5 things to know about Minnesota’s $9.3 billion projected budget surplus

Economic risks include conflict in Ukraine, which could dampen world economy

By: - February 28, 2022 3:33 pm

The Minnesota Capitol. Photo by Max Nesterak/Minnesota Reformer.

Minnesota lawmakers have more than $9 billion available to spend, after Minnesota Management and Budget published a new forecast Monday showing an estimated surplus of $9.3 billion. 

State coffers are flush, with more than $4 billion already collected in the current biennium, which started July 1, 2021. The rainy-day fund — which is a separate pot of money — is also fully funded, standing at nearly $2.7 billion. 

The economic and budget forecast sets the stage for the spending debate at the Capitol, but lawmakers are not obligated to tap the surplus after approving a two-year budget last summer. Still, big appetites abound for a number of priorities for the Senate GOP, House DFL and Gov. Tim Walz, who have divergent views on how to spend the largest surplus in Minnesota history. 

Here are five takeaways from the budget forecast:

Larger surplus due to improving economy

Minnesota revenue collections from individual income taxes, sales tax and corporate franchise tax are all higher than previously estimated, with the sharpest increase in corporate tax collections. Budget forecasters estimate the corporate franchise tax will bring in $4.4 billion, which is $324 million — 7.9% — more than the November forecast predicted. 

Individual income tax and sales tax revenues are forecasted to be 1.7% and 1.6% higher, respectively. 

Minnesota’s economic resilience mirrors the nation’s: U.S. gross domestic product — the total value of goods and services — grew more than expected, from 5.5% to 5.7% in 2021, the national forecast showed. 

The bad news: Inflation grew faster than previously forecasted, from 4.5% to 4.7% in 2021, and it is expected to be 4.3% in 2022, with an easing by the second half of the year as supply-chain disruptions abate. 

The state’s unemployment rate is down to 3.1% from its peak of 11.3% at the height of the two-month recession caused by the pandemic. While the state has regained nearly all of the jobs lost then, tens of thousands of Minnesotans have left the labor force. 

Ukraine conflict not accounted in forecast

Russia’s invasion of Ukraine, which has rocked the geopolitical world, is expected to affect the global economy but is not yet accounted for in economic forecasts. It nonetheless has been raised as a potential risk to the state and U.S. economies. 

“It could put a dent in the anticipated forecast improvement,” said Jim Schowalter, commissioner of Minnesota Management and Budget. “It’s a challenging time to issue a long-term forecast.” 

Minnesota’s largest international trading partners are Canada, Mexico and China, so there will not be a direct disruption to the state economy because of the conflict in Ukraine, said state economist Laura Kalambokidis.

Still, the war is expected to raise the price of commodities. Russia is a major exporter of oil and gas, while Ukraine is a major agricultural producer. 

Republicans say Minnesotans are overtaxed

Senate Republicans, who are calling for permanent tax cuts, pointed to the large surplus as evidence Minnesotans are overpaying.

“The massive surplus continues to get larger, meaning the state government is simply collecting too much money from the taxpayers,” Senate Majority Leader Jeremy Miller, R-Winona, said in a statement. “It’s time to give the money back to the people.”

Senate Republicans recently proposed reducing the first income tax tier from 5.35% to 2.8% and eliminating state tax on Social Security benefits. 

Sen. Julie Rosen, R-Fairmont, called the surplus “out of control.” She criticized DFL proposals, like a summer gas tax holiday or Walz’s plan to give people one-time checks. “We have a duty to give it back with real, permanent, significant tax relief. No election-year gimmicks or one-off checks,” Rosen said. 

Walz, DFL legislators call for some tax cuts, more government spending

Walz struck an optimistic tone on Monday, saying he is hopeful the divided Legislature can reach a deal that incorporates their various priorities. “There’s a lot of space here for compromise,” he said. 

(On the other hand, this is an election year, which makes compromise harder, especially with two GOP senators running for governor against Walz.)

A previous proposal by Walz to issue one-time payments to Minnesotans can grow up to $500 per individual and $1,000 for married couples. His original plan called for $175 for individuals and $350 for couples. He also said he would support some permanent tax cuts for lower income Minnesotans. 

Walz said he would issue an updated supplemental budget proposal outlining his priorities in detail. 

The House DFL is pursuing a paid family leave program, as well as requiring paid sick time for all workers. They also passed a bill to give workers classified as essential during the pandemic $1,500 bonuses from a $1 billion pool. It still needs Senate approval. 

Decades-high inflation reduces surplus by about $1 billion

They can’t account for it. They can’t publish it. But state budget forecasters can allude to it: inflation in state spending estimates. A 2002 state law banned adjusting spending estimates for inflation, creating a rosier picture of the state’s budget. Costs are going up more than expected, but that’s not reflected in the surplus estimate released Monday. 

Since 2003, the Minnesota Council of Economic Advisers have criticized the accounting change. And, with inflation at its highest levels in more than 30 years, the council has come to call the spending estimates “fundamentally misleading.” 

MMB estimates that if inflation were counted, the state’s surplus would be roughly $1 billion smaller. Higher prices for goods and services means it costs more to build and maintain roads, operate schools and pay for health care.

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