In Minn. budget mess, 2 sides have some options

As intractable as the budget mess that led to the Minnesota government shutdown seems to be, there is a way out.

For all their rhetoric, Democratic Gov. Mark Dayton and GOP leaders have shown hints they could compromise, and in some cases offered small clues on how.

Dayton has pushed for months to raise income taxes on the state's wealthiest residents to fix a budget $5 billion in the red. Yet he has suggested he would drop that proposal if Republicans who control the Legislature agree to some other way of raising money to get closer to his spending target of nearly $36 billion.

That's a big if for the GOP, and yet in the last round of negotiations, party leaders showed they might finally budge on their proposed spending limit of $34 billion - the amount the state is expected to collect in the next two years if no new revenue is found.

"They pick a number in between and find another way to pay for it other than an income tax, which if you're a Republican, they hate. That's the third rail of Republican politics - that's the worst tax," said Tom Hanson, who served as the state's finance commissioner during Republican Gov. Tim Pawlenty's administration.

To get closer to Dayton, the GOP could go for several options that don't include the dreaded T word, including further delays in school aid payments, surcharges on medical providers, expanded gambling or issuing bonds for tobacco payments.

The shutdown that started Friday - Minnesota's second in six years - sent 22,000 state workers home, halted road construction and closed state parks leading into the Fourth of July weekend. Minnesota is the only state to shut down government this year, even though nearly all states are dealing with significant budget shortfalls. The standoff started almost immediately after Dayton and GOP legislative majorities were sworn in early this year.

No new talks were expected until Tuesday. Though maddening for a public that has lost a wide array of services, the break could allow time for the two sides to cool off - and gauge the vehemence of public reaction.

"The most likely scenario is that Gov. Dayton recognizes that the Republicans in the Legislature will not agree to a tax increase, and the Republicans in the Legislature recognize that Gov. Dayton will not agree to a $34.2 billion budget. The difference is going to be, I believe, made up by some additional spending beyond where the Republicans are today and Gov. Dayton giving up on his tax increase," said former Rep. Paul Kohls, a Republican from Victoria who served during the partial shutdown in 2005.

That shutdown ended when Pawlenty, a Republican-led House and a Democratic-controlled Senate agreed to raise cigarette charges by 75 cents per pack. They called it a "health impact fee," although many saw it as a tax.

Here's a look at some of the revenue options that could help break the current stalemate in Minnesota:

-Delayed school aid payments. The accounting maneuver helped Pawlenty finish a budget in 2009, when he exercised his executive authority to push $1.2 billion in school payments into the next fiscal year. The price of balancing the state's books this way is that schools have to wait longer for the money, and the payments must be caught up if budget surpluses return. As the current shutdown started, both sides released documents showing that Republicans had proposed delaying another $700 million in school payments, and Dayton was open to it.

-Medicaid surcharges on health care providers. Dayton's initial budget proposal included this complicated financial arrangement to draw nearly $900 million from the federal government. Here's how it would work: The state would raise surcharges on hospitals, health plans, nursing homes and care centers for those with developmental disabilities, triggering an influx of federal money. The providers would get some of that money back through higher reimbursements. Pawlenty used the move in the 2003 budget. The hard part, according to Hanson, is that some providers win and others lose.

-Gambling. A perennial proposal to allow casino-style gambling at two horse-racing tracks in Minnesota is still around. Backers say adding slot machines at Canterbury Park in Shakopee and Running Aces in Columbus would raise more than $200 million in new tax revenue over the next two years. Dayton is open to it. Republicans are divided, with some social conservatives opposed on moral grounds.

-Eliminating tax breaks. The head of the Senate tax committee said early this year that ending exemptions to sales, income, property and corporate taxes could help pare down the deficit, although Republicans were quick to take back the comments. Most Republicans now equate eliminating tax breaks with tax increases.

-Sales tax expansion. Minnesota doesn't tax clothing or food, and there have long been proposals to expand the sales tax while perhaps lowering the tax rate. Almost no one at the Capitol likes the idea, but extending the tax just to clothing could bring in roughly $600 million every two years.

-Tobacco securitization bonds. Republicans revived an idea first floated by Pawlenty in 2009 - raising one-time cash by selling bonds backed by annual tobacco settlement payments the state gets from cigarette companies. The Pawlenty proposal would have raised nearly $1 billion but was roundly rejected by the Democratic-run Legislature then. The Republican proposal was for less, but Dayton rejected the option in the latest round of negotiations.

But the governor left things open in an interview Friday.

"I think everything that has been discussed is certainly open for reconsideration. There are only so many sources of revenue, and believe me we scoured the landscape on both sides to try to find it," Dayton said. "But my preference would continue to be having the wealthiest Minnesotans pay their fair share."

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Associated Press writer Patrick Condon contributed to this report.

(Copyright 2011 by The Associated Press. All Rights Reserved.)

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