ST. PAUL — Minnesota’s historic budget surplus only continues to grow, now reaching $17.6 billion, according to state projections released Tuesday.
It’s a record that comes after a year of historic surplus projections. Last December, the state reported a $7.7 billion surplus and by February it had grown to a projected $9.25 billion. The record $17.6 billion surplus comes ahead of a year when a state government, now fully under DFL control, will have to set a budget of more than $50 billion for the next two years.
"Minnesota remains resilient, and our budget outlook bright," Minnesota Management and Budget Commissioner Jim Schowalter told reporters at a briefing Tuesday at the Department of Revenue in St. Paul. "While the bulk of balances we're projecting come from a carry forward from previous years, our ongoing structural balances are also positive. As a result, (the) governor and the lawmakers have more options than they have usually had to invest in Minnesota and address the needs of Minnesota families, businesses and communities."
Minnesota Gov. Tim Walz told reporters immediately after the briefing that the growing surplus means the state can invest more in education, child care and infrastructure. He also once again pitched direct payments to residents.
“The golden opportunity that we have to make Minnesota an even better and fairer and more inclusive and more prosperous state is there. And the opportunity to work together in the legislative bodies to make that happen,” Walz said, later adding: “Now's the time to lower costs for families, now's the time to reduce and get some money back in their pockets.”
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Walz's fellow Democrats in the Legislature, who control the House and won control of the Senate in November, have similar priorities such as paid family and medical leave, increasing education funding, and backing programs to address climate change. However, legislative leaders were not particularly receptive to Walz's proposal earlier this year to send the surplus back to Minnesota residents as rebate checks of $1,000 for individuals and $2,000 for families. Incoming Senate Majority Leader Kari Dziedzic and soon-to-be House Majority Leader Jamie Long, both of Minneapolis, on Tuesday said they respected the governor's proposal but that their caucuses hadn't reached any decision on whether they'd back it.
There is also some disagreement on whether the state should cut income tax on Social Security payments. Walz said he was open to the idea, but legislative Democrats said they were concerned it could impact state revenue. Dziedzic said she was concerned such cuts could cost the state $500 million.
Budget projections from the Management and Budget department do not account for inflation, and this year’s record inflation rates not seen in nearly 40 years could put a dent in the actual surplus. Schowalter told reporters about $12 billion of the projected surplus is one-time money that can more or less be counted on at this point, and about $6 billion lies ahead in the coming fiscal biennium. Inflation will likely cut the overall surplus by $1.5 billion, he said.
Minnesota’s Department of Management and Budget said strong collections and lower-than-projected spending added to the 2022-2023 surplus. “Economic headwinds” might lower growth in the coming year, the department said, while still projecting healthy revenues in 2024-2025.
Headwinds the budget department expects and factored into its projections included a mild recession from the last quarter of 2022 and halfway into 2023. High inflation and rate increases by the Federal Reserve also played a role in slowing growth, as did the Russian invasion of Ukraine's effects on the global economy.
What's next?
Walz, DFL House leadership and the outgoing Republican majority in the Senate could not reach an agreement on how to use the earlier surplus before the end of the 2022 session, leaving billions of dollars on the table. Negotiations between the governor and legislative leaders on a plan to use most of the surplus on tax relief, education and law enforcement fizzled in June, and $7 billion of the record $9.25 billion surplus remained.
Now that the Democratic-Farmer-Labor Party won control of the Senate in the November election, they’ll have significant control over how the state uses its enormous surplus. The Legislature convenes again on Jan. 3.
"We listened to Minnesotans during the campaign. They told us they were tired of gridlock and inaction," Dziedzic told reporters. "So starting in January, with this legislative trifecta, we will use this tremendous opportunity to help Minnesotans afford their lives. We won't walk away. We were elected to lead and we will get things done."
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Republican minority leadership in the Legislature said the growing surplus is a sign the state government is collecting more than enough in taxes and called for long-term tax relief. Incoming House Minority Leader Lisa Demuth, R-Cold Spring, called the $17.6 billion surplus "jaw-dropping."
"We know Minnesotans are being overtaxed, money that could be kept within Minnesotan families," she said. "My caucus believes tax hikes should be completely off the table."
In a statement, incoming Senate Minority Leader Mark Johnson, R-East Grand Forks, also called for tax relief.
“What we don’t need is this Democrat-controlled government to create massive increases in government spending — guaranteeing higher taxes for Minnesota’s families and businesses,” said incoming Senate Minority Leader Mark Johnson, R- East Grand Forks. “The last time Democrats had single-party control, we saw a plethora of new government programs requiring billions in permanent tax and fee increases.”
Tuesday’s surplus projection comes ahead of the coming budgeting year in the Minnesota Legislature. There will be a second estimate from the department in February.
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