Minnesota budget picture comes into focus as federal stimulus dollars pour into state

Lawmakers have two months to negotiate a new budget or risk going into special session

The quadriga horses at the Minnesota State Capitol in St. Paul, Minnesota. Photo by Tony Webster.

Minnesota lawmakers have two months to negotiate a new state budget or risk going into legislative overtime. 

When the year started, the Legislature was facing a sizable budget deficit, with divergent ideas on how to close the gap. 

Since then, however, despite the loss of nearly a quarter million jobs, the state’s economic recovery has shown promising trends. Previous rounds of economic stimulus — including generous unemployment benefits, direct cash payments and rental assistance — have buoyed the economy. Higher-income workers kept their jobs, working from home and saving money as many forewent travel and eating out. Certain corporations, including Target Corp., notched record profits. 

State government is now expected to see a $1.6 billion surplus, not factoring in the expected windfall of the federal American Rescue Plan Act. The February budget was prepared before passage of President Joe Biden’s $1.9 trillion federal stimulus package, so the state’s economic outlook is likely to brighten even more.

Minnesotans are expected to receive a cumulative $6.3 billion in direct cash through stimulus checks; state government will receive nearly $2.6 billion, while local governments will receive $2.1 billion.  

Minnesota Management and Budget, which is the state’s budget office, says it is still examing the new law to see how the stimulus funds can be spent. “(MMB) and other state agencies will be going through the American Rescue Plan grants to determine what needs can be met through the program-specific dollars and what needs remain,” an MMB spokesman said. 

Questions also loom about whether tax relief sought by state Senate Republicans will be stymied by a provision in the stimulus law that seems to prohibit tax cuts funded by federal stimulus dollars. Senate Majority Leader Paul Gazelka, R-East Gull Lake, said he found it concerning and is still awaiting clarity on how it would affect Republicans’ tax cut priorities. 

Here is how some state lawmakers, Democratic-Farmer-Labor Gov. Tim Walz and other interest groups say the surplus and federal stimulus dollars should be spent.

Walz 

The first-term governor has now outlined two versions of a budget, including a revised budget on Thursday that factors in the state’s projected budget surplus. He is scaling back some of his proposed tax increases, which had been aimed at the state’s wealthiest residents and large corporations. Instead of seeking nearly $1.7 billion in new revenue, he now wants $670 million. 

The bulk of his budget would go toward E-12 education, with temporary programs addressing the major consequences of the pandemic on education, which disrupted learning, hitting students of color hardest. Thousands of parents opted to pull their kids from public schools to homeschool or enroll them in private schools, cutting state funding to school districts. Walz wants to give schools $68 million to account for that drop in funding, up from $25 million previously. 

Walz also wants $150 million for summer learning programs intended to offset the education disruptions from the pandemic. Some of the school funding would be paid for with federal dollars, but the bulk of new education spending would increase the state’s contribution to school districts, totaling $301 million, to help keep pace with inflationary costs.

Walz has also moved toward Republicans’ position on tax exemptions for Minnesota companies that received federal Paycheck Protection Program loans. The federal money, which came in the form of forgivable loans if companies spent it on payroll, is not subject to federal taxes. But it is subject to state taxes, even as many of those companies continue to struggle under the weight of the pandemic. Walz said he would allow a state tax exemption on loans up to $350,000, which account for the vast majority of them. Ninety percent of loans were $350,000 or less, according to the state’s Revenue Department.

Senate Republicans

Gazelka, the top Republican in the Legislature, proclaimed in late January: “Thank God that Republicans have the majority in the Senate,” making a pledge they would block any tax hikes sought by Walz and the DFL-led House. 

On Tuesday, Senate Republicans released a budget plan that called for $591 million in tax cuts. The bulk of that would pay for the state tax exemption on Payroll Protection Program loans, as well as exempting from taxes up to $10,200 in state unemployment insurance benefits from taxes. 

The Senate GOP is largely avoiding the funding of new programs, though they scaled back their call for 5% across-the-board cuts for all state agencies. They’ve trained their budget scalpel on state government administrative costs, which could see a cut of $379 million in the upcoming biennium. 

Tax Implications

The American Rescue Plan Act, however, could gum up plans for tax cuts. A U.S. Senate provision tucked into the law would ban the use of stimulus dollars to pay for tax cuts, leading Republican attorneys general from 21 states to demand the U.S. Treasury Department clarify that a range of tax scenarios would be allowable, imposing their own March 23 deadline.

“It would not be wise to move forward with something if it causes us to not get the federal resources,” Gazelka said on Friday. 

He also said it was “frustrating” the provision was included because it seems to penalize states that had been fiscally prudent with taxpayer dollars.

State Sen. Carla Nelson, R-Rochester, the Senate’s Taxes Committee Chairwoman, said in an email on Thursday that she is nonetheless focused on cutting taxes and reiterated opposition to tax increases.

“Money is fungible and it is very concerning that the federal government would tie the hands of the state Legislature and prevent tax relief with federal stimulus funds,” Nelson said. “I am glad to see many states are asking for more clarity on this issue and look forward to the guidance we will receive.”

House DFL

The DFL-led House is expected to publish their budget blueprint on Tuesday, but so far they have indicated support for many of Walz’s budget proposals. House Speaker Melissa Hortman, DFL-Brooklyn Park, has previously said she expects a full budget to emerge from the House by April 9, about six weeks before the Legislature is scheduled to adjourn its legislative session. 

“You could do a significant amount to reduce the opportunity gap in education with that kind of money,” Hortman said in a text message to the Reformer, referring to the coming federal dollars. 

House Ways and Means Chair Rena Moran, DFL-St. Paul, said their focus would be on working class Minnesotans and small businesses, as well as access to mental health care and summer programming for students who need extra help. 

“All through an equity lens,” she said, referring to the state’s longstanding racial disparities in education, income and health outcomes. 

Supporting workers, businesses

The “K-shaped” economic recovery — upper income Minnesotans enjoying broad prosperity not experienced by large swaths of the population — has highlighted the stark disparities in the state. Low wage workers hit hardest during the pandemic have been overly represented by women and people of color.

Some advocates are calling for a broader agenda beyond the short term. Progressives want to make rental assistance available for more Minnesotans (more than 500,000 of whom pay a third of their income or more in rent); the creation of paid family leave; wire more greater Minnesota communities with broadband; and offer targeted business assistance, including investing in businesses owned by Black, Indigenous and other Minnesotans from communities of color.

“We need to make investments now so that we don’t just go back to the situation of Minnesota workers and families unable to afford their rent and other basic expenses or unable to afford to live where there are more jobs,” said Laura Mortenson, a spokeswoman for the Minnesota Budget Project.

Business groups like the Minnesota Chamber of Commerce also want to make PPP money exempt from state taxes and are pushing legislation that would shield businesses from COVID-19 lawsuit liabilities.