Minnesota Held Hostage

How the governor's political aspirations are preventing a budget deal

During his deficit-laden two-and-a-half-year tenure as governor of Minnesota, Tim Pawlenty's boyish affability has been his most formidable political asset. The 44-year-old Lutheran and U of M graduate has demonstrated a sure intuitive grasp of old-school Minnesota provincialism that befits the former hockey-playing son of a South St. Paul milk truck driver. He exudes an unpretentious confidence that seems informal but not callow or cavalier. Pawlenty's down-home bona fides and open manner have won him a great deal of slack with the state's press corps along the way. When news of his association with a dubious-seeming telecom venture broke during his first year in office, Pawlenty sat down with the capitol press corps for more than two hours, simultaneously acknowledging and downplaying his relationship with the firm. During that sit-down, he volunteered that he had been paid more than $4,000 per month by another telecom executive during his gubernatorial campaign and couldn't prove he'd provided any services in return. Inverting the political adage that cover-ups are more damaging than the original crimes, his ostentatious disclosure quelled another wave of potential scandal like a controlled burn set in the path of a potentially calamitous brushfire.

But that adroit bit of political chutzpah was decidedly small potatoes compared to the high-wire act Pawlenty has been performing for the past year or so. Since getting the credit for resolving a whopping $4.6 billion budget deficit in 2003 without reneging on his no-new-taxes pledge, the governor has been mentioned as a trendy dark horse candidate for president or vice president in 2008. Pawlenty offers the obligatory disclaimer that he hasn't given a second thought to running for higher office. But actions speak louder than words, and by his actions, it is increasingly apparent that Pawlenty is putting political ambition ahead of sound financial management of the state he was elected to serve. Convincing the public otherwise has begun to strain his considerable charms.

It's hardly a secret that Pawlenty's no-new-taxes pledge is the key to any viability he might have as a national candidate. The right-wing Republican Party insiders who have done the most to promote the governor's name are Grover Norquist and Paul Weyrich. Norquist, who runs Americans for Tax Reform, is the de facto ringleader of the pledge. Weyrich, a conservative commentator and fundraiser who heads the Free Congress Foundation, flatly told the Strib that "if [Pawlenty] breaks that pledge, he's absolutely dead."

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For the moment, Pawlenty is not only very much alive, but moving up GOP ranks as his peers fall by the wayside. In recent years, Republican governors in Idaho, Georgia, Kentucky, Ohio, and Alabama have all chosen to break their pledges and raise taxes in order to supply the basic needs of their constituents without jeopardizing the fiscal integrity of their governments. The majority of these states have traditionally been staunchly conservative, suspicious of politicians, and antagonistic toward taxes. By contrast, as Rep. Ron Erhardt (R-Edina), chair of the House Transportation Committee, put it, "Minnesota is a high-service state. We've always asked for, wanted, and gotten a high level of services. And that's a major challenge right now. We don't have to go hog wild on spending, but we do need to take care of some things. Education is one; transportation is another. The whole problem, of course, is that the governor has made the pledge and he is seeking higher office, so he is trying to live with his promise of no new taxes."

Unfortunately, nearly all the easy budgetary remedies available to Pawlenty were tapped out in 2003. To balance that year's gargantuan deficit, Pawlenty used just about every stray dollar, cost shift, and financial gimmick at his disposal--and then slashed nearly $2 billion worth of services. More than $1 billion in onetime monies from the state's 1998 tobacco settlement and the reserve fund were tapped. Hundreds of millions of dollars in new or raised fees were imposed. Meanwhile, the responsibility for funding hundreds of millions of dollars' worth of services was pushed down to local property tax rolls. Even so, state funding for education declined for the first time in modern history, and tens of thousands of people were deprived of state-supported health insurance.

 

Because state budgets are set in two-year cycles, the 2005 session represents Pawlenty's second attempt to dodge and distance himself from the absolutely deadly "T" word by any means necessary. And the means have been many, most of them designed to obscure the fact that the budget is a mess--held together with smoke and IOUs and desperately in need of more stable and substantial sources of revenue.

"The state is running a structural deficit," says John Gunyou, the former finance commissioner under Republican Gov. Arne Carlson and the current city manager of Minnetonka. "What that means is that, for the fourth year in a row, there is not enough ongoing state revenue to keep up with ongoing state spending--and that's before you make any improvements. It's irresponsible financial management."

Pawlenty and his no-tax allies have famously said that Minnesota has a spending problem, not a revenue problem. As evidence, they frequently trumpet the fact that tax revenues will rise 8 percent, or approximately $2 billion, during the next biennium. But what they conveniently omit is that over half that increase will be consumed in replacing the more than $1 billion in tobacco settlement and reserve fund monies that were tapped in '03 and are no longer available. Or that the estimated revenues coming into state coffers contain an upward adjustment for inflation, while the projected spending requirements don't. Or that the growth in the state's population that will help to generate the revenue increase will also mean more need for services. What does it all add up to? According to Senate tax committee chair Larry Pogemiller (DFL-Minneapolis), "If you're talking about real [inflation-adjusted] dollars per capita, the governor's proposed budget for '06-'07 represents about a 2 percent decline from the previous biennium."

