Minnesota legislators are in their districts this holiday weekend, collecting advice about how to right the worst imbalance between revenues and expenditures seen on state balance sheets in modern times.
Today we add our counsel. The Star Tribune Editorial Board favors a mix of remedies, including significant spending cuts, tax increases and one-time money. We support shared sacrifice, but also urge setting priorities to position Minnesota for future prosperity. We ask that the one-time money in the next budget be viewed as bridge funding, to be spent restructuring government for a leaner tomorrow.
State receipts in the next two years are expected to fall $6.4 billion short of the amount needed to fund current-law obligations. That's a 20 percent fiscal gap that the Legislature is constitutionally obliged to close before July 1.
Fortunately, significant help is available from the federal government -- $2.6 billion. Minnesota should take full advantage of it. Of course, that help is temporary. It disappears on Jan. 1, 2011, before the next state biennium ends. That's why it's important for this Legislature to confront not only the remaining $3.8 billion deficit, but also the state's long-term financial condition.
A blue-ribbon panel earlier this year reported that a chronic imbalance exists between the taxes Minnesota collects and the cost of its programs. That imbalance accounts for as much as 40 percent of the deficit, said panel cochair Jay Kiedrowski, a former state finance commissioner.
Erase the deficit primarily with one-time money, as Gov. Tim Pawlenty proposes, and the built-in imbalance will only return with a vengeance in 2012-13.
One of Pawlenty's one-time money proposals is particularly objectionable. He would borrow $1 billion and pledge future state revenues to pay the debt service. That's like taking out a second mortgage to cover this year's mortgage payments. It pushes the problem ahead, and makes it worse when it recurs.
We prefer a larger dose of permanent fiscal medicine. Our plan includes about $1.4 billion in spending reductions and $1.5 billion in tax increases.
Pawlenty persuasively argues that all state spending is not of equal importance. In the global economic race, Minnesota enjoys one overriding advantage -- its well-educated workforce. Preserving that edge is vital to sustaining prosperity and a high quality of life in this state.
Those principles and priorities lead us to these recommendations:
• Freeze all education spending -- not just K-12 -- at 2008-09 levels. Pawlenty's proposal to give K-12 a funding increase, while cutting early childhood and higher education, does not acknowledge the value of learning by Minnesota's youngest and oldest students. Economic analyses suggest that preschool spending may bring the highest rate of return on any tax dollar spent. Minnesota's higher-education tuitions are already among the highest in the country. Our education spending freeze would book an additional $175 million against the projected deficit.
• Rein in human services spending. Galloping health care costs are making the need to cut acute, not just in Minnesota but around the country. An infusion of federal money is shrinking the projected biennium-to-biennium growth rate in this part of the state budget from a whopping 19 percent to about 12 percent. It needs to fall into single digits. The Legislature should strive for at least a $750 million spending reduction.
• Send $250 million less than projected to local governments and disadvantaged property taxpayers. Pawlenty has proposed even larger cuts. But the need for local government services swells during hard times, and the property taxes that rise when local budgets are under stress pinch business as well as family budgets.
• Cut spending or raise fees totaling at least $250 million from smaller state programs. But among them, the judiciary, a bedrock government function, should be singled out for gentler treatment.
• Book no more than $750 million by delaying payments to schools. A few weeks' delay in midsummer payments to districts -- the "school aid shift," in Capitol parlance -- is a time-honored budget management tool during recessions. Pawlenty proposes to use it for a one-time $1.3 billion gain in 2010-11. For the start of a biennium, that's excessive. The school shift serves as a hidden reserve fund. It ought to remain available for deployment if the economy tumbles late in a budget period, when time has run out on other options for keeping the books in the black.
• Generate more revenue from consumer taxes. The cuts and shifts we favor leave about a $1.5 billion gap to be closed with tax revenues. We think they should take several forms. Our first choice is one we've urged for decades: Apply the sales tax to clothing purchases. Minnesota is one of only five states that collect a sales tax but spare clothing; the other four all once were home to the textile industry. This state is home to the Mall of America. Exempting clothing misses a fine chance to tax out-of-state shoppers.
We also favor extending the sales tax to more services purchased by consumers -- but not businesses. These include such things as personal grooming, auto repair and home maintenance. Services comprise an ever-bigger share of consumer purchases, and with a few exceptions largely go untaxed in Minnesota. That should change.
A boost in the cigarette tax also belongs in the mix, as a deterrent to smoking and a payment for the public health cost of tobacco use.
So does a down payment on the reform of the state income tax code that should unfold in coming years. The state tax code allows too many exemptions, deductions and credits. These "tax expenditures" have accumulated through the years; many of them produce questionable results. Five Minnesota-based foundations recently suggested eliminating tax expenditures and replacing some of them with closely monitored grants, for the sake of better bang for the tax buck.
Chipping away at tax breaks is preferable to raising the income tax rate on incomes greater than $250,000, as some legislators propose. Creating a "fourth-tier'' would involve imposing a high tax rate that would make Minnesota an outlier among the states. Further, high-end filers include many small-business owners who report business profits as well as their own salaries on their personal tax returns. In the midst of the worst recession most Minnesotans have known, squeezing businesses should be avoided.