State predicts $2 billion budget surplus over next three years

Minnesota's financial health has improved significantly in three years. In 2003 lawmakers were facing a $4.5 billion deficit. They have plenty of budget breathing room heading into the 2007 legislative session thanks to higher-than-expected tax collections and lower-than-expected state spending. The projected surplus for the current two-year budget cycle weighs in at $1 billion, and grows to more than $2 billion by 2009.

Finance Commissioner Peggy Ingison says the forecast is "pretty good news," but she's urging lawmakers to be cautious. State law requires the forecast to ignore the effects of inflation. And Ingison says about a billion dollars of the projected surplus disappears when inflation is taken into account.

"We think that this is a pretty positive forecast that leaves us pretty well positioned. But a combination of economic changes and imprudent financial decisions could kind of put us in rough shape again. And that's what we'd like to avoid," she said.

Ingison is recommending an increase in the state's budget reserves as one protection from future economic slowdowns. Finance officials are particularly concerned about the current slump in housing construction.

State Economist Tom Stinson says housing permits have dropped by 37 percent over the past year and state revenues will soon feel the impact "because it affects construction employment. We've taken 8,000 jobs out of the construction sector because of the weakness in housing. It's also important to Minnesota because there's a lot of construction-related manufacturing. The lumber and wood products industry is an important industry in the state," according to Stinson.

The November economic forecast will guide Gov. Tim Pawlenty in the coming weeks as he assembles his two-year budget proposal for the 2007 legislative session. Pawlenty says the surplus gives him options he didn't have in his first term. Under a 1999 state law, the surplus also requires Pawlenty to prepare a plan for a possible tax rebate.

"The tax relief that we will propose will fall into two primary categories," he said. "One is property tax relief and another is some things that would be helpful to our economy long term. Strategically helpful to our economy long term that will stimulate additional strategic investment, capital investment, technological investment, job growth in Minnesota. And there's a basket of things we're considering in that regard."

Pawlenty says he's not ready to be any more specific about his tax plan. Legislators can approve or reject the required rebate proposal. Republican legislative leaders generally support the idea of one-time tax relief.

But DFLers, who now control both the House and Senate, are taking a different approach. The new speaker of the Minnesota House, Margaret Kelliher of Minneapolis, is making the case for long-term relief for property taxpayers.

"Clearly this budget forecast provides the opportunity for us as legislators to bring permanent property tax relief to Minnesotans," she said. "It's not an understatement to say that people have been shocked by their increases. And that we need to provide permanent property tax relief."

That's good news to Steve Peterson, a policy analyst for the Coalition of Greater Minnesota Cities.

"We want to increase local government aid and restore the cuts from 2003 and hopefully we can use some of the surplus to do this. The election showed that property tax relief was one of the biggest issues. And we think that's going to be one of the top priorities for the Legislature," Peterson said.

Peterson was one of several lobbyists who anxiously waited to hear the latest forecast number.

Eliot Seide, the director of the state's largest public employee labor union,e says some of the money should go to workers who have sacrificed to help balance the budget over the past few years.

"If we're going to grow the economy, we have to start seeing workers gain some real wages. Because when workers gain real wages, they have the multiplier effect of their spending. It effects housing, it effects cars, it effects everything," he said.

But one other lobbyist says the extra money means there is room for tax cuts.

"We have a situation right now where Minnesotans aren't going to have to pay the federal estate or death tax, but they are going to have to pay the state. Most people in the tax planning area don't want to see that," said Mike Hickey with the Minnesota Chapter of the National Federation of Independent Business.

While the spending proposals may seem like a feeding frenzy, some lobbyists acknowledge that the state can't pay for every program this year. Nan Madden, with the Minnesota Council of Nonprofits, says she'd like to see lawmakers think beyond this year and the next two-year budget. She supports an income tax increase or an expansion of the sales tax on some services to pay for projects.

"We have to think about how we get our revenues and our investment needs to line up and right now we don't think there are enough revenues in the system to address the needs in the state," she said.

That proposal will likely be resisted by Gov. Pawlenty and Republicans in both the House and Senate. House Speaker Designate Margaret Kelliher says the House DFL caucus has not taken a position on an income tax increase. She says she does support efforts to eliminate tax breaks for some corporations that operate in foreign countries and a greater crackdown on tax evaders.

But House Minority Leader Marty Seifert of Marshall says he doesn't think any tax increases are needed. Seifert says the budget surplus is a result of the belt tightening done by Gov. Pawlenty and House Republicans who cut spending over the past four years. Seifert warned that spending one time money for ongoing expenses will result in future deficits. He says he'll oppose any major spending plans.

"Lesson number one is that when you have a boatload of money, it is our job to keep the drunken sailors off the ship," he said.

DFL Sen. Tom Bakk of Cook says the heightened expectations are a result of a hard fought election and a change in control at the Minnesota House.

He says those expectations will be scaled back once the legislative session begins.

"The campaign trail kind of tends to raise people's expectations and now that the elections are over and the first of our budget forecasts are in, those expectations probably get tempered a little bit as people start put the pen and pencil to what some of the promises actually cost," Bakk said.

Bakk and other legislative leaders say they're willing to work with Gov. Pawlenty on his budget proposal. It's unlikely that lawmakers will release their budget plans until the next budget forecast is announced in February.

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