Senate DFL’s budget outline: The numbers are one thing, the politics something else entirely

In terms of the arithmetic, the Senate DFL budget targets released last week could hardly be simpler: 7 percent across-the-board spending cuts totalling around $2.4 billion, and another $2 billion in new tax revenues from sources yet to be determined. (Among the big three budget lines, education would lose $1.194 billion with $973 million of that figure coming from K-12 and $221 million from higher ed; Health & Human Services would take a $719 million hit; and city and county aid would fall by $240 million.)

But as a matter of politics, the plan is almost impossibly difficult. The obstacles it will face include opposition from a) the state’s education lobby, which finds itself in the unusual position of preferring a Republican governor’s budget that proposes to hold K-12 harmless; b) Gov. Tim Pawlenty, who’s pledged to nix any tax increases; and c), in a practical if not a public sense, the House DFL caucus–which is generally much more conservative on taxes than its Senate counterpart.

More about some key particulars of the Senate DFL proposal:

Health care cuts. The terms of the American Reinvestment and Recovery Act make it impossible to change eligibility standards for programs funded with federal Medicaid dollars during the 2010-11 biennium. But that’s not to say the spending in those areas can’t be touched. Since Medicaid-related programs account for about 85 percent of the state’s health care costs, there will certainly be cost-cutting measures in those areas. "It’s true that we can’t cut eligibility," says Health and Human Services Budget chair Sen. Linda Berglin (DFL-Minneapolis), "But that doesn’t mean we can’t cut [provider] reimbursement rates and be more efficient with our dollars."

But there are limits to those savings. So where will the rest of the requested $719 million in health and human services cuts come from? "I have quite a number of proposals that I think are alternatives to the governor’s [cuts]," says Berglin, "and I don’t know the total savings of that.I’m still waiting for fiscal notes [with cost estimates]. I’m hoping to alleviate some of the worst of the cuts with my alternatives. One area I worry about is long-term care–that’s about one-fourth of my budget, so it would be hard not to do something there. But we’re talking about elderly, frail, disabled people."

Education cuts. The approach here involves across-the-board cuts for all districts, according to one DFL senator, and not category-based cuts for certain programs. This could pose political difficulties for the DFL in some swing districts around the state, the senator concedes: "Obviously you’re concerned if you have to make budget reductions in education. But I think it’s important not to worry about politics now. It’s more important to try to bring some fiscal stability to the budget. And with K-12 and higher ed at 50 percent of the budget, you cannot bring fiscal stability without a combination of base cuts and new revenue."

The near-$1 billion cut to education coincides roughly with the potential savings from a plan favored by some Senate DFLers that would transfer some of the education funding burden back to local property taxes. (PIM has written about that plan previously: [I] [II]) But two sources close to the Senate Tax Committee say they don’t think that proposal could win Senate support. "From the House? Maybe," says one. "And that could put it back in play. But I don’t see that coming out of the Senate."

Tax increases. In committing to pass a budget with $2 billion in revenue hikes, Senate DFLers are expected to lean heavily on upper-bracket income tax increases. They drew additional support for their case from the 2009 Minnesota Tax Incidence Study released earlier this month [previous PIM item], which shows that the top earners in the state pay the lowest effective tax rates. Tax Committee chair Sen. Tom Bakk (DFL-Cook) (pictured above) has said taxes on the highest incomes are where the "lion’s share" of the new money would come from; a source close to Bakk’s committee says upper-bracket increases may be closer to 35-40 percent of the $2 billion nut.

Bakk is thought to have interest in a possible fourth income bracket modeled on California’s top rate of 10.3 percent on incomes over $1 million, which would reportedly raise around $640 million per biennium. But it’s also possible the Senate will revisit the 9.7 percent top bracket proposal that it’s passed before, in 2007. Still another possibility involves combining some version of an upper-bracket increase with a temporary flat-rate surcharge on all incomes of the sort that Gov. Al Quie applied in the early 1980s.

Here is the Minnesota Budget Project’s breakdown of the proceeds from various tax-increase approaches:

It’s harder to say what the source of the additional non-income-tax revenues might be. Bakk has publicly criticized sales tax extenders, but they remain one of the few obvious sources of substantial revenue.