Minnesota lawmakers have an estimated state budget surplus of more than $1.3 billion to work with in the fiscal year 2020-2021 biennium.
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The extra funding has already sparked a debate between a divided Legislature and Gov. Tim Walz, a Democrat-Farmer-Labor Party member, over how to use the extra money.
Republicans, who control the state Senate, suggested potential tax cuts. Leader in the state House, controlled by the Democrat-Farmer-Labor Party have urged caution and said more revenue is needed to cover $1.2 billion in estimated inflation in 2022 and 2023.
Although not a budget-setting session next year, lawmakers can decide to spend the surplus on anything from new or existing state programs and tax breaks to financing of construction projects. Lawmakers convene the 2020 session on Feb. 11. They will get another forecast weeks after that which they will use to make final decisions.
Walz on Thursday emphasized the need for a “robust” bonding bill, which allows the state to borrow to pay for improvements to transportation, wastewater systems, state and university buildings and other infrastructure. He declined to say how big the bill would be but said it would likely be larger than the $1.27 billion he proposed last session.
The GOP rejected Walz’s plans for a $1 billion bonding package as part of the state’s latest two-year budget. The state’s 20-year highway investment plan warns of $18 billion in unfunded needs.
Walz said on Thursday in a presentation that the state's surplus shows that it can afford a "robust" bonding bill and cited the favorable interest rates for the state’s August 6 sale of general obligation bonds thanks to AAA bond ratings from both Fitch Ratings and S&P Global Ratings. Moody's Investors Service rates the state Aa1.
“The size of the bonding bill is always a subject of much debate,” Walz said. “I think one of the things that we have learned this year is to have a bonding bill is representative of everyone across the state. We had over $5 billion in requests. How you pare that down is difficult.”
House Speaker Melissa Hortman, DFL-Brooklyn Park, said she thinks Minnesota has been very conservative on borrowing compared to other states. She said that approach doesn't always make sense when interest rates are low and construction costs will keep rising.
“It really makes sense for the state right now to borrow and invest, take advantage of today’s construction costs and create as many jobs as we can,” she said. “Looking ahead, there may be a recession on the horizon. There’s not a lot state legislators can do to prevent that. But one thing we can do to create jobs is pass a big bonding bill.”
Republicans lawmakers are open to doing an infrastructure bill but said that $2 billion is too large.
“Moderate debt is what gave us our good bond rating,” Senate Majority Leader Paul Gazelka, R-Nisswa, said.
“We want to do a reasonable sized bond bill,” House Minority Leader Kurt Daudt, R-Crown said. “I would much rather see a nice-sized bonding bill that is really focused on projects that are important.”
Gazelka said the surplus shows that the federal tax cuts enacted under President Donald Trump and the bipartisan state income tax cut approved by the Legislature earlier this year are spurring economic growth. He was pleased that the budget reserve has hit the target that lawmakers set.
“It’s time to give the rest back,” Gazelka said.
Gazelka listed four areas for potential tax cuts and one-time new spending: eliminating the state income tax on Social Security benefits, a “holiday” on motor vehicle license tab fees, more school safety funding, and road and bridge improvements.
Daudt said the surplus should be used to fund a repeal of a tax on health care providers. “In the last election, the No. 1 issue was healthcare costs,” Daudt said. “In the next election, the No. 1 issue, I predict, will be healthcare costs.”
Budget officials attributed the surplus to higher-than-expected income and sales tax collections, which more than made up for lagging corporate tax revenue. Individual income tax revenue forecasts for the 2020-21 fiscal year beat out previous estimates by about 1.9% or $493 million. General sales tax revenue is similarly expected to increase by 2.2%, or $252 million.
The state corporate franchise tax is forecast to generate 9.2% or $294 million less in revenue than was previously predicted.
“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."
The state has $6.56 billion in outstanding general obligation bonds with another $2.1 billion of remaining authorization.
