Some sage advice on how to deal with a deficit

Minnesota policymakers wrestling with the budget deficit can take cold comfort in knowing that they are not alone – at least 25 states in the U.S. are facing a budget deficit in the next fiscal year. The Center on Budget and Policy Priorities (CBPP) has responded by publishing a special series of reports on how states can best respond to deficits.

Check out their new (and to-the-point) analysis called Four Helpful Hints for States Dealing with Deficits. In sum, they recommend:

  1. Protect state revenues from the effects of new federal tax changes.
  2. Tap the state’s “rainy day” fund.
  3. Don’t rule out revenue increases.
  4. Avoid “stimulus” tax cuts.

So, how does Governor Pawlenty’s proposal stand up to these guidelines?

  1. Great – Pawlenty’s proposal does recommend protecting the state from tax losses due to the recent federal economic stimulus package which gives tax breaks to businesses.
  2. Not so great – Pawlenty draws on the state’s budget reserves, but doesn’t follow that up with a long-term plan to fix our future budget deficits.
  3. Getting worse – While Pawlenty’s proposal does raise some new revenue (mostly by closing a loophole for corporations with foreign operations), the CBPP recommends income-tax surcharges on high income earners. We’ve blogged before on how such a tax increase can help during an economic downturn.
  4. Bad – Pawlenty’s proposal includes a 1/8th percent reduction in the statewide sales tax. This proposal would reduce state revenues, forcing additional spending reductions. At the same time, the sales tax cut is unlikely to rovide effective economic stimulus. (More about that in another blog entry.)

-Katherine Blauvelt

About Katherine Blauvelt

Katherine Blauvelt served as the Minnesota Budget Project’s policy analyst from 2007 to 2009.
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