CHICAGO — Minnesota Gov. Tim Pawlenty outlined a broad legislative agenda yesterday in his final state of the state address, which focused on job creation, cutting taxes for employers, reining in government spending and eliminating a $1.2 billion budget deficit through cuts.
The Republican governor, who is not seeking re-election this year, proposed the Jobs Creation Bill that provides six forms of tax credits and other incentives for employers. It includes a 20% reduction in the corporate tax rate, a 20% exclusion from taxation on small business, an “angel” investment tax credit for startup companies, a research and development tax credit, a capital gains exemption for qualifying investment, and incentives to promote investment in small businesses.
Employers want government to “get out of our way, leave us alone, make it easier, not harder,” Pawlenty said in pushing his proposals as a means to spur the job growth needed to help lift the state out of its economic struggles. “The state of our state is challenged, but our spirit is resilient.”
He also called on lawmakers to make the current property-tax cap permanent and asked them to approve a constitutional amendment that would limit state spending.
The state is facing a $1.2 billion deficit in its current two-year budget due to declining revenues. The governor said he would lay out his plan to balance the state’s books — one that won’t include a tax increase — on Monday.
“It will include very dramatic and painful spending reductions. While programs for the military, veterans, core public safety functions, and K-12 classrooms will be protected, nearly all other areas will be proposed for reduction,” Pawlenty said, calling on lawmakers to offer alternatives if they oppose his cuts.
The impending cuts set the stage for the latest round of fighting between the governor and Democrats who control the legislative chambers. Pawlenty cut $2.7 billion — through a process known as unallotment — from the operating budget approved by the Legislature last year.
The Senate this week approved a $1 billion capital budget, known as the bonding bill, up from Pawlenty’s $685 million proposed package. Democrats have also introduced legislation that would curtail the governor’s ability to “unallot” spending measures in the future. A state court judge ruled against the governor on a recent challenge to his unallotment powers and the state Supreme Court is reviewing the ruling.
Minnesota’s credit is under pressure because of the deficit and its reliance in the past on one-time revenues to erase red ink. Moody’s Investors Service earlier this week revised the outlook on the state’s Aa1 general obligation rating to negative from stable.
The state is especially vulnerable to ongoing fiscal weakness due to its depletion of reserves and reliance one-time measures like bill payment delays, fund transfers, and federal stimulus funds to erase a $4.6 billion deficit going into the current budget cycle, straining the state’s liquidity and limiting its options, Moody’s said.
Minnesota carries top marks of AAA from Fitch Ratings and Standard & Poor’s, though Fitch assigns a negative outlook.