The 8 percent tax revenue "increase" is just one of many feats of accounting deployed by Pawlenty. The governor, for example, accurately claims that his proposed budget will provide a 9 percent biennial increase in the state's funding formula for education. What he doesn't say is that there is no such increase for education costs that fall outside the state formula, a class of expenses that include special education and the compensatory aid used to benefit schools with an above-average number of students from poverty-stricken homes. Pawlenty likewise fails to mention that approximately $300 million of that biennial increase would come from allowing school districts to increase local property taxes. You may recall that then-House Majority Leader Pawlenty was among those who took credit for lifting the burden of education funding from property-tax payers during the "big fix" tax reform enacted in the waning days of the Ventura administration. Back then almost everybody agreed that using property taxes to fund schools offered unfair benefits to wealthier districts. But since shifting taxes onto other units of government doesn't count against his no-new-taxes pledge, Pawlenty now seems willing to risk the inevitable lawsuits challenging this inequitable funding.

It is understandable that Pawlenty plays political hardball with teachers' unions, who vote overwhelmingly against his party and fund his opponents. The union has sufficient clout to ward off the governor's no-strike proposal and his call for private school vouchers. But it is disingenuous for Pawlenty to propose that at least 65 percent of education revenue be devoted to "classroom learning." This implies that schools are bureaucratically top-heavy and could easily do more with less. But two of the most prolific sources of bureaucratic paper-shuffling involve testing and assessments required by the No Child Left Behind law and special education--each of which is mandated, and systematically underfunded, by the Republican- dominated federal government.

The bottom line is that none of the competing budgets offered by the House, the Senate, or the governor increases real per-pupil funding for Minnesota schoolchildren this coming biennium. And the per-pupil funding in this smug, wealthy "brainpower" state is already below the national average.

 

But if Pawlenty's hard line on taxes has played havoc with state budgets and services, it has simultaneously had a much more bullish effect on the value of his own political stock. During last year's Republican convention in New York City, Pawlenty was treated as something of a prodigy by the right-leaning national media. No less than the Beltway Boys themselves, Fred Barnes and Morton Kondracke, stopped by to pay their respects. Pawlenty also rubbed shoulders with some of the party's power brokers at the convention, and again at this year's inauguration bash. And during that time his name has been bruited about more and more regularly when 2008 comes up.

In retrospect, the New York trip may have been a bit too heady for Pawlenty's own good. Shortly after his return, he began issuing what has become a series of proposals--on gambling, transportation, and, most recently, cigarettes--that seem specifically tailored to secure large sources of revenue for the state without appearing to break his no-tax pledge. To varying degrees, all have been political miscalculations that have exposed his ambition, tarnished his credibility, and hindered his prospects for national office.

Pawlenty's attempt to carve out a piece of Native American gaming revenue for the state contained a fistful of flaws. First of all, most of the tribes in Minnesota had signed an agreement with the state explicitly detailing the terms of their gambling practices in Minnesota, and they had never violated it. Without question, the distribution of gaming revenues was, and still is, heavily tilted in favor of the tribes, at least when compared with subsequent compacts negotiated in other states. But when Pawlenty demanded last September that the tribes pony up $350 million a year or face competition from the state for their gaming dollar, he engaged a potent foe: Gaming-rich tribes are serious political donors, and thus serious political players, in their own right. When the tribes stonewalled him, the governor's next gambit, announced during his January State of the State speech, was scarcely less ham-handed: a proposed partnership between the state and three remote northern tribes geographically excluded from the gaming windfall. All the impoverished tribes had to do was deposit an initial $200 million "partnership fee" in the state treasury, spend twice that amount acquiring land and building a Twin Cities casino, and give the state a hefty share of their profits--$100 million was a low estimate--every year.

Four months later, all but one of the northern tribes have walked away from the deal. Opponents of the arrangement have unearthed Pawlenty's own statements, made shortly after he was elected governor, saying he would not support an expansion of gambling and did not believe it was a proper role for government. His "Gaming Fairness" act has yet to make it out of committee in either the House or the Senate. Having broken his no-new-gambling pledge for the sake of his no-new-taxes pledge, Pawlenty now has nothing to show for it but a $200 million hole in his budget proposal.

If that sounds like a lot of money, it pales beside the fiscal juggling act Pawlenty has before him concerning the state's roads. Pawlenty is currently hell-bent on pushing through a $7 billion transportation funding package without raising taxes. To prove it, he just vetoed a bill approved by bipartisan majorities in the House and the Senate that would have increased the gas tax for the first time since 1988 and dedicated the proceeds to transportation infrastructure.

