Minnesota's projected budget surplus balloons to nearly $9.3 billion

Minnesota's predicted budget surplus has ballooned to a record of nearly $9.3 billion, driven by increased income tax collections, corporate profits and consumer spending.

But finance officials cautioned Monday that inflation and the global financial aftershocks of Russia's attack on Ukraine could change the state's budget outlook.

"Sometimes it's hard to even anticipate what's going to happen next month, much less next year," said Minnesota Management and Budget Commissioner Jim Schowalter.

"Even as we put the final numbers together for this forecast, the news broke — the terrible news broke — of the Russian invasion of Ukraine. This news is also significant and could put a dent in the anticipated forecast improvement."

Monday's estimate grew from a $7.7 billion surplus projection in December. It will shape major spending decisions at the State Capitol over the next few months, as legislators clash over their priorities in an election year and as advocates lobby for a portion of the money.

DFL Gov. Tim Walz said the larger surplus means he could triple the size of his proposal earlier this year to give direct rebate checks to Minnesotans. He suggested giving $500 to individuals and $1,000 to couples.

"I think the reason that the checks make such a difference now is you can put a significant amount of money in the hands [of Minnesotans]," Walz said.

He cautioned that long-term tax cuts could jeopardize the state's future financial stability.

But House GOP Minority Leader Kurt Daudt said Minnesota is projected to have more than it needs in the 2022-23 budget cycle and the following biennium.

"Our job isn't to find new things to spend money on. And our job certainly isn't to give one-time money back to Minnesotans in an election year. I think Minnesotans are smarter than that," Daudt said. "What Minnesotans want, and what they need, are permanent tax reductions."

Last week, Senate Republicans proposed cutting Minnesota's first-tier income tax rate, a move they said would save a family making $100,000 about $1,000 a year and a single person earning $37,000 about $500. The proposal is estimated to cost $8.5 billion over three years.

"A $9.3 billion surplus is absolutely mindboggling. And I think today's forecast really strengthens the argument for permanent, ongoing tax relief to working Minnesotans and senior citizens," GOP Senate Majority Leader Jeremy Miller said. "Minnesota is overtaxing the people ... at a time when they're struggling with record inflation."

State leaders can have a discussion about tax cuts, Walz said, but he said any change must exclude wealthy Minnesotans in the state's top tax brackets.

"I don't want us pulling money for tax cuts to the wealthiest Minnesotans at a time when we know that there's things we need to invest in, especially around education, healthcare costs," he said.

The governor also urged lawmakers to approve $2.7 billion to replenish the state's unemployment insurance trust fund and $1 billion for workers on the front lines of the COVID-19 pandemic.

But Miller said he doesn't want to be "pitting one neighbor against another" by providing bonuses to frontline workers.

"Every Minnesotan working in Minnesota right now is essential," he said.

He called for tax relief for all, including top earners and Minnesotans on Social Security.

DFL House Speaker Melissa Hortman said bonus checks for essential workers such as nurses, teachers and grocery store staff are long overdue and lawmakers should act quickly on them.

Hortman said she also wants to put money toward paid family and medical leave, child care, affordable health care and good schools. And she noted House Democrats are working on a property tax refund proposal focused on senior citizens.

"We should be finding the resources to invest in recovering from the COVID-19 pandemic," she said. "The state and its people are under a lot of stress, and they need to rebuild and recover."

Hortman and Senate DFL Minority Leader Melisa López Franzen urged caution amid uncertainty. Hortman suggested putting a large chunk of the surplus money into reserves.

The state's macroeconomic consultant predicted inflation will slow late this year into next year as supply chain issues are resolved, more people join the workforce and the Federal Reserve sets policies to control inflation, state economist Laura Kalambokidis said.

She said U.S. employment will likely return to pre-pandemic levels later this year and total wage income growth — the sum of all employer payrolls nationwide — is expected to grow 9.4% this year.

However, the prediction of easing inflation was created before the war in Ukraine. That conflict could exacerbate inflation and gas and oil prices in the United States and will be a key consideration as Fed officials look to raise interest rates in March. Kalambokidis noted that Russia and Ukraine are not among Minnesota's top 10 trading partners, which limits the state's exposure to risk.

Higher than anticipated consumer spending, wage and salary income, and corporate profits contributed to the growth in the state's surplus, she said.

Meanwhile, state spending estimates dropped by about 0.5%, primarily because of lower than expected spending on education as student enrollments fell and special education transportation expenses dipped, state Budget Director Ahna Minge said. Health and human service cost estimates also fell as an extension of federal aid is expected to decrease Medical Assistance expenses.

State budget forecasts largely do not account for inflation on expenses, which DFL legislators are pushing to change this session — the latest in a series of attempts to alter the accounting approach.

"When we do not consider inflation on the spending side, we're misrepresenting what a surplus or potential deficit really is," Rep. Jennifer Schultz, DFL-Duluth, said during a recent hearing on the bill.

Staff writer Emma Nelson contributed to this report.