Minnesota's already record surplus swells to $9 billion

Minnesota added $1.5 billion to an already record $7.7 billion surplus expected in the current two-year budget fueling further debate over spending plans and tax relief.

The annual February forecast released Monday raised the general fund surplus by $1.5 billion to $9.253 billion for the biennium that runs through June 30, 2023. It’s driven by $1.25 billion in additional revenues now expected while spending is down $270 million primarily in the education and health services budgets. The state issues formal revenue projections in February and November.

Individual income tax collections were raised by $500 million, general sales taxes by $212 million, and corporate taxes by $324 million with other revenue lifted by $219 million. The state’s books remain structurally balanced in the next biennium under the estimates.

Gov. Tim Walz and his finance team cautioned that the outlook is clouded by inflation and the Russian invasion of Ukraine poses new geopolitical risks.

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

Other risks include the future path of the COVID-19 pandemic.

Walz said the latest numbers support nearly tripling the size of his rebate check proposal outlined earlier this year raising individual checks to $500 from $175 while couples would receive $1,000 instead of $350. "This gives us the opportunity to get those checks right in the hands of folks now,” Walz, a Democrat, said.

Republicans who hold a Senate majority are pressing for deeper and permanent tax cuts that includes lowering the individual income tax rate and eliminating the state tax on Social Security income. The House is controlled by the Democratic-Farmer-Labor Party.

“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. “It’s time to give the money back to the people.”

Walz cautioned that long-term tax cuts could damage the state’s structural balance but opened the door to an income tax cut under certain conditions. “I think there is space in here for us to talk about that, but I think it needs to be crafted in a way where you are excluding those top brackets,” Walz said.

Walz’s previously outlined plans for the $7.7 billion surplus calls for $2.7 billion to go to cover the deficit in the state’s unemployment trust fund and checks for front-line workers.

Other Democratic leaders said they support checks going to front-line workers, providing property tax relief for seniors, and tucking more away into the state’s rainy-day fund.

Lawmakers are back in session with other issues on the frontburner including how to use another $1 billion remaining from the state’s $2.8 billion share of the American Rescue Plan Act and passage of a capital package known as the bonding bill.

Walz has proposed $2.7 billion bonding bill, a record size capital package that is taken up in even-numbered years following passage of the biennial operating budget in odd years. The proposal tops the record $1.9 billion bill adopted two years ago. A three-fifths supermajority is required to pass new bonding.

The state’s November forecast that projected a $7.7 billion surplus marked a dramatic turnaround from a year earlier when red ink driven by the pandemic’s anticipated tax blows loomed.

The tide shifted as it did for many states later in the year as tax revenues rebounded from early pandemic lows and the gap evaporated in the February 2021 forecast when a $1.57 billion surplus was projected heading into budget season.

With the November forecast, the budget reserve was restored to $2.66 billion. The state is operating on a $52.3 billion budget.

The state typically borrows in the late summer. Ahead of its $870 million general obligation sale last year the state won two improved rating agency outlooks.

Moody’s Investors Service moved its outlook on the Aa1 rating to positive from stable. S&P Global Ratings moved the outlook on its AAA rating to stable from negative. Fitch Ratings affirmed its AAA rating and stable outlook ahead of the sale.