The broad outline of the challenges confronting Minnesota during the current legislative session were defined by two separate but related events at the capitol: Governor Tim Pawlenty's State of the State address to a joint session of the legislature and a presentation of the findings of the State Budget Trends Study Commission. Neither identified specific solutions to the projected $5 billion budget deficit, though they confirmed the magnitude of the challenges that lie ahead.
In his address, Governor Pawlenty advocated broad reforms in several key areas: corporate income taxes (reduce them from 9.8 to 4.8 percent over six years); a variety of tax credits and exemptions to stimulate business investment in equipment and related business development, including a total exemption from sales taxes for new capital equipment purchases; and "reform" of the state's sales tax (which currently exempts food, clothing, medicine and some business services). The hallway discussion on sales tax reform is that Governor Pawlenty and legislative leaders may be considering expanding the sales tax to cover more items, especially services, in exchange for some reduction in the overall tax rate. Finally, the governor proposed a series of caps and spending reductions for all state agencies, including a two-year wage freeze for all state government employees and any units of government (cities, counties, towns, universities, etc.) that accept state funding.
Separately, the State Budget Trends Study Commission outlined the cost drivers and budgeting limitations confronting the state. Notably, health care expenditures continue to grow at a rate more than double the rate of state revenue growth. Minnesota' s demographic trends show a substantial growth pattern for state outlays to support health care and related services, such as nursing homes, as the Baby Boomer population marches toward retirement. Another major driver is education, which already consumes nearly half of the state's spending.
It is apparent that the legislature and Governor Pawlenty will have heavy lifting to do in the coming months. Major reforms to the tax and spending aspects of state government will be required; the old adage of stopping waste, fraud and abuse will undoubtedly be trotted out in the press releases, but will no longer suffice as a solution. We should get a better sense of what’s to come this week with the release of the Governor’s budget for fiscal years 2010-2011.
As usual, we will be tracking these developments at the capitol for our clients. Please feel free to call a member of our Government Relations team if you have questions or require assistance. Enjoy this issue of CapitolWatch!