Revenues collected by the state of Minnesota in the first quarter of the 2010 fiscal year are running slightly below estimates, raising the prospect that the state’s deficit problem may be getting worse, not better.

The state’s continuing financial struggle comes even as most signs point to a return to actual growth in the economy. But even as the economy grows modestly, job growth continues to lag behind, and that’s the biggest reason for the sluggish improvement in state tax receipts. According to a report issued Tuesday by the state office of Minnesota Management and Budget, state collections of personal income taxes were off $93 million, or 5.4 percent from estimates made back in February. The reduced income tax collections reflect the state’s high unemployment rate this summer. The state’s unemployment rate dipped to 7.3 percent in September, according to a labor report issued Thursday, which should improve tax collections in the future. At the same time, a much higher percentage of Americans (about 17 percent according to state officials are either unemployed, discouraged, or working fewer hours than they would like due to the economic conditions.

“It’s not very good news,” said state Sen. Tom Bakk, DFL-Cook. “The income tax numbers were down 93 million dollars, and that’s a reflection of the unemployment situation.”

Reduced sales tax collections, which ran $20 million, or 2.3 percent below projections, also contributed to the overall revenue shortfall.

At the same time, collections of corporate income taxes were up 41 percent, while tax collections from the sale of motor vehicles jumped 25 percent, a reflection of the success of the federal government’s “Cash for Clunkers” program. In both cases, however, the overall dollar amount of those increases was too small to erase the differences in personal income and sales taxes. The lower-than-anticipated revenues meant a deterioration in the state’s budget picture for the 2008-09 biennium, which ended $142 million below projections.

The latest finance report also includes a somewhat mixed economic forecast compared to the one used by state officials in February. The latest forecast predicts a 2.5 percent economic decline in 2009, slightly better than the 2.7 percent decline foreseen in February. The latest forecast shows little change in its growth forecast for 2010, although it downgrades its growth estimate for 2011 from 3.5 percent to 2.9 percent.

Looking towards 2012

The slower growth estimate for 2011 is likely to boost red ink projections for the next biennium, which begins July 1, 2011. In the February forecast, state officials predicted a $5.1 billion deficit in the next biennium, although that balloons to $6.5 billion when the effect of inflation is added.

“These numbers are more for planning purposes, but they do indicate that there is no quick answer to Minnesota’s economic challenges,” according to Christina Wessel, with the Minnesota Budget Project.

Bakk says the state will likely face at least a $7 billion shortfall when all is said and done. Adding to the problem, he says, is the decision by Gov. Tim Pawlenty to delay a billion dollars in payments in schools. While that allowed the state to balance the books this biennium, the prospect of reimbursing schools will only add to the state’s fiscal problems in future years.

Without additional federal stimulus funding, which cushioned state cuts in the current biennium, Bakk said the state may well face a historic budget crisis by 2011.

Bakk, who is running for governor, says he’s made it his mission to speak honestly about the enormous challenges the state is facing, and the reality that tax increases can’t solve the problem alone. He said DFLers need to realize the limits of tax increases on the wealthy, while Republicans need to reject the notion that reforming government offers the kind of savings necessary to bring the budget into balance.

“People seem to want easy answers, but there aren’t any,” he said.