Why Governor Dayton should veto the spending and tax bills

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Session implodes at midnight over roads and public works

That headline pretty much sums up the legislative session in general from an economics perspective. The Legislature made no progress on long-run issues such as infrastructure spending and pre-K education and probably worsened the medium-term budget outlook.

I am especially disturbed by the tax and spending bills passed by both chambers.  Minnesota’s budget outlook is cloudy and these bills add more uncertainty to the situation.

Start with the current budget forecast for FY 2018-2019:

2017-18 budget forecast

According to these data, we can expect a $1.2 billion surplus for FY 2018-2019, a bit over half of what Minnesota Management and Budget (MMB) thought it would be in November 2015. Most economists see economic growth of 2 percent or less, so it’s likely this figure will shrink further but let’s begin with this.

[I say “according to these data” because MMB is quite careful about not using these data to make a projection about the surplus/deficit.  In their words, “the planning estimates are not intended to predict surpluses or deficits several years into the future (p. 44).” I understand where they are coming from as they don’t want these data to constitute an official forecast.]

The legislature enacted tax cuts that will reduce this estimate by about $550 million. That brings the surplus down to about $650 million.

The spending bill only affects the current fiscal year, but I’m doubtful that those who receive these one-time funds will accept this situation and not ask for extensions and expansions in 2018-2019.

Notice the line in italics: this tells us that if spending simply increases at an inflation rate of 2.5 percent, then the projected spending estimate is low by $1.7 billion.  Inflation has been running below that, but knowing about the one-time spending increases and their potential effects let’s use that as an upper bound on spending increases.

The result is that when the February 2017 forecast arrives it will likely show a deficit, perhaps one in the range of $1 billion over FY 2018-2019.  Even without the tax cuts, we’re already facing a potential deficit of $500 million or so.

This is why Governor Dayton should veto the tax and spending bills passed by the legislature. Rather than using the projected surplus for one-time spending and a down payment on permanent tax cuts, we should put aside whatever shows up as a surplus in anticipation of projected deficits in the coming biennium.

Keeping state spending and taxation at its current level or less versus allowing each to grow is the central issue that separates Republicans and Democrats. This is the kind of impasse that can only be decided by the voters, and perhaps not even by them given our current legislative districts. The prudent course is for Governor Dayton to veto the tax and spending bills and let the voters have their say.