It was the overarching theme of the recently-completed election, and it will be the number one priority at the Minnesota Capitol when the 2011 legislative session convenes in January. How do we resolve a projected $6.2 billion deficit in fiscal years 2012 and 2013? A close second, and intimately tied to the budget discussion, is the question of how best to stimulate private sector job creation.

Minnesota lost 5,100 jobs in November, and the unemployment rate remains at 7.1%. However, Minnesota's employment growth has been above the US average overall and is expected to stay strong. A recent report released by the Federal Reserve also predicts a better 2011, including increased starts in manufacturing, agriculture and construction.

That cautious optimism doesn't relieve the pressure confronting the newly elected leadership at the Capitol. The new Republican leadership in the House and Senate will have to work with Governor-elect Dayton on resolving the deficit issues facing the state over the next biennium. Fortunately, the state is forecasting a $399 million surplus for the current biennium, eliminating the need for unallotment or short-term borrowing. However, the surplus is due largely to a reduction in projected expenditures – state revenues are actually down.

The projected deficit accounts for approximately 16% of the state's total general fund budget. If those numbers are adjusted for inflation, the deficit would increase by another billion dollars. It is clear that K-12, Higher Education, Health and Human Services and Local Government Aid are going to take hits if there are no revenue raisers in the final package.

Governor-elect Dayton and incoming Senate Majority Leader Amy Koch held a press conference on December 16, after meeting to discuss areas where common ground could be found. Dayton is suggesting a 2011 bonding bill, an initiative that would normally be dealt with during the 2012 session, as a way to stimulate job growth. The bonding initiative received a relatively cool response from Majority Leader Koch, although she did state that "all ideas are on the table."

Besides the bonding bill, Dayton has advocated for additional gaming opportunities in the state. This could conceivably include gaming in bars, a "racino", or a casino hosted at the airport or the Mall of America, according to Dayton. A recent poll shows that 55% of Minnesotans support expanded gambling, although such initiatives have failed to pass recently in many states.

Majority Leader Koch and Deputy Majority Leader Geoff Michel are seeking input on private-sector job creation mechanisms, possibly including building off of last year's Jobs Bill package, which was signed by Governor Pawlenty on April 1, 2010. Many of the provisions in that bill terminate at the end of June 2011 unless extended. Increased employment would drive additional tax revenues into the state's coffers over time, but will not likely occur fast enough to affect the current budget debate.

Will there be increased taxes? Governor-elect Dayton ran on a platform that actively advocated for raising taxes on upper income taxpayers. The new Republican leadership in the House and Senate are unlikely to accept any general tax increase as the price of resolving the budget shortfall. What is unknown is whether other revenue raisers, such as the infamous "health impact fee", will become part of the discussion. If so, will those increases be described as fees in an attempt to avoid political fallout? The fact that the incoming leadership has steered clear of a discussion on tax issues likely means a last-minute showdown at the Capitol in May before we know the end of the budget story.

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