PIM: If you assume no substantive changes to the Minnesota tax system, how long under current forecast conditions before we get back to the inflation-adjusted equivalent of pre-recession state revenues?
Stinson: Well, just calculating it crudely, FY2008 had $16.7 billion in revenue. If we use the CPI (consumer price index) [to factor in inflation], it doesn’t happen in ‘10 or ‘11 or ‘12. We don’t quite make it back by the end of 2013. It’s close. We’re about $200 million short [at that point] in real dollars compared to where we were in 2008.
Of course, during that time, we can expect expenditures to rise due to inflation, which means we’ll be running a deficit for the next four years.
Stinson also explains why the state’s huge 1999 and 2000 tax cuts, which seemed affordable at the time, have left our state with a seemingly permanent budget deficit:
PIM: Back in 1999 and 2000, Minnesota passed some of the largest state tax cuts in the country. Can you take us back to that frame of reference and say why those tax cuts appeared to be sustainable back then?
Tom Stinson: In 1999 and 2000, the economy was growing extraordinarily rapidly. I can’t remember the exact numbers, but real, inflation-adjusted growth rates above 3.5 percent were being projected on out to forever. That was excessive, and it fooled forecasters. Global Insight held out for a long time. They kept saying no, the economy can’t grow that fast. In ‘99 or 2000, they finally changed their outlook [to prolonged high growth].
We were being fooled by technology. What people didn’t realize at the time was that a lot of the demand for technology that was going on wasn’t sustainable. It was being prompted by Y2K types of things. Once the demand for technology and for IT specialist labor fell off following Y2K, the growth rate was substantially less. We’ve been in two recessions, and we’re not through the second recession yet. It’s a situation where what appeared to be affordable at the time turned out not to be affordable.
Eventually, we’re going to need to face up to the truth: We’re currently not bringing in enough revenues, and on top of that we’re spending too much as well. The solution may not be politically popular, but it is simple: We need to increase taxes and decrease spending. Until we permanently realign our budget with today’s economic realities, we’ll run a deficit every single year.
There’s a lot more in PIM’s interview with Stinson; the whole thing is worth a read.
I hate to tell you all this, but raising taxes won’t fix this structural problem.
I respect Stinson and think he is a good economist. Don’t know which way he leans politically, and that should not be relevant if he is giving his best professional opinion.
We do have a structural issue. On a macro level, the problem is that it is now taking a higher % of our state’s production in order to fund our government. That is a major issue. We have to spend a larger piece of our collective pie to get the same services. Some else in the pie, then, has to give. What will it be? Food? Clothing? Investment in jobs? Elective education? Philanthropy?
It all comes from the same pie. Of course we need to spend more absolute $$ each year, as long as there is inflation. That is a given. But that is a huge difference from having to spend a larger % of the pie just to get the same services.
Structural issue is right, but there are three possible solutions, not one:
1) Raise taxes
2) Cut back services
3) Perform services in a more efficient way.
Before you tell me that government has been cut to the bone and can’t do anything more efficiently, I’d like to see all the bureaucrats who have leftover money at the end of the fiscal year actually return it rather than scrambling for ways to spend it.
Let’s start by personally rewarding our civic department administrators and employees for not spending their entire budgets, and see what kind of savings that creates. Today, the incentive is to spend it all the way to zero, and spend it all is exactly what they will do, necessary or not.
If this could be done with some practicality it sure would be nice. The fact is we are pragmatic Minnesotans and should be able to at least get a handle on this.
I agree with Dan’s
1) Raise taxes
2) Cut back services
3) Perform services in a more efficient way.
What is the primary goal of solving the structural tax problem? I would think effective government on a state level with an assured return on the tax investment of the citizens. Notice that I am not whining about the government confiscating my money but rather asking for a return on that money. Even progressives want to see the government educate, protect and serve in a cost effective manner. We used to be able to do that… we were admired for a state where government worked.
What should be the true priorities of our state government?
Cue the libertarian tax whiners…