State showing a slight surplus, but a court challenge to cigarette fee could eat up funds and much of a $317M tax relief account

ST. PAUL -- Minnesota legislators return to the Capitol today with a little fiscal breathing room, but a court decision could erase the modest surplus.

ST. PAUL -- Minnesota legislators return to the Capitol today with a little fiscal breathing room, but a court decision could erase the modest surplus.

The state Finance Department released a budget forecast Tuesday showing an $88 million surplus in the current two-year, $31.2 billion budget. However, a court challenge to last year's cigarette fee could eat up the surplus and much of a $317 million tax relief account.

Still, the report marked a turnaround from 2002 when legislators had to make deep cuts in programs to balance the budget in light of a nearly $4.6 billion deficit.

"For the first time in a long time, we are able to show a positive balance on the bottom line," Finance Commissioner Peggy Ingison said.

Reaction among Republicans and Democrats appeared to come from different planets.


"It represents the state being in about as strong a fiscal position that it ever has been," Gov. Tim Pawlenty said.

"That's flat wrong," responded Chairman Richard Cohen, DFL-St. Paul, of the Senate Finance Committee, adding that the budget is not strong at all.

Tuesday's budget forecast, which legislators use to decide how much to spend, could not answer one question - how much money, if any, will be available from the new 75-cent-a-pack charge on cigarettes.

Cigarette makers and distributors sued the state, saying a 1998 agreement between big tobacco companies and the state forbid new fees on smokes. A district court sided with the tobacco companies, but an appeal is pending in the state Supreme Court.

If the court agrees with the tobacco companies, the state will lose an estimated $370 million, Ingison said. However, how to deal with that splits policymakers, including friends Pawlenty and House Speaker Steve Sviggum.

Sviggum, R-Kenyon, said an adverse court decision would mean rethinking property tax relief and other programs his Republican caucus supports.

Pawlenty said the lawsuit is something to consider, "but it is not a make-or-break issue."

Wayne Cox of Minnesotans for Tax Justice said the lawsuit question is significant.


"I call it an asterisk forecast," Cox said. "Minnesota really won't know its financial picture until the courts act, possibly late in the legislative session. Its hands will be tied until then."

If the decision goes against the state, it could eat up the $88 million surplus and $317 million that is supposed to go to tax relief.

The surplus was not bigger because the state lags behind other states in creating jobs, but State Economist Tom Stinson did not have an answer as to why.

"The real question is if this is a momentary period of underperformance ... or if this is the beginning of a longer trend," Stinson said.

Cohen said he knew why the job market was down.

"We are losing the good-paying jobs and we are creating the McDonalds (jobs)," the senator said.

Fewer jobs meant less tax money going into the state treasury. Spending was down slightly, helping make the small surplus.

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