balanced on the backs of poor people. Kim Hosmer says lawmakers squandered the budget surpluses of several years ago on tax cuts for the rich.

"While the rich were getting richer and getting big tax breaks, the number of kids becoming homeless in Minnesota skyrocketed. While the rich lined their pockets, more and more of our families stand in line at homeless shelters and soup kitchens. We say, make the rich pay," Hosmer said.

Groups such as the Children's Defense Fund and Minnesota Council of Nonprofits are already calling for a tax increase to balance the budget. They say a budget based on spending cuts will hurt children and vulnerable Minnesotans.

But conservative groups say Minnesota's spending is the problem. David Strom of the Taxpayers' League, the group that asked Pawlenty to sign the no-tax-increase pledge, says state government needs to go on a diet.

"We're outspending what we have. And so what we need to do here is, for the first time in a long time, take a realistic look at how fast revenues can grow at the state level on a long-term basis. You cannot increase spending at an 18-percent biennial rate forever, and that's what we've been doing for the last decade," according to Strom.

Other groups argue that some of that spending stems from the tax cuts of the past few years. The executive director of Minnesota Citizens for Tax Justice, Wayne Cox, blames the property tax cuts pushed by Gov. Ventura and House Republicans.

"And they said it would all be paid for by the surplus; not one penny of the surplus ever came about. Well over half of this deficit is caused by new spending for the property tax cuts that was done last year," Cox said. But tax cut supporters say that's not the reason for the deficit. Bill Blazar of the Minnesota Chamber of Commerce, which supported the property tax reforms as a way to lower business property tax rates, says Minnesota has made significant strides over the last four years in becoming more competitive with other states.

"And we don't want to move backwards on any of that. I think there's great evidence -- in fact, there's decades of evidence -- that had we not cut the income tax and fixed the property tax, we would have just spent the money on something else, and we would have had an even bigger problem," according to Blazar.

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Image Targeting the tobacco endowment

Gov. Ventura stands by the tax cuts he pushed, and the rebate checks that marked his term in office. He says people spent their rebates, boosting the economy. And when the economy began to slide, Ventura says he warned Minnesotans that the good times were over.

Last year, he recommended fixing the deficit with a combination of tax increases and spending cuts. Ventura says if lawmakers had heeded his advice, the problem would be more manageable.

"We made hard attempts. And my vetoes were overridden. And this problem today does not have my fingerprints on it in any way shape or form, because I attempted to solve this problem," Ventura said.

The budget fix passed by the Legislature relied on budget reserves and accounting shifts. Now those reserves are gone, and about the only pot of money left comes from the state's tobacco settlement. Tobacco endowments set aside for anti-smoking programs and medical education and research are currently valued at around $900 million.

Republican House Speaker Steve Sviggum of Kenyon says the tobacco endowments are a likely target, along with most of state government.

"While everything is on the table, it's education and nursing homes that are going to be protected by this caucus, and taxpayers. Everything else is on the table. In fact, those are on the table as well; you can't take anything off the table, but that's going to be our priorities," Sviggum said.

Gov.-elect Pawlenty says he'll try to protect money for the classroom, but he's not making any promises. Pawlenty will submit his budget proposal to the Legislature in mid-February, shortly before the next revenue forecast is released.

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