Making choices: Minnesota’s budget

The Daily Planet’s New Normal Project is a series of news stories and community conversations devoted to identifying community priorities as we face serious economic challenges. Every month we’ll tackle a different topic, including neighborhoods, the state budget, education, health care, public services, immigrant communities, the environment, work and inequality. You’re invited to join the conversation, either online (by commenting on articles like this one) or by participating in a community conversation (see the list of this month’s conversations at the end of this story.)

The Challenge:

As the legislature and governor clash over taxes and spending, what should our priorities be for the state budget? How should our economic and social values shape how we balance the budget?

Is the best solution to:

A)   Increase revenues through taxes on the state’s top income earners?
B)   Drastically cut spending?
C)   Aim for a balanced approach, one based on new revenues from various sources alongside more modest cuts?
D)   A different approach (please share your ideas.)

The Facts:
The State of Minnesota is facing a $5 billion budget deficit, lower than the $6.2 billion initially forecast. Republicans, who took control of both houses of the legislature in November, have very different ideas about how to close that gap than the newly elected Democratic governor. The Senate has proposed a budget totaling $34 billion, while Gov. Dayton’s plan totals $37 billion. As the two sides continue to clash over how to eliminate the deficit, Dayton is said to have his veto pen ready. Onlookers say they will be surprised if a budget is approved by the end of the session on May 23.

Background:
Republican legislators have stood firm throughout the session, adhering to their pledge of no tax increases and repeated calls for “living within our means” and more limited state government. According to the legislative majority, state government should be held responsible for three things: public safety, K-12 education, transportation, and little if anything else. Better to allow individuals to decide how to spend their money, than government. Among the items on Republican legislators’ chopping block this session are: funding for health and human services—which mainly serves the elderly—local government aid to cities (LGA), higher education, job training, and transit. State government innovation and veterans affairs would also take big hits.

Governor Mark Dayton, a Democrat, has voiced his preference for a balanced approach to solving the state budget crisis, one that involves generating new revenue sources alongside much more modest cuts in spending. To avoid deep spending cuts, the budget he proposed calls for higher taxes on Minnesota’s top income earners. Dayton told a LaCrosse, Wisconsin television news reporter that: “People who work hard for $20-, $30-, $50,000 a year are paying a higher percentage of their income in state and local taxes than somebody making $5- or $10 million dollars a year. I just think that’s wrong.”

How Did We Get Here?
According to a report by the Minnesota Budget Project, “The prolonged economic slowdown has played an important role in creating significant revenue shortfalls in most states, including Minnesota. However, heavy reliance on short-term solutions to solve Minnesota’s revenue shortfalls, has led to larger deficits than we otherwise might face.”

A report by State Economist Tom Stinson and State Demographer Tom Gillaspy echoes this analysis. It underscores that problems facing the state loom large and are structural, so cannot be met with “short run solutions.” The authors stress that spending pressures will only continue to increase, largely around two areas: support of the aging and health care.

Arne Carlson inherited a $2.3 billion budget deficit when he became governor in 1991. Eight years later, when he left office, Minnesota had a surplus and a Triple-A bond rating.  Carlson is among those arguing that Tim Pawlenty, the Republican governor who preceded Dayton, played “kick the can,” eliminating long-term planning in favor of short-term thinking, enacting policies based on accounting shifts and massive borrowing that were politically expedient, yet harmful to the state.

Seeking Solutions

Everyone interviewed for this article was passionate about the state budget and various solutions being proposed to close the gap. In some cases the outcome of debates will impact the work these people do directly. In others it will seriously affect the populations they serve.

The Case for Increasing Taxes on the Wealthiest Minnesotans

Jeff Bauer, Director of Public Policy for the Family Partnership, a nonprofit that provides counseling, education, and advocacy for the area’s most vulnerable children and families, says that while his organization does not receive much money from the state, drastic cuts in health and human services would be felt in significant ways by the people it serves. Bauer asks why the very richest people in the state, “those who pay a lower level of taxes already, should be protected, held immune,” while cuts in services are proposed for those who need assistance the most. Bauer says that our current tax system fails to produce sufficient revenue, largely because the people at the top do not pay their fair share. He favors a fourth tax bracket for the wealthiest Minnesotans. Fairness, Bauer says, must be at the heart of any solution to a balanced budget. As part of the equation, he would like to see “targeted investments in communities that have been left out,” to help address huge racial gaps in employment and income. He refers to findings of recently released reports that demonstrate those gaps, including one by the Children’s Defense Fund of Minnesota.

Like Bauer, Mayor Dave Smiglewski, of Granite Falls, wants to see people at the top of the economic ladder pay the same level of taxes as those on the rungs beneath them. If that were done, it could help prevent proposed cuts in LGA funding to communities across the state, thereby allowing a level of services to be maintained. Smiglewski is incensed by the “shameful mistruths” about LGA being bandied about by legislators. If LGA funding is taken away, he worries that Minnesota’s smaller cities and towns, like his, will become places where people won’t want to live. “If you want to have Minnesota struggling, then close the doors on half the towns.” He observes that mayors across the political spectrum, and throughout the state, recognize how vital LGA funds are, not only to their cities’ long-term survival, but to every city in the state.

