5 things to know about Minnesota’s historic $17.6 billion projected budget surplus

By: - December 6, 2022 6:37 pm

Gov. Tim Walz speaks with reporters about his priorities for the $17.6 billion surplus at the Minnesota Department of Revenue building on Tuesday, Dec. 6. Photo by Michelle Griffith/Minnesota Reformer.

Minnesota lawmakers will have a projected $17.6 billion available to spend this upcoming session after Minnesota Management and Budget published its latest forecast Tuesday.

Strong tax collections, low spending and the estimated $7 billion surplus the Legislature left untouched last session have contributed to the projected budget surplus, said Minnesota Management and Budget Commissioner Jim Schowalter during a news conference.

Here are some highlights from Tuesday’s budget forecast:

Fierce budget battles still likely

The projected surplus — the largest in state history — makes crafting the state’s next $50 billion or more two-year budget easier for DFL lawmakers and Gov. Tim Walz. 

“The golden opportunity that we have to make Minnesota an even better and fairer and more inclusive and more prosperous state is there,” Walz said during a news conference following the budget forecast presentation.

But even with one party in control of state government, this coming legislative session will likely see fierce battles between lawmakers over how to apportion the surplus among their many priorities: schools, child care, infrastructure, health care, paid family leave and the environment. 

Democrats also only hold a one seat majority in the Senate, meaning they will have to be completely unified in order to pass a budget. 

Walz said he will again propose to return some of the state’s surplus to Minnesotans in the form of $1,000 tax rebate checks for individuals and $2,000 checks for families to give money directly to Minnesotans. 

“If you want to reduce some of the costs in the short run and make an impact on families, especially those who really need it, it’s one of the most effective ways,” Walz said.

However, legislative leaders on Tuesday did not heartily embrace the idea of rebate checks — previously dubbed “Walz checks” by the governor — saying their caucuses hadn’t yet made a decision.

Walz also said he is open to cutting the state’s Social Security tax — which only applies to high-income Minnesotans — but noted he won’t be proposing tax cuts for the wealthiest residents.

Incoming Senate Majority Leader Kari Dzeidzic and House Majority Leader Jamie Long are cooler on the idea, saying they have concerns about cutting the Social Security tax.

“I’m on the record for having deep concerns about that. It’s about $500 million a year, but as caucus leader, I will lead the discussion with our caucus,” Dzeidzic said.

Minnesota’s revenue keeps surprising economists

Officials said that for many months the state’s revenue collections have exceeded predictions — especially from income and corporate taxes — and revenue is expected to surpass spending in the next several years.

Revenues for fiscal year 2022-23 are now forecast to be nearly $60 billion, which is about 6% higher than February’s forecast. Officials estimate that the state’s monthly revenue is a projected $3.5 billion higher than was predicted last forecast.

Minnesota is also expected to save $280 million in E-12 education, as the state’s student population has decreased, and health and human services spending decreased by $1.1 billion during the biennium.

“Minnesota remains resilient and our budget outlook bright,” Schowalter said. “As a result, the governor and lawmakers have more options than they have usually had to invest in Minnesota and address the needs of Minnesota families, businesses and communities.”

Inflation not included

While the state’s budget forecast includes inflation on the revenue side, it cannot include the cost of inflation in spending calculations. That’s thanks to a rule created by lawmakers two decades ago when the state was facing a budget deficit. 

Soaring inflation will eat into the state’s budget with higher costs for everything from gasoline for snow plows to computers for state workers.

Officials for years have discussed adding inflation back into the forecast so the lawmakers can have accurate numbers with which to make their budgets.

“The conversation I want us to start having is we need to budget and (have) budget forecasts with inflation as a part of it,” Walz said. “That … is just an honest budget.”

A mild recession ahead

Minnesota Management and Budget officials said that their outside forecasting firm is predicting the U.S. economy will experience a mild, three-quarter recession starting now that will last until late next year.

Russia’s invasion of Ukraine, high inflation and the Federal Reserve’s decision to raise interest rates have weakened the U.S.’s economic outlook. 

However, state officials are optimistic that Minnesota will weather the recession as the state recently posted the lowest unemployment rate of any state in U.S. history. The state also has healthy rainy day funds, which will continue to be to fed with surplus revenue as required by law. 

“We enter that (recession) with a very strong financial position, a very strong labor market position,” Schowalter said.

Minority Republicans urge tax cuts

Incoming House Minority Leader Mark Johnson, R-East Grand Forks, on Tuesday pushed for returning some of the $17.6 billion surplus back to taxpayers.

“We are being battered with high property taxes, rapid inflation, rising energy costs, and a looming recession,” Johnson said in a statement. “We need real relief that all Minnesotans can count on for years to come.”

However, without a majority in either chamber, Republicans will mostly be relegated to shouting their priorities from the sidelines. 

Republicans last year gridlocked spending bills, which would have paid off for them had they swept control of the Legislature and governor’s mansion. Now in the minority, they left billions on the table for their DFL colleagues to divvy up. 

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Michelle Griffith
Michelle Griffith

Michelle Griffith covers Minnesota politics and policy for the Reformer, with a focus on marginalized communities. Most recently she was a reporter with The Forum of Fargo-Moorhead in North Dakota where she covered state and local government and Indigenous issues.