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Legislature must balance budget with eye on Pawlenty's pledge
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Incoming Senate Majority Leader John Hottinger of St. Peter says he's skeptical Pawlenty can erase the deficit through spending cuts alone without causing major disruptions to government services. (MPR Photo)
If voters knew one thing about Republican gubernatorial candidate Tim Pawlenty it was this: under no circumstances, he said, would he raise state taxes. Now, Gov.-elect Pawlenty is facing a $4.5 billion budget deficit over the next two years, far bigger than most had anticipated. Pawlenty says the unexpected size of the shortfall hasn't diminished his resolve to stand tough on taxes. But critics say his pledge could damage the state's long-term prospects.

St. Paul, Minn. — Out on the campaign trail, Gov.-elect Pawlenty knew the state was headed for a budget deficit. But as recently as a month ago, even the more pessimistic forecasts called for a shortfall in the $2 billion to $3 billion range. When the official projection weighed in at $4.5 billion, some suggested all bets on how to address the deficit were off. Pawlenty wasn't among them.

"Well, I certainly have been urged to reconsider the no-new tax position because of the magnitude of the deficit has gone up times two," he says. "But I don't think that's right for the times. And I don't believe in that. This is not like we are losing revenues. The situation is the money coming in the door from the taxpayers continues to increase. And the appetite for government spending in Minnesota simply needs to be slowed down."

Pawlenty appears well-positioned to maintain his committment. After November's elections Republicans in the Senate are now only two votes shy of a majority. And House Republicans hold a convincing 30-vote lead over DFLers in that body.

House Speaker Steve Sviggum worked closely with Pawlenty during the incoming governor's days as House majority leader. Sviggum says Republicans are anxious to see the new administration succeed.

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Image House Speaker Steve Sviggum

"I will stand there with the governor. I want to see what the options and the choices are, because I believe in him, and I believe that his philosophy; that there needs to be some tough decisions to be made. But I don't suspect that the governor would ever sign a bill that has a tax increase in it," says Sviggum.

Even Democrats say they're leery of proposing tax increases in the face of a certain veto. Incoming Senate Majority Leader John Hottinger of St. Peter says he's skeptical Pawlenty can erase the deficit through spending cuts alone without causing major disruptions to government services. But Hottinger says the Senate will examine the new governor's plan before offering its own alternative.

"We'll be open and we'll listen to them and we'll analyze them. But we are certainly concerned that the consequences will not be fairly shared across the board. And that they will be too much; they will damage Minnesota's strengths, its quality of life," he says.

The no-new-taxes pledge obviously limits Pawlenty's options. But David Strom says that's precisely the point. Strom is the legislative director for the Taxpayers League of Minnesota, the group that urged candidates to take the no-tax pledge.

"Pawlenty has the strongest negotiating position possible, which is, 'Look, I've made certain promises to the people. And I got a mandate. You know, I won by eight or 10 points.' Everyone believes that he's going to veto a tax increase. And because of that, people are not going to go down that rabbit hole," according to Strom.

Pawlenty's tax position also has the backing of the state chamber of commerce. Bill Blazar, a senior vice president with the chamber, says resisting tax increases will help stimulate economic activity, leading, in the long run, to increased state revenues. But he says it's also critical that policymakers use the deficit as an opportunity to reinvent state government.

"Our population is aging. The rate of growth of our workforce is declining. We really do need to rethink the way we provide state and local government services. Otherwise, the problem that we have right now will just keep repeating itself even in a growing economy. So, we need to change our ways. And this is as good an opportunity as any to do that," says Blazar.

Critics of the no-new-taxes pledge say its logical corollary is that spending on state services will necessarily drop -- precisely when more Minnesotans are turning the state assistance to weather the economic downturn.

Nan Madden, the director of the Minnesota Budget Project, notes that during the boom years, tax rates shrank and rebate checks flowed from the state treasury. "And it seem like just common sense to me that if in a surplus time you divide those extra dollars out between spending and tax cuts -- and they were divided about equally -- it just seems to makes sense that now we need to look at both sides of the equation."

Madden also points out that a sizeable portion of the supposed growth in state government spending -- as much as a third of it -- is actually attributable to property tax reforms passed in 2001. The state is spending roughly $1 billion a year more than it used to in order to relieve local property tax payers of the basic K-12 education costs. But even with that buydown of taxes, property levies are creeping back upwards.

And some observers warn that Pawlenty's no-new-tax pledge will cut into funding for local governments and schools, forcing them to accelerate the property tax hikes.

Just before Christmas, the incoming governor petitioned outgoing governor Jesse Ventura to cancel a portion of city and county aid due at the end of the year. Ventura refused. Cities breathed a sigh of relief.

But Austin Mayor Bonnie Rietz says local officials know future funding remains uncertain. And she says any cuts from the state will increase pressure to raise local fees and property taxes.

"Most assuredly. By cutting that local government aid, it is a shift, then, to the local taxes. And they, in fact, will need to go up to cover those basic services that we need in outstate Minnesota," Rietz says.

But Pawlenty says he doesn't accept that argument. He says, if necessary, he'll consider a cap on the ability of local governments to raise their tax levies. And he's asking local officials to answer his call for more efficient government.

"And so if we were, for example, to modestly reduce their local government aids by three or five percent, the answer can't be they're just going to jack up their levies by three or five percent. They, too, should be asked to reorganize, streamline, reprioritize, downsize, outsource, use early retirements or attrition, or find better ways to perform their services," according to Pawlenty.

Pawlenty's no-new-tax pledge, however, doesn't quite rule out all revenue increases. The state collects millions in so-called user fees meant to support specific services: hunting license fees, licensing fees for beauticians, attorneys, and plumbers. Pawlenty says increases in such fees remain on the table. But he notes it's unrealistic to expect fee revenues to cover a $4.5 billion gap.

"We would take a dim view of them as a way to balance the budget. But if there are services being provided that were originally intended to be user-fee-funded, and those fees aren't supporting the programs fully, we would be open to some fee increases," he says.

Some, at least, smell a loophole. Already cigarette and gasoline taxes are being repackaged by hopeful constituencies as user fees.

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