Far too little attention is given to thinking about a “greater good,” or the “commonwealth,” according to Monte Bute, a professor of sociology at Metropolitan State University. Instead, he says, “everyone is trying to defend their own private interests.” He notes that legislators frequently talk about “sharing the pain, but I ain’t seen no pain directed out to Minnetonka lately.”

Bute argues that state tax codes must be rewritten in such a way that property is no longer overtaxed, while income is simultaneously under-taxed, and egregious loopholes remain. Even more importantly, in his view, people must dispense with the notion that low taxes are the answer to our problems. “Low taxes are not job creators. Jobs and prosperity are created because we have an educated workforce. That’s what attracts business.” Bute warns that present day legislators who adhere to an anti-government, low tax ideology have put Minnesota on track to be on par with states like Mississippi that generally rank lowest on all key measures.

The Case for Cutting Spending

Republicans in the state legislature champion the idea of living “within our means” and scaling back the role of government to what they say are a few constitutionally mandated essentials. Sen. Geoff Michel, a Republican from Edina, has said, “We’re going to build a budget based on what is in Minnesota’s checking account — not what we wish was in the checking account.” David Hann, a Republican from Eden Prairie, who chairs the Senate Health and Human Services Committee, and who has been named “Best Friend of the Taxpayer” four times by the Taxpayers League, says that the state must work with the revenue it has.  House Speaker Kurt Zellers, R-Maple Grove, argues, “If you don’t over collect and you let the people, the hardworking taxpayers of this great state keep the money, they’ll do the right thing with it. They’ll invest it. They’ll spend it.”

Kail Padgitt, a staff economist for the Tax Foundation, explains that as an economist, he focuses his attention on government’s roles, not its priorities. “State and localities tend to handle education and law and order. So when looking to spending priorities, it’s important to always keep in mind (that those are) the proper role of government.” With that as his foundation, Padgitt follows a costs and benefits approach.

“There are public goods where the benefit of providing is likely far less than the cost.” He gives the example of a fireworks display. “The benefit to individuals (of a fireworks display) is probably not equal to the costs of putting that on.” This leads Padgitt to seeing merit in spending cuts. At the same time, he stresses that individual states must “make the determination of what choices are right for them,” in each instance scrutinizing the costs alongside benefits. Much like Stinson and Carlson, Padgitt adds that, “those states that have taken steps to stabilize long-term budgets will do better than states that have enacted temporary patches to get through the downturn.” 

The Minnesota Business Partnership, which works on fiscal policy, K-12 education, and health care, points to numbers that show that Minnesota’s tax burden remains high. High taxes, the group contends, create barriers to business investment and job creation. “As lawmakers address immediate budget shortfalls, they should be mindful of Minnesota’s global competitiveness and pursue opportunities to update Minnesota’s tax system to better reflect the new global economy without raising the overall tax burden.”

The Case for a Balanced Approach of Modest Spending Cuts, New Revenue Sources, and Reforms

Many people use the phrase “balanced approach” to describe their preferred solution. They look for a third way that lies somewhere between budget cuts and tax increases, or perhaps incorporates some of both.

As public policy director for the Metropolitan Consortium of Community Developers (MCCD), Darielle Dannen has a lot of experience helping small businesses, and promoting affordable housing and workforce development. Dannen views Gov. Dayton’s budget plan as a balanced approach, one that raises revenues and makes relatively small, realistic cuts, while not decimating programs that are working. At the same time, she finds it important to entertain unpopular measures, such as reevaluating the mortgage interest deduction and considering a service tax.

Dannen said that many lawmakers are shocked to learn that constituents spend over 30 percent of their incomes on housing. The market alone, she contends, is not going to address those needs. Having government invest in affordable housing for low-paid workers is one example of how to help people “climb the ladder of ‘the American Dream.'”

Keith Hardy, clerk of the St. Paul Board of Education, says that schools in that city will be greatly affected if the legislature’s reduces compensatory aid to schools. In addition, he says, committees in the House and Senate want to hold flat spending for special education, an area where costs are rising. “Schools will have to eat those costs,” he notes. More broadly, Hardy says, the state must address the growing number of people who require assistance to meet basic needs, while also planning three to five years out, especially on the economic and jobs front. Like Dannen, Hardy is a proponent of putting all ideas on the table, including controversial ones, such as adding a clothing tax and allowing racinos. He is most intrigued, however, by seeing the state become more aggressive about exports. Because he finds it essential that Minnesota develop new sources of sustainable revenue, exports could become the best long-term solution for the state’s finances problems.

Money spent now, saves money in the long run, according to Trixie Ann Golberg, President and CEO of Lifetrack Resources, a nonprofit human services organization that works with families and adults facing life challenges. Golberg notes that successful business owners know that “getting things right the first time is a lot cheaper than fixing a problem at the back end.” She offers that, “Under-investing in a child today lessens the value of every other investment we will make during a child’s lifetime and beyond. The return on investment in early childhood services and education is documented and accepted across party lines.”

Tough Questions for Hard Times

How can we guarantee the quality of life that Minnesotans would like to have? Plan for a future without a sizable debt? Confront problems today, not push them aside for others to solve tomorrow? Achieve all of these goals in a way that’s fair and equitable to all Minnesotans? These are the types of challenging questions that people are posing as they debate state budget choices.