Two years ago, Pawlenty tried to stave off a gas tax by borrowing $800 million through 20-year bonds, and taking another $200 million from the state's highway maintenance money. But since the MnDOT estimates that road projects will face an annual $1 billion shortfall every year beginning in 2007, the move simply traded long-term debt and potentially unsafe roads for a stopgap fix. Last December, the governor came back with a proposal to borrow another $4.5 billion over 20 years, and ask voters to approve a constitutional amendment that would divert $2.6 billion in motor vehicle sales tax money out of the general fund over a decade's time.

If his proposal is approved, the budgetary fund that is used to pay for education, health care, and a vast array of other vital services of state government would be deprived of hundreds of millions of dollars every year for a decade. Asked how, or if, the state would replace those diverted dollars, Pawlenty and his administrators speak of "re-prioritization" of services and offer up the handy nostrum of "economic growth."

"No self-respecting politician would put their name on what the governor refers to as his transportation plan," says former finance commissioner Gunyou. "It is 100 percent borrowing and transfers and shifts.

"The problem with debt is you have to pay it back. The House did some projections that show over 20 years, there will be fewer dollars going to maintenance of roads than there are today, not even adjusting for inflation. A third of our roads are classified as a category called 'too far gone'--meaning they can't be patched, they have to be reconstructed. But the governor has cut maintenance. I would call his transportation program insane. Meanwhile, the bill that passed in the Republican House is a good bill that funds roads, funds transit, and honestly pays for what we need."

Pawlenty not only vetoed that bill, he called its bipartisan supporters "dumb" for wasting time by bringing it to his desk. Then, to climax the photo op, he stamped VETO on the legislation in huge red letters while his antitax supporters applauded.

Did somebody say insane? The very next day, Gov. Tim Pawlenty held a press conference to propose a 75 cent increase in the wholesale cost of cigarettes. This was not, he emphasized, a cigarette tax. "I believe it's a user fee," he said-- specifically, a "health impact fee." The governor's aides passed out a flyer containing nine bullet points, each explaining a circumstance where a fee is more appropriate than a general tax.

One of the bullet points claimed that fees are the appropriate designation when "public benefits or costs can be apportioned to sub-groups of citizens... the more precise the assignment, the better." But the gas tax Pawlenty vetoed was levied against consumers of transportation, and would have gone to a state fund specifically designed to benefit users of the transportation system. The health impact fee Pawlenty proposed would be levied against cigarette smokers, yet less than a third of the revenue would actually go toward trying to affect the health of those smokers. The vast majority--all but $100 million of the anticipated $385 million total--would instead be earmarked for education. As Senate Health and Human Services committee chair Linda Berglin ruefully remarked, "My division would mostly just be laundering the money for education." Indeed, shortly after his cigarette tax announcement, Pawlenty dispatched his education commissioner around the state to spread the word about this new boost in education funding. But according to literature from the National Council of State Legislators, one of two primary sources cited on the flyer, it is of dubious legality to devote "fees" instead of "taxes" to education funding.

Only the most gullible or blindly partisan Minnesotans fail to see the contradiction between Pawlenty's gas tax veto and cigarette tax proposal. But as Steve Perry points out (see p. 16), this issue of whether something is a tax or a fee is a parlor game of pundits, and ultimately far less important to the gatekeepers of higher office than who is paying the money and who isn't. If there's political cover to be had (the "fee vs. tax" charade) and the political donor class is relatively untouched, such moves are fine with them.

Studies have shown that those earning less than $30,000 a year will pay approximately half of the total cigarette tax that Pawlenty just proposed. By contrast, when the DFL majority in the Senate passed a bill that seeks a two-year boost on income taxes paid by the state's wealthiest residents, the governor went ballistic, calling the proposal "profoundly stupid" and "a job killer." But a comprehensive tax incidence study conducted by the nonpartisan bean counters in the state's revenue department clearly shows that the comprehensive state and local government tax burden on these wealthiest wage-earners will drop from 9 percent in 2002 to 8.5 percent in 2007, even as the burden rises for most middle-income residents, who are currently donating more than 11 percent of their income to taxes.

As for the notion that progressive taxation--meaning simply that the wealthiest pay a slightly higher share than everyone else--kills off jobs, consider that Minnesota began to emerge as a regional economic power at roughly the same time it began instituting higher, progressive taxes and investing the proceeds in crucial areas such as education, transportation, and health care. And what has Tim Pawlenty's no-new-taxes wrought? Twenty-five states have regained or surpassed the employment levels they enjoyed before the terrorism-abetted recession of 2001, but Minnesota is not among them. As for job growth in the governor's "business-friendly" Minnesota, it has lagged behind for the first four months of 2005, as it did in 2004.

Also in this issue: Pawlenty for President FAQ: See Tim Run by Steve Perry

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