MANKATO — The Republican wants to slice another $5 billion from the state budget, saying it must be done to protect employers from tax increases.

The Democrat thinks that would be disastrous, proposing instead a combination of cuts and taxes on wealthier Minnesotans.

The Independence Party candidate is willing to add revenue from gambling to help reduce the magnitude of cuts, but he’s not inclined to raise general taxes.

In Tuesday’s special election in state Senate District 26, tax and budget issues — and how they affect the economy and the core services provided by government — are at the heart of the debate.

With the state facing a $1.2 billion gap between projected spending and anticipated revenue in the current budget, lawmakers and Gov. Tim Pawlenty have an immediate problem waiting for them when the 2010 legislative session begins Feb. 4.

The red ink for the two-year budget period starting in July 2011 is even deeper — projected at $5.4 billion. And the new deficits come after years of shortfalls that have left the state with no reserve funds, virtually no easy spending cuts and few of the accounting shifts previously available.

Calling for cuts

Republican Mike Parry of Waseca has a straightforward solution for the projected budget shortfalls — cut spending by 15 percent. That’s about $5 billion in a $34 billion two-year budget.

Parry insists his proposal isn’t just a statement of his preference for cuts over taxes. Reductions of that level are realistic and can be accomplished.

“I think you can. I really do,” Parry said. “I mean, there are so many inefficiencies in government.”

Talking about making big cuts in spending has proven easier than identifying specific areas for the ax. Even Republican Gov. Tim Pawlenty — who spent years telling Minnesotans the shortfalls were the result of too much spending, not too little revenue — seemed to flinch when he got his chance to prove the point last summer.

Using his unallotment powers rather than negotiating a budget compromise with Democratic lawmakers, Pawlenty eliminated a $2.7 billion budget shortfall. But he used spending cuts to make up just $800 million of that total, resorting to delays in payments to schools and other onetime accounting measures to handle the rest.

Parry was asked, if billions of dollars in inefficiencies are present in the budget, why Pawlenty didn’t target them when he had the chance.

“I wasn’t there,” Parry said. “I don’t know what he was thinking.”

One problem, according to Parry’s philosophy, might have been the governor’s attempt to protect K-12 education funding and other popular parts of the budget. Parry would exempt only two relatively small sections of the state budget — veterans benefits and public safety programs.

Every other part of the budget must be cut — even property tax credits and other favored line items that directly reduce people’s property taxes, according to Parry.

“We’re going to have to,” he said.

He cautions that he isn’t necessarily suggesting across-the-board cuts of 15 percent. Some programs can be eliminated or aggressively reduced, allowing for lesser reductions for higher-priority spending.

Words of warning

Democrat Jason Engbrecht of Faribault predicts devastating impacts if spending is cut by 15 percent.

“I’ve looked very closely at our budget,” said Engbrecht, who teaches physics at St. Olaf College. “... It’s going to mean laying off an awful lot of teachers in our classrooms, and our class sizes are going to shoot up.”

South-central Minnesota communities also would be deeply harmed by cuts in state aid to cities, counties, nursing homes and hospitals, he said.

Many residents — particularly the elderly would be forced from their homes as property taxes rise and local services decline, Engbrecht predicted.

Budget cuts are going to be necessary, but education spending should be protected from reductions if at all possible, he said.

“I think of schools as like our house payment — we don’t have any choice,” Engbrecht said. “We have to make our house payment or we lose our house.”

If school funding isn’t maintained, the state would lose the economic competitiveness that comes with a strong workforce, the innovation that comes from a highly educated populace, the population stability that comes from a citizenry that wants to raise families here.

Assessing alternatives

Instead, Engbrecht proposes erasing a portion of the budget deficit by raising taxes on Minnesotans who earn more than $250,000 a year. Tax incidence studies show that those Minnesotans are paying between 9 percent and 10 percent of their income in local and state taxes, compared to around 12 percent of the incomes of Minnesotans earning between $20,000 and $100,000.

“Nobody’s saying they have to run the whole state,” Engbrecht said of wealthier Minnesotans. “But if we can ask them to pay their fair share, that would go a long ways toward addressing our budget situation.”

Parry, a business owner and former radio industry worker, said higher taxes are the worst alternative — especially in a weak economy when jobs are desperately needed.

“People always want to take from the rich business people,” Parry said. “They have built a business that employs hundreds or thousands of people. What gives the state or the Legislature the right to say they have to share that with everybody else?”

One revenue source that Parry would support is state-sponsored casinos at horse-racing tracks.

“It’s a way to generate revenue without raising taxes,” Parry said.

Engbrecht said he would be open to additional revenue from gambling, as is Roy Srp — the Independence Party candidate and Waseca mayor. But Srp, before agreeing to new state-sponsored casinos, would propose “respectful” negotiations with tribal governments in the state to see if they would be interested in sharing more of their casino profits in return for a moratorium on new state-owned casinos.

“I think that might make them come to the table,” Srp said.

Srp hopes to avoid cuts to schools and isn’t inclined to raise taxes for the state general fund, although he believes wealthy Minnesotans should pay the same percentage of their income in taxes as everyone else.

“There is absolutely no reason why it can’t be a fair tax,” Srp said.

But most of the deficit is going to need to be eliminated through reductions in government spending, a difficult process that’s going to require listening with an open mind to all options, Srp said.

“If the Republicans have a good idea, use it. If the Democrats have a good idea, use it,” he said. “But let’s get out of this mess.”