Legislature shouldn't take risks with Minnesota's future budget stability

Editor's note: Thank you to the dozens of readers who answered our invitation for questions about the 2018 session of the Minnesota Legislature. Lori Sturdevant answers several readers in her column, and we chose this question, submitted by Chuck Hansen of Waterville, Minn., to answer in the following editorial: "I realize that the state Constitution only demands that the current biennium be in balance, but why don't the House and Senate look forward to coming years? Didn't we learn anything from former Gov. Tim Pawlenty's tenure with borrowing from school districts and punishing cities and counties for unsustainable tax policy when legislators have no stomach for specific reductions to programs?"

Chuck Hansen had state government's fiscal stability on his mind when he responded to the Star Tribune Editorial Board's call for questions about the 2018 legislative session. Here's our response:

Mr. Hansen, you may be pleased to know that state government's fiscal health in the coming decade is on lawmakers' minds, too. It emerged last week as a point of contention between DFL Gov. Mark Dayton and the Republican-controlled Legislature as the year's big tax and spending bills moved into conference committees.

It's good to see their argument take that turn. When the state budget falls into deficit, Minnesotans are subjected to a range of unwelcome consequences, from cuts to schools and public safety to sudden increases in fees and taxes, all for the sake of adhering to the constitutional requirement to which Hansen refers — the state is barred from carrying a deficit from one budget period into the next.

A number of measures under conference committee consideration and one feature of Dayton's tax proposal appear to be flirting with future financial trouble. We find these items worrisome:

• The Senate's "trigger tax cuts." What may be the most pernicious of this year's threats to a balanced budget has a cost that registers as "unknown" on Senate spreadsheets through 2021. The Senate bill says that if and only if a surplus is forecast when state receipts are projected each November, individual and corporate tax rates will automatically be reduced by 0.1 percent in each bracket. State revenue officials project the provision's potential cost to the state treasury in year one, 2020, at about $200 million.

That modest-sounding sum would swell whenever a surplus appears. Tax cuts would be ahead in line of every other claim on state funds, including the need to maintain reserves. If future legislators preferred to use surplus dollars to meet other state needs — or if economic conditions changed after a November forecast was issued — they would have to cancel an already-delivered tax cut. That's a politically difficult thing to do, as shown by this year's resistance to extending the life of the circa-1992 health care provider tax past its scheduled 2019 sunset.

• The House's phased-in tax rate reductions. The House is similarly trying to cut taxes both now and in the future, albeit more directly than the Senate. Its tax bill phases in both individual and corporate income tax rate reductions over three years, betting on the come that state revenue in 2020 and beyond will be robust enough to allow for larger tax cuts than the state budget could handle today.

The bite out of revenue that the House bill would take is forecast to grow quickly and dramatically, from $130 million in the current budget period to more than $570 million in 2022-23. House leaders cite the state's latest budget forecast to defend the affordability of growing tax cuts. But that forecast only projects through mid-2021 — and by the Legislature's own design, it does not include the impact of inflation on most items on the spending side of the budget ledger. That skews today's view of the affordability of cuts in the future.

• The use of one-time gains for ongoing purposes. Both Dayton's own tax proposal and, to a lesser extent, the House tax bill propose ongoing uses for money the state hopes to collect from U.S. corporations that take advantage of the new federal law's eight-year low-rate window to "repatriate" profits they have heretofore attributed to their foreign operations.

That presents two potential problems for future state budgets. The anticipated repatriation is a one-time revenue gain, not a continuing funding stream. And the state's attempt to tax those previously foreign profits is almost certain to be challenged in court. State budgeters should avoid using such uncertain revenue for continuing costs.

• There's more. Legislators are at work on a constitutional amendment to take a bite out of the general fund — the receipts from sales taxes on vehicle repairs — and dedicate it to highway funding. According to the Dayton administration's analysis, that bite would start at $167 million in the current budget period and grow to more than $650 million in 2026-27.