Budget forecast cuts Minnesota deficit by 43 percent

Revenue gains from an improving economy have eased the pressure on Minnesota's long-suffering budget, providing welcome news for Gov. Mark Dayton but also fresh difficulties as he attempts to push through a series of tax increases.

Thursday's forecast of the state's revenues and expenditures, often an exercise in hand-wringing and defict-tallying, showed that the projected deficit for the next two years has been cut nearly in half, to $627 million from $1.1 billion. Expected improvement between now and June will allow the state to shave off another chunk of the debt it owes to public schools.

"Today's new budget forecast for the next two years is very good news for Minnesota," Dayton said. Given the improved outlook, Dayton said he favors giving additional tax benefits to renters and to businesses making capital purchases, and will take another look at his budget plan in light of the new numbers. But he did not say the forecast would cause him to back off his plans to increase income taxes on the wealthy or expand the base of the sales tax.

Republicans said Dayton should retreat immediately in the face of the better-than-expected news.

"It's a good day for Minnesota, a good day for Minnesota taxpayers," said House Minority Leader, Rep. Kurt Daudt, R-Crown. "A good day for middle-class Minnesotans. A good day for Minnesota job creators. The only people who think this isn't good news are the people who want to raise taxes."

The cloud among the silver linings was the weak rollout of new electronic gambling games that are supposed to help fund a new Minnesota Vikings stadium. Revenues are far below estimates, which were questioned by stadium critics during passage of the Vikings bill last year.

"The critics of the numbers are correct," said Jim Schowalter, commissioner of the Minnesota Management and Budget agency.

Thursday's forecast, based on newer national and state data, lowers the projected deficit to $627 million for the next biennium. The improving economy allows the state to further pay down its debt to schools, leaving $801 million.

Dayton pointed out that the projected deficit is about one-tenth of the $6 billion hole he faced when he took office in January 2011. "That's progress," he said.

The forecast shows that Minnesota is beginning to enjoy the fruits of a broad-based recovery in employment that includes gains in health care, trade, professional and business services, and manufacturing. "Even the long-suffering construction sector is beginning to grow, as pent-up demand for housing is reviving and construction firms are beginning to hire again," the report said. The state has now recovered about three-fourths of the 150,000 jobs lost during the recession. That contributed to gains in individual income tax revenues. In addition, health care spending — one of the state's costliest areas — also is down, due partly to negotiated reductions in managed care rates.

State Economist Tom Stinson emphasized that the improvements are modest in the overall scheme of the budget, which will total $36 billion to $37 billion over the next two years. He said the state dodged a bullet when Congress and President Obama reached an agreement to avoid the so-called fiscal cliff, whose spending cuts and tax increases could have plunged the nation into a recession.

But the state's economic advisers also warned that Washington paralysis could yet do harm.

The economists assume the automatic spending cuts to the federal budget, which will go into place Friday if Congress and the president cannot agree to change them, will take place and will last for two months.

"In the pessimistic scenario, those cuts — known as 'sequestration' — occur and persist throughout the year. But while the uncertainty produced by continued political brinkmanship reduces private sector confidence and further increases uncertainty, there is no recession," the forecast said.

Dayton's original budget plan included $500 property tax rebates, a lower overall sales tax rate, and more money for K-12 education, higher education and preschool programs, in addition to his sales and income tax proposals. He argued that most Minnesotans would see a tax reduction under his plan, but it has been attacked by GOP minorities in both legislative bodies and by business leaders as the worst thing for a recovering economy.

Dayton and DFL leaders said Thursday that they remain committed to long-term spending in education and other areas, but they would not say what level of tax increases they will support in light of the improved fiscal outlook.

"I expect to propose that most of the money be returned to Minnesota taxpayers," Dayton said, noting that he could release a modified budget proposal by mid-March.

"We need to position Minnesota in a better place structurally, for the next time we hit that economic downturn," Bakk said.

Thissen said that "this really is an opportunity for us to look forward for the first time in a long time."

Republican leaders said their stance in successfully resisting tax hikes in the last budget battle in 2011 has been vindicated.

"I think what we have shown over the last two years is the state can increase revenues without increasing taxes," Daudt said.

David Olson, president of the Minnesota Chamber of Commerce, which has been fighting Dayton's tax plan, said the state's economy is still fragile, "But obviously because it is coming back, state revenues are increasing. So why the massive tax increase?"

rachel.stassen-berger@startribune.com