Dayton joins appeal on fiscal cliff

WASHINGTON - With his own budget outlook in doubt, Minnesota Gov. Mark Dayton and a bipartisan group of governors sought assurances from President Obama on Tuesday that any looming federal tax hikes and budget cuts will not throw the states over a fiscal cliff.

The 90-minute meeting came as Minnesota budget officials were preparing to release a new state economic forecast on Wednesday, which will serve as the basis of the two-year budget plan the DFL governor will present to the Legislature in January.

"It's implicit that if you're going to cut a trillion dollars or more out of the spending side of the federal ledger, that's going to add up to very serious money for all the states," Dayton said after meeting with Obama and other White House officials.

Dayton and other executive committee members of the National Governors Association made the same pitch to GOP House Speaker John Boehner, Senate Democratic Leader Harry Reid and other congressional leaders.

With fiscal cliff negotiations at an impasse, the White House and Capitol Hill meetings provided a chance to exert bipartisan pressure from outside the beltway to reach a deal.

Dayton said the governors -- three Republicans and three Democrats -- did not take sides as a group between Obama's plan to raise taxes on the wealthy and Republican proposals to cut entitlement spending in Medicare, Medicaid and Social Security.

Instead, he said governors made a plea for maximum flexibility in dealing with any budget cuts so that they are shared and not simply shifted onto the states. "That kept us focused where we agree about the need for the governors to be involved in the decisionmaking process," he said.

Dayton said that a third of Minnesota's overall budget comes from the federal government, with the biggest chunk made up of Medicaid and other health programs. "Like every other state, we have a big stake in these decisions," he said.

Uncertainty hurts planning

State finance officials have been warning for weeks that their budget planning is being hindered by uncertainty over the so-called cliff, a combination of dramatic federal tax hikes and spending cuts scheduled to go into effect after Dec. 31.

"We are trying to figure out what happens if we go over the fiscal cliff," said state economist Tom Stinson.

Dayton noted that Minnesota was among the first states to expand Medicaid, and is setting up a state-run health insurance exchange to meet the requirements of the new federal health care law. "So if the federal government pulls back significantly on either one of those in terms of their financial commitment, that would be a serious problem," he said.

The report suggests that consumers in Minnesota could spend nearly $3.6 billion less than they otherwise would in 2013 just because of higher taxes on the middle class.

In an effort to head that off, Minnesota Democrat Tim Walz launched a legislative effort Tuesday to force a House vote on extending the Bush era tax cuts on the first $250,000 of income -- something that he said would help "100 percent of Americans." The effort would require 27 Republicans to join in. So far, none has.

With only a few weeks for Congress to bang out a deal with the White House, economists are warning of a slide back into recession in 2013, which could put further pressure on regional economic growth, state revenues, and an array of health and safety net social programs.

Meanwhile, Republicans continue to balk at raising tax rates for the wealthy, while some Democrats are drawing a line at cutting entitlement programs such as Medicare, Medicaid and Social Security.

On the upside, Minnesota is one of 25 states that could collect more in taxes as a result of going over the cliff, according to new research from the Pew Center on the States. That's because the state's tax code is linked to certain federal deductions and credits that are scheduled to expire. That could result in more income subject to state taxes, at least in the short term.

The state's last forecast in February -- before fears arose of confronting massive federal budget dislocations -- anticipated a $1.1 billion shortfall in the next two-year budget period.

Kevin Diaz is a correspondent in the Star Tribune Washington Bureau.