Lower budget shortfall; same political divide

State officials released a new economic forecast Monday that shows an improving financial picture, but they warned that the crisis is not over.

Minnesota's projected state budget deficit has shrunk from $6.2 billion to $5 billion, according to the new forecast numbers.

The smaller deficit prompted DFL Gov. Mark Dayton to back off one of his proposed tax increases, but there's still a wide divide between Dayton and Republican legislative leaders over how best to erase the remaining red ink.

Lawmakers have a little smaller problem to solve before their scheduled adjournment on May 23, because incoming revenues are better than expected.

But Minnesota Management and Budget Commissioner Jim Schowalter said the remaining deficit projected for the next two-year budget is still serious, and he's also concerned that structural deficits that could linger for several years to come.

"We have, and are happy to discuss, improvements in the economy, improvements in the revenue included in this forecast," he said. "But at the end of the day, we still have a $5 billion deficit, which will be a challenge for all parties to resolve."

Minnesota's improving financial picture was helped in large part by recent congressional action on federal tax policy. State Economist Tom Stinson said a 2 percent reduction of the payroll tax, continuation of unemployment benefits and a delayed capital gains tax increase have bumped up state revenues.

"At the end of the day, we still have a $5 billion deficit, which will be a challenge for all parties to resolve."

"That stealth stimulus package provided us with some welcome fiscal insurance looking off into 2011. Most of it is one year in nature, but it produces a large change in the expected growth rate for the economy in 2011," said Stinson.

Gov. Mark Dayton responded quickly to the forecast by revising his two-week-old budget proposal. Dayton announced in a news release that he would eliminate a temporary 3 percent income tax surcharge on Minnesotans earning more that $500,000 per year.

"I'm delighted that this revenue picture permits it to be extremely temporary, and would reduce then the top rate that I'm proposing to the 10.95 percent in the so-called fourth tier," Dayton said.

Dayton said he will also reduce several spending cuts in his budget, including about $200 million from health and human services programs.

Senate Majority Leader Amy Koch, R-Buffalo, said she was glad to see Dayton roll back one of his tax proposals, but she remains concerned about the others. The GOP wants to balance the budget without tax increases. Koch said the smaller deficit doesn't change that priority.

"With what's in the checkbook, let's live within that. Let's compromise within that," Koch said. "Let's reform, and we'll be healthier for it. Our economy and our budget will be healthier for it."

The state economist threw some cold water on the GOP budget approach. Tom Stinson said a "cuts alone" solution would do slightly more to harm to the economy than a mix of spending cuts and tax increases, which is proposed by Dayton.

House Speaker Kurt Zellers, R-Maple Grove, sidestepped questions about Stinson's analysis. Zellers said he thinks the forecast had a clear message about taxes.

"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," said Zellers. "They'll invest it. They'll spend it."

Zellers suggested some targeted tax relief could do even more to help the economy. But he didn't offer specifics.

DFL House Minority Leader Paul Thissen said it's time for Republicans to put their budget on the table.

"We still have a $5 billion budget deficit that we have to close," said Thissen. "They would like to ignore that, wave a magic wand, thinking just saying 'live within your means' is going to accomplish closing that budget deficit. Further tax cuts are just going to make that problem worse."

House and Senate finance committees will use the new forecast to guide budget discussions over the next four weeks. Republican leaders have set a March 25 deadline for those committees to finish their work.

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