State budget shortfall shrinks to $5.03 billion

An improving economy and some unexpected federal stimulus shrank Minnesota's projected budget deficit by $1.16 billion, state budget officials announced.

The state's February Economic Forecast predicts a $5.03 billion budget shortfall for the 2012-2013 fiscal biennium - down from $6.2 billion in November's forecast. Minnesota Management & Budget Commissioner Jim Schowalter called it "a modest and hopeful improvement."

"At the end of the day, we still have a $5 billion deficit that will be a challenge for all parties to solve," he said.

State Economist Tom Stinson credited the uptick to a package of tax cuts enacted by Congress and President Obama in December. He said this "stealth stimulus package" will boost taxable income from capital gains by extending Bush-era tax cuts, and also increase consumer spending by cutting the payroll tax and extending unemployment insurance benefits.

"Those aren't large percentage changes, but I'm sure they're welcome by the governor and the Legislature," Stinson said.

Shortly after the release of the forecast, Gov. Mark Dayton announced he would drop a proposed temporary surtax on the state's highest earners from his budget proposal. He would also reinstate $200 million in proposed cuts to human services, transit and economic development programs.

Republican leaders said the forecast proved that taxpayers' money is better left with the taxpayers, who will use it to generate economic growth.

"When the money is left with the people who make it, earn it, invest it, they do the right thing," said House Speaker Kurt Zellers (R-Maple Grove).

Zellers said Republicans will release a spending plan that stays within the $33.33 billion the state is now projected to collect in tax revenues. He said businesses need the "certainty" of knowing their taxes won't go up before they invest in new jobs.

DFL leaders said the forecast showed the exact opposite was true. They cited a comment by Stinson that a combination of tax increases and budget cuts would be better than cuts alone, because tax increases would have a smaller impact on consumer spending.

House Minority Leader Paul Thissen (DFL-Mpls) said legislators should focus on the needs of the middle class.

"As gas prices go up, just like college tuition, just like property taxes, that's mainly money coming out of middle-class families' pockets. And so it's even more urgent that we balance this budget in a way that's fair and that everybody shares," he said.

Stinson said the economy is steadily improving, and that "all the pieces are in place" for more rapid growth in employment; however, he cautioned that unrest in the Middle East and the threat of a federal government shutdown could damage the economy's rebound.