State faces revenue shortfall, ‘fiscal trap’

published 10/19/2009

As tax revenues fall short of expectations, lawmakers are looking toward another record state budget deficit and a long-term "fiscal trap," officials say.

State Economist Tom Stinson told the Subcommittee on a Balanced Budget — part of the Legislative Commission on Planning and Fiscal Policy — that tax collections for the first quarter of Fiscal Year 2010 (the state’s fiscal year begins July 1) came in below the original forecast by $52 million, or approximately 1.7 percent. (Watch the meeting.)

As bad as the weaker-than-expected tax revenues look, Stinson and other state officials explained this may be the least of Minnesota’s problems.

Stinson said Minnesota will likely begin the 2012-13 biennium with a budget deficit of at least $4.4 billion; however, House Chief Fiscal Analyst Bill Marx said the true number could be as high as $7.2 billion, once inflation and the impacts of Gov. Tim Pawlenty’s 2009 unallotments and vetoes are factored in.

Beyond 2013, Stinson said long-term demographic trends will reduce the state’s tax revenue base. In particular, he said the state’s aging population will create a situation where revenue growth will decrease just as demand for government services is going up.

“The demographics are going to make tax increases more difficult,” Stinson added, explaining that Baby Boomers trying to save money for retirement will likely resist proposals to raise taxes.

State Demographer Tom Gillaspy said the Baby Boomers will also require more state health care spending as they get older, making it more difficult to fund education and other government services. He suggested the key to getting out of this “fiscal trap” would be to increase the productivity of the state’s workforce. Stinson noted that this in turn requires new public investments, like infrastructure and education, creating what he called a “fiscal Catch-22.”

View Stinson and Gillaspy’s presentation here.

The subcommittee plans to hold two more meetings before the beginning of the 2010 legislative session — on Nov. 12 and Dec. 10.

- Nick Busse