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A Surplus Now, but the Deficit’s On the Way

Minnesota Management and Budget has forecast a tiny surplus in the state budget for the current biennium. Great. But as Commissioner Jim Schowalter observes, “we still have lots of IOU’s” to pay back–including the “school shift” of $2.7 billion.

The press release also shows another cloud on the horizon: “The forecast shows a projected deficit of $1.1 billion for fiscal years 2014-15.”

Uh-oh.

The state’s spending trajectory is still unsustainable.

Not Enough of the Rich to Close Budget Deficits: Governing Magazine

One problem with covering deficits by singling out the rich for tax increases is that there are not enough of them. So says Governing magazine–hardly an outlet of the so-called “1 percent.”

The magazine, in its December 2011 issue, also says “The more progressive the income tax rates, the greater the volatility is going to be.” That’s one reason, I argue, why depending on the income tax, especially “soaking the rich,” is an unwise policy. The magazine cites this volatility as one reason for the recent budget deficits of California (top rate: 10.3 percent) and New York (top rate: 8.97, introduced on January 1, 2009).

While raising the taxes (only) on high-income earners is “a relatively palatable idea politically,” says Governing, “there aren’t enough wealthy people around to make up most deficits through a 2 or 3 percentage point hike on a limited pool of individuals.”

The Star-Tribune, meanwhile, says that increasing tax rates on a few people is the centerpiece of Gov. Dayton’s legislative agenda … for 2013. The governor is correct in saying that the state needs to get away from “one-time gimmicks like school shifts and tobacco borrowing.” But, to borrow from the article from Governing, the solution is not “a more progressive state income tax.” A far better path would be to some reforms to state government (also mentioned in the Strib) that would lower the cost of government.

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Update: MinnPost notes this commentary, but says that “Mr. LaPlante excludes a bit of the nuance of the article.” Well yes, I did. The fundamental point of the article is that people who expect “soak the rich” tax increases to adequately address budget deficits will be disappointed. The fact that estimates aren’t always right is a minor point. After all, you might say that another name for an estimate is a “scientific guess.” Are estimates more likely to be wrong in a recession? I don’t know. But the problem addressed in the article is more than a measurement error. As the Kellogg School of Management at Northwestern University points out, “those who experienced the greatest shock to their incomes [during the recession] were likely the top 1 percent of earners.” Legislators, overload your expectations on them at your peril.

State Revenue Forecast Gives Both Good and Bad News

The good news: the latest budget forecast shows that Minnesota has a surplus of $876 million. The bad news: the latest budget forecast shows that Minnesota has a surplus of $876 million.

While forecasted revenues will go down slightly ($24 million) from what was previously projected, the big change will be in expected spending levels (down $348 million). Of course these amounts are mere rounding errors when you consider the operating budget of about $60 billion, but still, they will make life a bit easier for legislators. Taxpayers, meanwhile, should be happy that they shouldn’t (but may still) hear calls for tax increases.

Most of the expected surplus will go towards backfilling the hole left in the budget reserve, which is a good thing. There won’t, however, be enough left over to begin to address the “school shift.” This means that the Legislature will at some time need to pay back the shift, or make permanent cuts to school funding.

The surplus is the good news. But it’s also bad news. Why? Hard times tend to focus the mind on making significant changes; easy times make necessary change more unlikely. Indeed, you could argue that government never (or hardly ever) makes important reforms unless the situation is dire. In the last session, the Legislature made some changes to the Health and Human Services budget, which accounted for 80 percent of the decreased revenues.  Given the tremendous run-up of spending in that budget area, it’s a good thing that the Legislature took some action. (Right action? Enough action? Those are questions for another day.)

But what will happen to further reform? Is it dead in the water? We’ll see. Legislative leaders are talking about Reform 2.0, which may do some good. Let’s hope so: After the surplus of $876 million comes a projected deficit of $1.3 billion for 2014-15. That’s a small deficit, but also a sign that the state is not necessarily on a sustainable path.

Will the Legislature use the surplus an excuse to pay out public money for a private business (the Minnesota Vikings)? That’s of course the question on everyone’s mind. And why not? Purchasing televised entertainment for Sunday afternoons is one of those very important functions of government that we can’t live without. Right? According to the Pioneer Press, Senate Majority Leader Amy Koch “said she expects the announcement of the surplus will have no impact on the ongoing stadium debate.” Ditto for Minority Leader Paul Thissen. But hold the phone, as the late Paul Harvey would say. Gov. Dayton said the surplus “creates a better opportunity to proceed,” presumably because legislators won’t be focused on addressing a budget deficit. Idle hands are the devil’s tools?

Subsidizing the capital expenses of a private business would be a mistake for several reasons. One of them is that the legislative energy required to put a financing package together would be better put to use addressing long-term reform.

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