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Tax cuts or spending to help economy?

ST. PAUL - Economists predict the worst of Minnesota's economy is yet to come, but Democrats and Republicans have different ideas about how to deal with what is expected to be a rough six to nine months.

Republican Gov. Tim Pawlenty would deal with a projected $373 million state budget deficit caused by the economic slowdown by trimming taxes, making more money available for Minnesotans to spend. Democratic leaders would gather in a special legislative session and approve millions of dollars in public works projects to create jobs.

The divergent visions appeared Friday after the state finance commissioner announced new estimates show the state budget likely will face a $373 million deficit, about 1 percent of the state's $34 billion, two-year budget.

Finance Commissioner Tom Hanson and State Economist Tom Stinson blamed a slumping housing market, high oil prices and lower employment on an economic slowdown that will reduce how much money state policymakers can spend.

Hanson and his boss, Pawlenty, did not see the deficit as a major problem for state government.

"This problem is manageable and we are in a good position to address it," he said.

Pawlenty said various funds within state government have large enough surpluses to cover the deficit.

State revenues are expected to continue to rise, but not as much as predicted in earlier budget forecasts.

Democratic-Farmer-Labor Party leaders said their solution to the deficit would be a special December legislative session to approve more than $600 million worth of public works projects around the state, which they said could create 10,000 jobs.

Leaders of the DFL-controlled Legislature will meet with Pawlenty Monday afternoon to discuss whether the governor should call a special session.

Pawlenty said he sees no need for a special session to create jobs for construction workers - "a select few who happen to be in the business of building government buildings." However, he said he is willing to hear out DFL leaders.

House Minority Leader Marty Seifert, R-Marshall, said he did not think a special session is needed. In fact, when the regular session begins on Feb. 12, he promised an effort to cut government spending. Pawlenty said he did not think cuts would be needed.

While the governor said Minnesota's economy is following a national trend, Democratic leaders blamed Pawlenty for failing to create jobs.

"The north star is dimming," Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, said.

Pointing to a chart showing Minnesota is lagging behind other states in job growth, Pogemiller and House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, placed the blame at Pawlenty's feet because he has vetoed public works and transportation funding bills that would have boosted construction jobs.

"Job creation is our priority right now," Kelliher said.

A vetoed Mall of America expansion plan would have meant 7,000 new jobs, Senate Tax Chairman Tom Bakk, DFL-Cook, said. Bakk said all of the state would benefit from the mall's expansion because of added tax dollars it would create.

State Economist Tom Stinson reported that 2,000 jobs were added in Minnesota last year, compared to 12,000 in earlier years. About 30,000 jobs should have been added if Minnesota's economy mirrored what is happening across the country, he said.

"This is not particularly a good record," Stinson said.

Bakk said that besides a public works bill - funded by the state selling bonds - Democrats want to close what they see as a loophole that allows some corporations with foreign holdings to avoid paying taxes. That would cut the $373 million deficit by $244 million, he said.

Pawlenty agrees to close the loopholes, but he wants to use the money to cut taxes for all Minnesotans. If the public can keep more money, more will be spent and taxes will increase, the governor said.

The deficit, which must be filled by June 30, 2009, was projected because economists see the state economy slowing for the next six to nine months. Stinson said Minnesotans can expect state economic growth to be less than half of the normal 3 percent annual increase.

While he said the slowing economy does not indicate a recession, the state's economic consultant says there is a 35 percent chance that a recession is possible.

Stinson said he expects the economic slump to be the worst in the first half of 2008, but growth after that should still lag behind the normal 3 percent annual growth. The expectation of better times in late 2008 is based on lower oil prices.

The housing market, which significantly affects northern Minnesota's lumber industry, is not expected to improve.

"It doesn't look to me like housing is going to turn around any time soon," Stinson said.

Lumber will be one of the worst-hit industries, he added. "Lumber wood products in not the place you want to be."

Retail sales are down due to declines in other industries.

However, health care and agriculture are growing faster than the national average.

An improved economy is predicted for late 2008, although that is based on a drop in oil prices.

Stinson said lawmakers can do little to improve the economy.

Finance Department figures show that the biggest part of the state problem came in a $14.3 million decrease in expected corporate tax revenues. Individual income taxes are in line with earlier predictions, but sales taxes now are predicted to drop 3.3 percent.

At the same time, state spending only looks to rise 0.2 percent from earlier projections.

Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.