The Minnesota economy is doing better than many expected, but a projected $1.2 billion budget deficit in 2022 is a flashpoint between Republicans and DFLers as they haggle over budget cuts, taxes, and how to utilize the state’s reserve funds.

“It is a tug of war without a doubt,” said Senate Majority Leader Paul Gazelka, R-East Gull Lake, during the Eggs & Issues virtual forum Friday, Feb. 19. “But I've made it very, very clear that the tax increases are not going to be part of it.”

“There was a lot of conversation about the budget, because we knew early last year that there was going to be a likely downturn and reduction in our budget,” said state Rep. Josh Heintzeman, R-Nisswa, at the forum. “Of course, raising taxes is always the solution from one side of the aisle, and it just isn’t an option. We can’t be doing that. The private sector is doing absolutely everything they can to reduce their budgets. Why in the world would we ask them to pay more. … If (Gov. Tim Walz) thinks he’s going to do that in this economy, and that we’re just gonna go all full steam ahead and be fine? You can’t do that. People will leave.”

That isn’t to say Republicans are in lock-step with one another either. In the lakes area, there’s general agreement that proposed tax increases in the range of $1.7 billion are a non-starter, but whether or not tax cuts are on the table is a different matter.

Gazelka said he does not see a situation where tax cuts are viable, in current budget scenarios, if the state of Minnesota is to balance the budget — which, he further noted, is required by state law and failure to do so will incur a government shutdown. The state is looking to lean on $2.27 billion in state budget reserves, Gazelka observed, as well as the possibility of federal Paycheck Protection Program aid for struggling businesses, to balance the budget without propping up revenues with higher taxes on corporations and businesses.

“Right now we have a billion dollar budget shortfall and so we don’t have extra money,” Gazelka said. “We do think we can balance the budget within the reserves that we’ve been setting aside for a lot of decades for a rainy day and I think anybody would acknowledge that this would be what you would call a rainy day moment.”

Gazelka’s colleagues echoed their aversion to tax increases and also noted the state’s reserve funds as a resource, but they were not of the same mind as the Senate majority leader when it came to tax cuts.

“I think everything is on the table to balance the budget,” state Sen. Carrie Ruud, R-Breezy Point, said during a phone interview Friday. “In the overall picture, if it worked? Yeah.”

In turn, state Rep. Dale Lueck, R-Aitkin, took a stronger stance and said the state needs to take a long look at tax cuts to alleviate pressure on small businesses and communities, particularly in rural Minnesota where many industries have struggled during COVID-19 closures.

“I think it’s in order,” said Lueck, who pointed out that Paycheck Protection Program aid is regarded as revenue by the federal government, which means businesses are going to be taxed on whatever funding they received from that emergency program. “We just brutalized a big segment of our business communities, so if there’s relief that we can provide there, that would make sense. ... It makes sense to look at giving them a little bit of time, at least temporary relief to help them get all these folks back to work.”

Gazelka, Heintzeman, Ruud and Lueck all cautioned projected budget numbers are not set in stone — particularly, they noted, in terms of the November forecast, which is often considered the least accurate estimate, while the upcoming February forecast is a real benchmark for lawmakers to craft the budget. Initial projections are more positive than initially anticipated, Heintzeman and Lueck observed, with tax revenue higher than expected and a more than half-billion surplus projected for the end of the ‘20-21 biennium.

Another area is agency budget cuts. For months, the Walz administration has been touting a 5% cut to administrative expenditures for most state agencies. These cuts are not intended to hurt the programs themselves, or curtail any services they may provide that are vital during an unusual point in modern history where more people are dependent on the government to make ends meet, Gazelka noted. Some state agencies, such as veteran affairs, would not see this cut, he added, while some agencies, like the Minnesota Department of Human Services, could see a larger reduction, based on recent inefficiencies and fraud.

In May 2018, it came to light that widespread fraud was being perpetrated in the Minnesota Child Care Assistance Program. At the time, it was speculated fraud could be as high as $100 million or more annually. Subsequent investigations pinned fraudulent activities as lower than the $100 million figure, standing at roughly $80 million.

In line with that, Ruud said the 5% figure is a talking point, not gospel, and there would likely be more targeted cuts to maximize savings, while minimizing the impact on Minnesotans.

On the other hand, Lueck said the 5% systemic cut proposal was “flimsy” and “doesn’t hold water,” based on the dynamic nature of budget projections and the likelihood that structural changes — for example, the fact the vast majority of state employees are working from home — would render those proposals obsolete by the time that cuts are actually implemented.

There were concerns, expressed by rural city administrators and members of the League of Minnesota Cities during the early months of the pandemic, that reductions to local government aid — or LGA funding, on which many rural cities are heavily dependent — would be inevitable, based on budgetary discussions and the aftermath of the 2008 Great Recession.

Gazelka and Ruud said there were no indications LGA funding would see a contraction, nor that associated forms of funding — such as the historically large 2020 bonding bill, the Legacy Amendment, or Legislative-Citizen Commission on Minnesota Resources grants — would be adversely affected by budget cuts.

There has to be an infusion of aid into the economy to help it get back on its feet, Gazelka noted, while Ruud pointed out infrastructure projects are a pressing issue needing to be addressed, or they would snowball down the line. On a specific note, she said it was her mission this session to pass the Whiskey Creek enhancement project in Baxter— which would purify and treat runoff from 400 acres of highly developed land on the Mississippi watershed.

GABRIEL LAGARDE may be reached at gabe.lagarde@brainerddispatch.com or 218-855-5859. Follow at www.twitter.com/glbrddispatch .

1/4: Sen. Carrie Ruud

2/4: Dale Lueck

3/4: Rep. Josh Heintzeman

4/4: Senate Majority Leader Paul Gazelka