Minnesota has a structural budget gap. In round numbers, it’s this: The economy’s growing at about 3 percent a year, but state spending is growing at about 5 percent.
In seven of the past 14 fiscal years, state general fund expenditures “exceeded current resources,” after accounting for temporary fixes, observes a new report from the Minnesota Business Partnership. Current projections indicate shortfalls again in 2014 and 2015.
State spending is growing faster than state revenue, and faster than the economy. This mismatch is trouble, and it won’t fix itself.
The new report from the Business Partnership, “Meeting Minnesota’s Budget Challenge; Framework for a Sustainable Future,” deserves immediate attention from lawmakers.
The key problems legislators have to address:
— State spending is growing faster than the economy, and that’s unsustainable.
— The main cause of the structural budget gap is health and human services spending.
Waiting makes it worse.
“If you let time slip by, your opportunities narrow,” said Doug Baker, CEO of Ecolab and chair of the Business Partnership’s fiscal policy committee. Waiting could mean making “more draconian cuts in a shorter period of time.”
The report by the partnership, which includes the CEOs of Minnesota’s largest companies, characterizes the situation like this: “Difficult as the past decade has been, getting Minnesota’s budget structurally balanced may well be more challenging in a future shaped by an aging population, increased global competition, emerging health care costs and deep public-sector deficits around the world.”
These factors are compounded by health and human services promises Minnesota made in faster times. If the state doesn’t control those costs, health and human services spending “will swallow everything else,” Baker said — including education, key to Minnesota’s competitive advantage: a smart workforce.
The usual politics — with shallow rhetoric about taxing and spending and obsession with short-term fixes — aren’t up to this task. Consider this fact: If state spending is rising faster than the economy is growing, raising taxes is only a short-term fix, too. It might buy a biennium or two, but then we’re back in the same structurally deficient boat, and with one fewer oar.
The Business Partnership urges policymakers to heed lessons from other states, which “found that tax increases couldn’t close budget deficits and were not a substitute for economic growth.” The report notes that the Minnesota Legislature in 2011 considered — and rejected — a proposal that would have increased personal and corporate income taxes by $1.2 billion. “Even with this tax increase, deficits would have returned by 2018 at the latest.”
Minnesota ranks eighth in the nation in individual income taxes per capita and has one of the highest sales-tax rates. We have the ninth-highest tax rate on top earners, 7.85 percent, and the third-highest corporate income tax rate in the nation, 9.8 percent, the report observes.
The world is more competitive, and higher taxes will isolate Minnesota. The Business Partnership argues for measured, reasoned, long-term repairs to our system of taxing and spending. Relying on growth in the economy, rather than increasing the government’s take from it, will produce better results.
Public spending growth that exceeds economic growth will eventually lead to disastrous and unintended consequences.
Unintended, perhaps, but not unforeseen.
The Business Partnership’s new report is the latest warning in a series over the past several decades, sounded by a variety of people looking beyond momentary crisis or windfall. The common thread is a concern for the well-being of Minnesota and Minnesotans. Baker and Charlie Weaver, executive director of the Business Partnership, said they are optimistic about working with the Legislature and with Gov. Mark Dayton, whom they see as genuine and forthright. Pragmatic and constructive, they said they’re also optimistic that Minnesota will figure things out.
Exactly how to address the problem is a matter for debate. Whether there’s a problem, and what the nature of it is, aren’t.
This editorial originally appeared in the St. Paul Pioneer Press on January 20, 2013.