Legislators say more work needed by July

Local legislators say Minnesota’s latest budget forecast is a good sign for the state’s growing economy, but state officials will need to decisively act to balance Minnesota’s budget by the time this legislative session ends.

“We’re definitely moving in the right direction,” said Rep. Jeanne Poppe, DFL-Austin.

Minnesota finance officials said Thursday that the state’s projected budget deficit has shrunk by more than 40 percent, leaving legislators with a more manageable, but still large, $627-million hole to fill over the next couple of months.

The updated economic forecast released by the Department of Minnesota Management and Budget sets the tone for a legislative debate over a two-year budget that starts July 1 and runs through June 2015.

The last forecast, released in December, showed a $1.1 billion deficit, and that’s what Gov. Mark Dayton relied upon to build his budget. He will release a supplemental budget in March to account for the changed projection.

The better news could prompt Dayton to scale back his proposed tax increases.

Legislators have held off plunging too deeply into the budget process until the release of the new economic report.

“Now that we got these numbers, we know where we’re at,” said Sen. Dan Sparks, DFL-Austin. “We continue to see some good signs.”

Yet balancing the budget will be tricky even without Dayton’s proposals. Sparks hopes legislators look into economic development and business incentives to grow local economies across the state.

“We want to make sure we maintain our existing businesses, but if we can bring forth some economic tools into the state to bring forth value-added economic growth, that would be good,” he said.

Poppe hopes legislators build on the statutorily mandated repayment to the state’s school districts by further investing in education, specifically stabilizing tuition rates at public colleges and universities.

A new projection for the budget year that closes in June shows a surplus of $295 million. Almost all of it is required to be used to pay IOUs to Minnesota schools, reducing a backlog in deferred payments to $801 million.

Minnesota has lurched from deficit to deficit for most of the past decade, and lawmakers have resorted to temporary fixes to get by. They have delayed school aid payments, borrowed against a tobacco lawsuit settlement and plugged in one-time federal stimulus dollars for programs that require ongoing spending. Poppe hopes state legislators come to more clear-cut solutions.

“The other thing that we need to do is start being transparent, not having to rely on shifts and gimmicks,” Poppe said.

Dayton tried a new tack this year with a proposal to raise billions of dollars in new taxes that he argues would add stability to the budget. But it has stirred fierce opposition from conservatives and business leaders, who say it would make the state less competitive. A stream of backers and opponents to the Dayton plan paraded before the House Tax Committee on Wednesday night to weigh in on the debate.

The proposal would impose a new income tax rate for couples on taxable income above $250,000, hike taxes on cigarettes and rental cars, charge higher taxes to Minnesota corporations with overseas earnings and demand tax payments from “snowbirds” who spend most of their year living in another state. But the most controversial aspect is his bid to broaden the state sales tax to services such as haircuts and legal bills, and to clothing purchases that exceed $100.

Dayton has also suggested lowering the sales tax rate from 6.875 percent to 5.5 percent, cutting the basic corporate tax rate, freezing business property taxes, cutting unemployment taxes paid by companies and giving all homeowners a $500 property tax rebate.

The net effect would add more than $2 billion in new revenue to the state coffers — half of which would go toward erasing the deficit and the rest toward new spending on education, economic development programs and other priorities.

Sen. Dave Thompson, R-Lakeville, said the state’s improving budget situation vindicates the Republicans’ insistence on not raising state taxes when his party led the Legislature in 2011-2012.

“It would be terribly unfortunate if this governor were to follow through on these draconian tax increases on every Minnesotan and send us back into a downward spiral,” Thompson said.

Both Poppe and Sparks agreed Dayton’s proposals were a good starting point, serving to get Minnesotans interested in how the tax classification system worked. The legislators say Dayton’s proposals are good ideas though they may not all be passed, but while Poppe said she would support Dayton’s proposal to expand the state’s tax classification system and tax higher-income earners, Sparks deferred to his constituents and what they want.

“It’s more important than ever to go back home and listen to peoples’ concerns,” he said.

Dayton will submit a revised proposal based on the budget forecast some time next month, but said Thursday there won’t be many revisions to his plan.

—The Associated Press contributed to this report.