If the state of Minnesota were a business (which in many ways it is), and one that was losing money (which, with a $1.1 billion budget shortfall, it most definitely is), its chief executive would look for solutions in the following order of priority:
1) Cut expenses to stop the bleeding;
2) Invest in initiatives to grow revenues, and only then ...
3) Explore the possibility of raising prices.
Raising prices is last on the list because doing so often worsens the cycle of decline, increasing the risk that clients and customers will move their business to competitors, hurting revenues and further increasing losses.
Making investments to grow revenue is a great long-term solution. But the money for those investments needs to come from somewhere, and if raising prices isn't possible, then cutting expenses is the only source for funding.
Which brings us back to option No. 1.
Regrettably, cutting expenses seems to be the last thing on our political leaders' list of options -- whether in St. Paul or Washington. Our state and federal governments are both suffering from structural deficits caused by expenses (government spending) growing faster than revenues.
In his budget proposal for the 2014-15 biennium, Gov. Mark Dayton has put the governmental equivalent of raising prices at the top of his list, by raising $2.1 billion in net new taxes.
In fact, the governor's budget includes $12 of proposed revenue increases for every $1 of spending cuts.
Just as it would in a business enterprise, this has the potential to put us on the path of competitive decline.
The state operates in a competitive marketplace. Big corporations, small businesses and their employees are its customers, the consumers of government services.
Minnesota has always been a "premium pricer." The cost of government services is higher here than in states like South Dakota, Alabama or Texas.
But our value proposition has always been a better quality of life than is found in other states -- an unequaled confluence of Fortune 500 companies; more leading cultural institutions per capita in the Twin Cities than in communities of comparable size; numerous high-quality public and private schools, colleges and universities; plentiful and well-maintained public spaces, and low crime rates.
Today, more than ever before, Minnesota competes with other states for businesses and for the well-paid, educated, civically engaged employees who come with them. And in today's service-intensive and technology-enabled global economy, businesses and their employees are more willing and able than ever to move out of the state, or never come here in the first place, if the price we ask them to pay for government services gets too high relative to our quality-of-life value proposition.
The math is simple: Any government whose spending grows faster than its revenues will eventually have to price itself out of the market for creating, attracting and retaining jobs.
That's exactly what we risk in Minnesota, where state government spending is increasing at a rate of 7.6 percent, while tax revenues (before the governor's budget proposal) are increasing by only 2.4 percent.
There are two options for fixing this structural deficit and for funding the investments we need to promote economic growth. Raise prices/taxes. Or cut expenses/spending.
I know what a CEO would do. The governor should do the same.
John Taft is CEO of RBC Wealth Management in Minneapolis.