Budget surplus shrinks by $500 million in new state economic forecast

The political battle over Minnesota's budget got even more complicated Thursday, as a new economic outlook predicted the state will bring in less money than anticipated in the years ahead.

The state's projected budget surplus shrunk to a little more than $1 billion, down nearly $500 million from a previous estimate late last year. The trend of slower economic growth is expected to continue in the future.

Gov. Tim Walz used the latest economic news to repeat his push for a large public works borrowing proposal and an increased gas tax to pay for roads and bridges.

"One of the best firewalls against a downturn is investments in infrastructure," Walz said "Those are jobs in our communities. Those are disposable incomes in our communities. Those are the things that increase growth."

Republicans took a different view of the latest economic snapshot.

Senate Majority Leader Paul Gazelka, R-Nisswa, called Walz's approach "very, very unwise." He likened the new forecast numbers to his family taking a sudden cut in their income. "What we would not do is immediately go out and binge-spend," Gazelka said.

State economists and budget officials offer predictions twice a year on how the state's economy will fare in the years ahead, and the factors affecting it. They said slower economic growth and lower tax collection is to blame for the drop in the surplus, though loses were offset slightly by less-than-anticipated spending in education and health care.

Economic growth has slowed nationally, with growth in the gross domestic product down at the end of last year, the Commerce Department reported Thursday.

Risks that could impact the Minnesota forecast include taxpayer response to the federal tax law changes, uncertainty about trade, geopolitical events and slowing growth in the labor force, said Laura Kalambokidis, the state economist.

The lack of workers to fill jobs will get worse as more baby boomers retire, she warned, and said Minnesota needs to continue attracting residents from elsewhere and look for ways to get more people into the workforce.

With a labor shortage, House Speaker Melissa Hortman, D-Brooklyn Park, said it is critical to pass policies that support workers, such as paid sick time and subsidies for child care.

"We'll be doubling down on policies that are important to keep Minnesotans in the workforce," Hortman said.

The latest forecast is the mark legislators work from as they finalize their targets for state spending.

Walz debuted his $49.5 billion budget plan last week. The latest forecast forces him to revise his proposal. But the Democratic governor did not back away from his plans for significant spending increases in 2020 and 2021, and a 20-cent gas tax increase to fund transportation infrastructure.

The state doesn't factor inflationary costs into its budget projections, and when that additional spending is taken into consideration the numbers look even more discouraging. Inflation over the next two years is expected to total almost $1.1 billion, exceeding the surplus.

The Democratic House majority and Walz are closely aligned on their budget goals, including devoting more money to education and health care. They both also want to pass a large borrowing package to pay for public works and infrastructure projects. On Monday, Walz rolled out his plan for a nearly $1.3 billion borrowing package.

The idea of protecting against a downturn by creating jobs through additional spending doesn't make sense, said House Minority Leader Kurt Daudt, R-Crown.

"We have a workforce shortage right now and we have the lowest unemployment rate in two decades," Daudt said. "The problem isn't that we don't have jobs and don't have people in the workforce, the problem is that the high-income earners are leaving the state of Minnesota."

Daudt said high-income residents and business owners are heading for states with lower taxes.

But Denise Specht, president of Education Minnesota, countered that the drop in state revenue in this forecast — after wealthy CEOs benefited from the 2017 changes to federal tax law — shows the state's tax code needs to change to take more from high earners. The teachers union is advocating for Minnesota to collect additional tax dollars from the wealthy and corporations to help pay for schools.

Walz's budget includes $20.3 billion for early childhood through high school education, a $733 million increase from the current two-year budget. He plans to support his new spending in large part through taxes on businesses and foreign income.

The governor's budget proposal would be an increase over current spending of more than 8 percent. Minnesota Chamber of Commerce President Doug Loon said in a statement that with slowing economic growth, spending should be limited.

"His proposals hit job creators especially hard with billions in tax increases, making it harder for employers to grow and invest in their Minnesota operations and employees," Loon said.

Walz would not indicate where he plans to trim his budget proposal, but said he would be going through it with staff. His administration anticipated the decline in the projected surplus. Myron Frans, commissioner of Minnesota Management and Budget, has been warning this February forecast will not be as rosy as the previous one from November. The past two months of state revenue updates showed tax collections were less than expected.

In Walz's budget plan, he left $789 million on the bottom line. He said earlier this week that those dollars were an indication that he was wary about what Thursday's forecast would show.

"We need to be overly cautious and fiscally responsible, because the rainy-day fund and our fiscal responsibility is something I'm unwilling to give on," Walz said.

Jessie Van Berkel • 651-925-5044