Gov. Pawlenty said last week that he's willing to propose some sort of property tax rebate because of the size of the budget surplus.
"I have a legal obligation as governor to submit a plan to the Legislature for a rebate and I think we're all a little pleasantly surprised by the size of this surplus so it opens up options that perhaps a week or a month or six months ago weren't on the table or weren't identifiable," he said.
Pawlenty is required by a 1999 state law to propose a rebate plan if the budget surplus tops $1 billion. The Legislature can adopt, modify or reject the plan.
"It was put into place just so that in circumstances like this where you do have a significant amount of extra money that arises that you at least have a rebate proposal on the table for consideration," according to Matt Smith, who was the revenue commissioner under Gov. Jesse Ventura. Ventura sent out two sales tax rebates checks to taxpayers.
But Smith, now the St. Paul budget director, says the current surplus could be better targeted. He says recent state and federal budget cuts have put added pressure on local governments. He wants the governor and state lawmakers to ignore a rebate plan. Instead, Smith wants to use part of the surplus to build up the state's budget reserves and also provide money so cities and counties can build up their reserves. He says that would slow the rate of growth on future property tax increases.
"There's a need for them on both levels and I think that certainly what I've seen here in St. Paul is that we've really had to lean very heavily on my financial reserves over the past few years. That may be a better long-term financial policy for everybody than just paying it out in rebates," he said.
Smith and other finance officials say the worst thing the governor and state lawmakers could do is consider tax cuts or more spending programs without cutting spending or raising taxes. That's because the $2.1 billion budget surplus is broken into two parts. $1 billion in one-time money available. That's money from the current budget cycle. The other $1.1 billion is projected for the next two year budget cycle.
Paul Anton, who serves on the Minnesota Council of Economic Advisors, says a bulk of that money would be wiped out by inflation. Anton says it's unwise to consider a tax rebate at this time.
"It would be too bad to actually have a rebate and then find that you would have to raise taxes right away to cover existing programs in the next year," according to Anton.
Others believe Gov. Pawlenty and state lawmakers won't spend too much time focusing on a rebate plan. Lynn Reed, the executive director of the Minnesota Taxpayers Association, a non-profit research and advocacy group, says it's probably not wise to provide rebate checks after several years of budget cuts. He also says there's just not much money available for a rebate after storing away money for a rainy day and balancing the next two-year budget.
"The amount of rebate that you would have, by the time you divide it up with the 2.5 million households or whatever there are, it would be very small for individuals so I don't see that there will be much support for that," Reed said.
Reed says he also believes that property tax rates will begin to slow down because home values are stabilizing and the value of business property is rising. He says lawmakers will have to consider a tax increase or spending cuts to other programs if they want to provide more money for schools, property tax relief and address the cost of health insurance.
John Gunyou, finance commissioner during Republican Gov. Arne Carlson's administration, says he'd like to see an expansion of the sales tax to certain services in order to pay for any new programs. He says a rebate is ill advised but would support using some of the one time money to help businesses transition to a new sales tax.
"One way to get that reform is to use some of these funds they have now, the excess funds, to help phase that in and make it possible. Rather than just sending out the rebate checks and we're back in the same problem in the next business cycle," Gunyou said.
Gov. Pawlenty is expected to present his budget proposal, which will include a rebate plan, in the third week of January. State lawmakers will wait until the February forecast is released before they finalize their budget proposals.