Minnesota's Nearly $8 Billion Surplus Has Democrats, GOP Haggling Over How to Spend It

Minnesota officials projected a nearly $8 billion surplus in the state budget Tuesday that has Democratic and GOP leaders haggling over how to spend it.

Governor Tim Walz said the surplus will allow for the expansion of economic opportunities for Minnesotans. He attributed the surplus partly to his administration's efforts to curb COVID and aid the state in its comeback from the pandemic.

"This is what responsible policies look like," Walz told reporters. "This is what happens when you can invest in people."

Walz and Democratic lawmakers said the huge surplus shows that Democratic spending policies do work.

House Majority Leader Ryan Winkler, of Golden Valley, said the surplus should be used to help fund paid sick leave, higher wages for essential workers, and programs for affordable housing and child care, thus providing opportunities to focus on workers, families and small businesses. The Democrats are against tax cuts for corporations and the wealthy.

"They're already doing fine. We're happy that they're doing fine. They don't need more support from state government," Winkler said. "State government needs to be here to support people still struggling despite a strong and resilient economy."

"Our economy is strong because everybody is doing better off because of our support at the state level," he added.

Republican Senate Finance Chair Julie Rosen, of Fairmont, and House Minority Leader Kurt Daudt, of Crown, support tax cuts rather than spending. Although Daudt said Republicans also don't support tax cuts for corporations, he mentioned education tax credits, the elimination of taxes on Social Security payments, and moratoriums on energy and gas taxes as possible cuts.

"We fully funded our state budget and now we see this huge surplus, which means that we are collecting more money than we need to operate state government for Minnesota," Daudt said. "There is no other answer than to give some of that back."

Tim Walz, Minnesota Budget Surplus, Spending
Minnesota Governor Tim Walz and Democratic lawmakers wish to use the surplus for economic opportunities for Minnesotans, opposing tax cuts for corporations and the wealthy. In this photo, Walz speaks to the press on June 3, 2020, in St. Paul, Minnesota. Scott Olson/Getty Images

The Republican leaders also backed averting a tax increase on businesses that's due to take effect next month to cover the state's unemployment insurance debts to the federal government.

That idea drew some support for Walz, who said, "We'll fix it."

Minnesota Management and Budget said strong growth in income, consumer spending and corporate profits since the initial shocks of the pandemic have driven "extraordinary revenues." And officials said higher tax receipts should continue due to the projected improvements in the state's economic outlook.

"The last couple of years have been tumultuous," Budget Commissioner Jim Schowalter said at a briefing for reporters on what he and other officials think is a record surplus for the state. "Today's forecast shows that the state's economy is emerging in a good place. It's not an accident. There's a lot of work that's gone into this."

The numbers were a huge leap forward from the agency's last major revenue-and-spending projections in February, when it said an anticipated $1.3 billion deficit due to the pandemic had swung to a $1.6 billion surplus due to a rapidly improving economy.

Some of the new money is already spoken for, including a required contribution to fully fund the state's $2.7 billion budget reserve. The new projections don't include more than $1 billion in federal COVID-19 relief that hasn't been parceled out. And they don't account for how the rise in inflation will affect spending in the long term.

Nearly all the growth in the surplus was due to higher-than-expected tax revenues. Schowalter said $3.1 billion of the money is effectively already in the bank. Only $364 million was due to lower-than-expected state spending, and the biggest part of that was due to lower public school enrollment as parents switched their children to home-schooling or private schools.

State Economist Laura Kalambokidis said Minnesota's "extraordinary revenue growth" is consistent with what other states and the federal government are experiencing.

But Kalambokidis cautioned that there are still 19 months left in the budget period, and there are risks ahead that could reduce the surplus. The accuracy of the forecast depends on the path of the pandemic, including the impact of the Omicron and any other new variants of the coronavirus, she said.

The forecast assumes inflation settles back into the 2% range late next year, but Kalambokidis said that depends on the resolution of supply chain blockages and people returning to the labor force. And she said any slower-than-forecast growth among major U.S. trading partners could reduce demand for American goods and slow U.S. economic growth.

"All this good news may lead some to think this wild ride's all over, but as our hospitals remind us, COVID-19 is still here, it's still dangerous. However, our economy is learning how to adapt," Schowalter said.

The Associated Press contributed to this report.