State's projected deficit starts a hot debate over the next step

Minnesota is back in the red, and the $373 million deficit projected on Friday sets up a coming clash between a Republican governor determined not to raise taxes and a DFL-led Legislature hungry for revenue and new spending.

The two-year projected deficit the state faces for 2008-09 is relatively small -- barely over 1 percent of the state's $34 billion budget. But it represents a sharp decline from February, when an ongoing surplus of more than $1 billion was expected.

The long-term outlook is worse: a $1.2 billion deficit by 2010-11 if inflationary spending increases are assumed.

National economic woes have fueled the sudden turn for the worse. Declining home values, a credit squeeze and high energy prices have all shaken consumer confidence and crimped budgets just as the Christmas retail season approaches.

DFLers came out swinging hard on Friday, saying the coming shortfall was evidence of the "failed" policies of Gov. Tim Pawlenty that had shortchanged investment and strangled revenues.

"His word games have been laid bare by today's news," said Senate Majority Leader Larry Pogemiller, DFL-Minneapolis. "You can't fake your way out of inflation and deficits."

Pogemiller and House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, said they have asked Pawlenty to call a special session in December to increase revenues by closing corporate loopholes and to pass a bonding bill that they said could put 10,000 Minnesotans to work on projects across the state.

"This is not a time for hysteria," he said.

Pawlenty said he would be "delighted" to close the loophole on foreign operating corporations, which would yield about $244 million over two years. But he said that could be done when the Legislature convenes in February. The money yielded, he said, should go not into more spending, but directly to individual homeowners facing property tax increases.

Pawlenty also rejected the DFL's proposal to make the loophole closure retroactive for 2007, which he said would unfairly penalize businesses. DFLers say that by making the change in December, the state could net an extra $122 million and apply that against the projected deficit.

Recession risk higher

State economist Tom Stinson said economic growth is expected to drop off sharply in early 2008 and could continue to slump for the first half of the year.

The most dramatic decline in revenue is expected in corporate income taxes, which are projected to fall more than 14 percent.

The forecast released Friday also showed that Minnesota has fallen further behind the national average in job growth. That, DFLers say, is why the state should prime the pump with projects that are needed, overdue and agreed on by both sides.

"We have projects that are ready to go now that can put Minnesotans to work this winter," said Senate Taxes Committee Chairman Tom Bakk, DFL-Cook.

Republican legislative leaders said the state should use the shortfall as an opportunity to whittle the size of government further. "Sacrifices will have to happen," said House Minority Leader Marty Seifert, R-Marshall.

But Pawlenty said the projected budget gap is small enough to resolve without either budget cuts or increased taxes.