Pawlenty budget fix cuts spending, but also cuts sales tax

When state finance officials released their economic forecast last week, Gov. Pawlenty described the projected deficit of $935 million as serious but solvable. He also proclaimed that tax increases would not be part of the solution.

A week later, Pawlenty outlined a proposed budget fix that cuts state spending by $341 million, uses $250 million from the budget reserve and shifts another $250 million from a surplus in the state's health care access fund.

During a state Capitol news conference Friday, Pawlenty described his plan as balanced and reasonable.

"It's going to require some compromise," he said. "It's going to require some sacrifice. It's going to require some changes, not just from the state but from our partners who receive funding from the state as well."

One change the governor wants is in the state sales tax. He wants a 1/8th of a percent cut in the current rate. Pawlenty said a sales tax reduction would help Minnesotans after Democrats overrode his veto of the transportation bill that included a gas tax increase and sales tax increase in the metro area for mass transit.

"I think it's important to strategically lower tax burdens in Minnesota," he said. "And we want to begin that process in this budget. And this 1/8 cent sales tax reduction will do two things. First of all, it will soften or mitigate the effects of the DFL tax increases. And number two, it will provide a modest stimulus for the economy that we think will be positive and helpful."

The sales tax cut is balanced out by several revenue increases, including improvements in tax collections and a change in tax law to collect more from some companies operating in foreign countries.

Pawlenty stood by his earlier pledge to not cut funding for K-12 education. His plan also preserves Local Government Aid payments to cities. But he proposes a cut in higher education spending, and he wants 4 percent reductions to most state agency budgets.

Pawlenty said he doesn't expect those cuts to result in layoffs.

"If we need to reduce workforce, we can do a lot of it if maybe all of it through attrition and retirement," he said. "We have large, large numbers of state employees who either are retiring or are scheduled to retire."

DFL Legislative leaders said they plan to carefully examine the governor's supplemental budget proposal and look for areas of agreement.

But House Majority Leader Tony Sertich, DFL- Chisholm, reacted skeptically to the proposed sale tax reduction.

"I've seen this governor in action for five years," he said. "A lot of his proposals don't make it past the press release. And he doesn't invest a lot of capital in making that happen past the press release. So, we hope he sticks around long enough to maybe make his case. And I'm sure the tax committees will look at that, just like all the committees will look at his proposals."

Democrats are also skeptical about Pawlenty's plan to use $250 million from the budget reserve. That rainy day fund currently stands at $653 million, which Assistant Senate Majority Leader Tarryl Clark, DFL- St. Cloud, said is already too low. Clark said the long-term financial health of the state rests on those reserves.

"When things keep getting bad, and we don't have those reserves there, it affects our bond rating," she said. "It affects how we can respond to emergencies, which we had obviously a couple this last year. So if we can avoid doing it, that would be a good thing."

The state constitution requires lawmakers to balance the budget by the middle of next year. House and Senate budget committees already have meetings scheduled Monday to begin dissecting the governor budget balancing proposal.

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