It’s a tale of two state budget forecasts

by T.W. Budig
ECM Capitol reporter

State officials took the unprecedented step of crafting two November state budget forecasts, the second and more dire showing the economic wallop of having the nation plunge off the federal fiscal cliff.

It’s a tale of two outcomes.

“This isn’t a gloomy forecast,” State Economist Tom Stinson said the November budget forecast shorn of fiscal-cliff implications.

Because state general fund revenues are expected to exceed end-of-session projections by about $1 billion, the extra dollars by law will buy down the $2.4 billion K-12 funding shift by more than half, leaving about $1 billion outstanding.

“After a decade of under funding, Minnesota schools will certainly appreciate the $1.3 billion payback of the state’s IOU, which is required by law,” Education Minnesota President Tom Dooher said in a statement.

But ultimate gloom could be injected into the forecast by events in Washington, Stinson warned, should Democratic President Barack Obama and Congress fail to avoid the automatic spending cuts and tax increases of the federal Budget Control Act, penalties exacted by failing to achieve a federal budget agreement.

Potential impact to the state resulting from such a failure are stark.

The state’s budget forecaster, Global Insight, foresees a recession beginning in early 2013 nationally if federal officials are unable to reach a budget settlement.

State income tax revenues could plummet by more than a $1 billion, sales and corporate taxes by at least $350 million and $250 million, respectively, it’s estimated.

The state budget deficit if a federal budget meltdown occurs could approach $3 billion — about $1 billion in deficit already is projected.

Beyond this, a recession could see the state’s current 5.8 percent unemployment rate rise to 7.1 percent in 2014, with personal income declining by more than four percent in 2015, state officials warn.

“We still have some tough decisions and heavy lifting to do,” Management and Budget Commissioner Jim Schowalter advises incoming freshmen lawmakers to the Minnesota Legislature.

One glint of light amidst the gloom is that a large part of the federal automatic spending cuts would fall on the Defense Department.

And that would leave the state relatively unscathed because there are few defense contractors here, Stinson explained.

“That’s good for Minnesota,” he said.

The state budget picture is as uncertain as he has ever seen it, Senate Majority Leader-designate Tom Bakk, DFL-Cook, said.

“That seems a little optimistic to me,” Bakk said of the players in Washington arriving at a budget solution.

House Speaker-designated Paul Thissen, DFL-Minneapolis, indicated lawmakers would need to look at both spending cuts and possible tax increases in formulating the state budget.

“Every time we have faced the deficit we have failed to take the longer view,” said Thissen.

The state’s tax system was “broken” and needed to be reformed, Bakk said.

Revenue Commission Myron Frans had the best insights on the tax reform as he has been travelling the state, meeting with the public on the issue of taxation, Bakk said.

Raising taxes and tax reform, to him, were two different topics, argued Bakk.

He deemed it “unlikely” that tax reform would include broadening the sales tax to include clothing.

But Bakk and Thissen in general avoided talking about possible tax increases.

Dayton, who began a late afternoon press conference with a moment of silence to remember fallen Cold Spring Police Officer Thomas Decker, who was killed in the line of duty and whose funeral Dayton attended, was more direct.

“I think you can expect it will be very likely,” Dayton said of a tax increase being included in his proposed state budget.

The budget normally is presented in mid-January.

“I am not proposing to raise taxes on all Minnesotans,” Dayton explained, holding aloft two fingers.

He has been proposing to raise taxes on just the upper two percent of Minnesotans, Dayton explained.

If enacted by the Democratically-controlled legislature, such an increase would bring in about $1 billion a biennium.

Dayton insisted the final decisions regarding his proposed state budget have not yet been made.

The governor was in Washington this week and believes a federal budget agreement will ultimately be hashed out.

“I think they’ll reach an agreement because the means to do so are there,” Dayton said.

He was absolutely committed to crafting a state budget without budget gimmicks, Dayton said.

“We’re done with the gimmicks. We’re done with the games,” he said.

Dayton indicated that making additional budget cuts would be difficult.

He suggested the budget situation has been made more difficult by Republicans refusing to accept his proposed tax increases in the past.

Republican legislative leaders indicated they are no more interested in tax increases in the future than in he past.

They heralded the state budget forecast as good news.

Senate Minority Leader-designate David Hann, R-Eden Prairie, argued the Republican legislature over the past two years largely managed to turn around the state budget through its fiscal prudence.

“We did not want to do that,” he said of raising taxes.

Indeed, the best way of continuing the turnaround — state budget officials view the state economy as currently slowly improving — was to propose tax cuts, Hann said.

House Minority Leader-designate Kurt Daudt, R-Crown, relished the idea.

“Let’s shoot for the stars,” he said.

Holding aloft a state budge forecast, Daudt argued the generally upbeat forecast proved that the Republican approach was correct.

“They’re (Democrats) not going to find that here,” he said of reasons for raising taxes.

The state will begin its school shift payback within a few weeks.

Currently, the state funds its schools at a 64.3-35.7 payment schedule — this reflects the shifts crafted by Republican and Democratic leaders in past sessions.

With the buy-down, the funding schedule for schools will change to 82.5-17.5.

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