House budget targets offer a balanced mix of tax relief, spending reductions, and increases

Republicans in the Minnesota House released their budget targets yesterday.  The overall target for general fund spending is $39.949 billion.  An additional $384 million from sales taxes on auto parts is redirected to a new transportation fund and $228 million in 2015 transportation funds that was not spent will go to fund transportation projects for a total of $612 million going to roads and bridges.  To provide flexibility and protection against future budget shocks, the targets also allocated $100 million to budget reserves and left $319 million to be allocated later in the budget process.  All of that adds up to $40.98 billion, which leaves $2 billion available for tax relief.  

Overall, these targets outline a responsible budget that fully funds the current needs of the state, while at the same time recognizes the need to control spending to prepare for the challenges an aging population presents to future budgets.  It’s a balanced approach that includes a mix of tax relief, spending reductions, and spending increases. 

The House budget targets largely line up with recommendations I offered in testimony to the House Ways and Means Committee last week. Here are the four recommendations with some discussion on each. 

  • Set a budget target at $40.2 billion.  I based this target on what spending would be if Minnesota applied various expenditure limitations used by a majority of states to guide and control spending increases.  An expenditure limitation is a smart budget tool that basically ties future spending increases to personal income growth or a combination of inflation and population growth.  American Experiment’s Minnesota Policy Blueprint recommends adopting such an expenditure limitation in statute or in the constitution.  While Minnesota does not require it yet, nothing stops lawmakers from using it to guide their budget decisions today.  In addition, I also considered what the 2015 spending level would have been without the dramatic spending increases imposed by the DFL last session.  We shouldn’t assume the excesses of the last session carry forward.  A future blog post will dig much deeper into these details and how they should guide the next budget.
  • Appropriate $600 million to the budget reserve account.  This is consistent with Minnesota Management and Budget’s recommendation to fill the reserve to 5.2 percent of the general fund budget.  Doing so mitigates pressure from future budget crises to raise taxes or drop spending.  And based on past budget crises, tax increases tend to be harder to roll back than spending reductions.  Though the House only adds $100 million to the reserve, that’s $100 million more than the Dayton administration and House Ways and Means Chair Jim Knoblach expressed a willingness to use part of the $319 million in unallocated funds to further bolster the reserves.
  • Increase general fund transportation spending by $400 million, which follows from our Blueprint recommendation to allocate a quarter percentage point of the existing sales tax to transportation.  Minnesota’s roads and bridges need more funding and dedicating a portion of the sales tax provides a long-term funding source to meet those needs without raising taxes.  Instead of allocating a portion of the general sales tax, the House proposal redirects $384 million in sale taxes from auto parts to fund roads and bridges.  This continues the tradition of a “user pays” model for transportation funding.
  • Finally, any targeted spending reductions should start with the health and human services (HHS) budget.  This is the area of the budget where Minnesota stands out as a huge outlier.  In 2010, Minnesota ranked fourth on Medicaid spending per person served and ranked second on public welfare spending per person under 200 percent of the federal poverty guideline.  It is simply unwise to let HHS spending rise uncontrolled at a time when an aging population is reducing the workforce and adding people to public programs.  Left uncontrolled, the HHS budget will soon find it more difficult to finance services for the neediest populations and it will crowd out other priorities like education and public safety.  The House targets take a responsible approach and aims to reduce spending by $1.1 billion from budget projections.  This is still an increase when compared to the current budget.

The House targets represent quite a contrast to Governor Dayton’s proposal to spend $1.7 billion of the $1.8 billion surplus and, in the process, pile on more spending obligations to future budgets.  The Senate has yet to weigh in, but this basically sets the table for the ensuing debate and negotiations over the state budget.