Forecast: Minnesota has a $1.3 billion budget surplus

Updated: 1 p.m.

Minnesota has a $1.3 billion projected budget surplus heading into the 2020 legislative session, setting up a potential conflict between a divided Legislature and DFL Gov. Tim Walz over how to use the extra money.

Minnesota budget officials released the latest economic forecast on Thursday, noting that improved income and sales tax collections and a slight decrease in expected spending contributed to extra money on the bottom line.

There’s also a surplus projected ahead into the next state budget, but economic officials said uncertain trade policies and a change in confidence from consumers could dampen that outlook.

“Consumers, the champions of this economic expansion and the main source of sales tax revenue, the risk [is] that they get spooked by policy uncertainty or negative wealth effects and and hold onto their wallets,” said Laura Kalambokidis, the state’s economist.

The total surplus was actually $284 million larger, but Minnesota law required that money flow automatically into the state’s rainy day reserves. The reserve fund is now at $2.359 billion, the level recommended by budget officials.

Lawmakers convene the 2020 session on Feb. 11. They will get another forecast weeks after that which they will use to make final decisions.

“This is a snapshot in time, and there are risks in this forecast,” Minnesota Management and Budget Commissioner Myron Frans said. “We know that the forecast will go up or down in February, so we need to be careful and cautious.”

It’s not a budget-setting session next year, but lawmakers can decide to spend the surplus on anything from new or existing state programs and tax breaks to financing of construction projects. The state typically borrows for public works projects but sometimes pays cash when there is available money.

Walz said he’s open to discussing ideas for one-time spending and proposals that relieve property tax pressure on communities across the state, but he wouldn’t delve into specifics. He also sounded a word of caution, warning against using the budget reserve.

“We must think to the future,” Walz said. “We must ensure Minnesotans are in the best position possible to weather whatever economic uncertainties come our way. We need to think about and budget for the next generation, not just the next year.”

Last year the DFL-controlled House, the Republican-controlled Senate and Walz agreed on a two-year state budget that topped $48 billion. It included the first middle-class income tax cut in two decades and the extension of a tax on healthcare providers to pay for health programs, known as the provider tax.

Republicans said the surplus means there’s room for more tax cuts. House Republican Minority Leader Kurt Daudt called on Democrats to reverse their decision to extend the provider tax.

“With our budget reserve fully-funded and revenues continuing to grow thanks to Republican-led tax cuts, we have an opportunity to reduce health care costs for Minnesotans by nearly a billion dollars," he said.

But Walz slammed the door shut on that idea: “Yeah, that’s not happening.”

All 201 legislative seats will be on the ballot next November, and the upcoming election will loom large in whatever action the Legislature takes.

Senate Republican Majority Leader Paul Gazelka said the surplus is a sign that tax cuts pushed by President Trump and Republicans in the Legislature are working.

“It’s time to give the rest back,” he said.

Gazelka suggested exempting Social Security benefits from income taxes and reducing the price of car license tabs, but he added that Republicans are open to one-time spending on school safety and road and bridge repair projects.

Democrats signaled they’re open to using the surplus on school safety measures, as well as adding more mental health counselors in schools, but Republicans could struggle to get buy-in for tax cuts from the DFL-controlled House.

“I don’t think there’s a big appetite for a major tax bill this year,” DFL House Majority Leader Ryan Winkler said. “If you look at the future, significant tax cuts of any kind make it difficult to provide the core services that Minnesotans value.”

He warned that the forecast doesn’t account for inflation in the budget, which is more than $1 billion.

“We are only balanced if you assume we are going to slowly let the air out of the tires,” Winkler said.

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