Thanks to strong economic growth fueled by robust consumer spending, the Minnesota Legislature will return to session at the end of January with the most welcome of election-year questions — how to utilize an exceptionally large budget surplus.
While the state’s fiscal and economic outlook may be clouded in the medium-to-long-term by COVID, inflation and supply chain issues, the short-term forecast presented earlier this month by Minnesota Management and Budget Commissioner Jim Schowalter is unquestionably good.
Schowalter described the projected $7.75 billion surplus as “out of the ordinary, even in extraordinary times.” The surplus amounts to about 15% of the amount lawmakers established last year as part of their two-year budget cycle.
Both major parties are tailoring their proposals on how to use that surplus with an eye to securing public approval, because, along with Gov. Tim Walz, all 201 legislators will be on the ballot this fall, running in new districts that are expected to be drawn in the coming months.
Currently, Republicans hold a narrow majority in the Minnesota Senate and DFLers a narrow majority in the Minnesota House. Over the last 30 years, only the 2012 election, which gave then-Gov. Mark Dayton a DFL legislature, saw voters award full control of state government to one party.
However, Republicans will hope to do well in the event of a traditional midterm backlash against President Joe Biden and his party, especially given that Biden’s approval ratings have sagged in recent months.
Meanwhile, DFLers need a net gain of just one Minnesota Senate seat to secure full control of state government and could benefit from redistricting thanks to robust population growth in their Twin Cities strongholds.
With the budget for the biennium already set, legislators traditionally hold a shorter session in even numbered years with a particular focus on the state bonding bill. Through bonding, the state is allowed to issue bonds to pay for key infrastructure projects.
Passed in October 2020, the most recent bonding bill was the largest in Minnesota history. The total package, which also included tax relief for small businesses and farmers, funds for affordable housing and a small supplemental budget, had a price tag of close to $2 billion.
Local communities across Minnesota have already submitted more than $5 billion in requests this year. For many communities, Coalition of Greater Minnesota Cities Executive Director Bradley Peterson said there’s no greater need than wastewater infrastructure.
While the recently passed federal infrastructure bill includes hundreds of millions of dollars to improve Minnesota’s water infrastructure, Peterson said the state needs to do more too. The coalition has estimated that, over the next two decades, communities will need more than $10 billion to complete needed water infrastructure projects.
“This is not the time for the state to take its foot off the pedal,” Peterson said. “We’ve got hundreds of millions of dollars in projects that need to be done.”
Sen. John Jasinski, R-Faribault, is the only local legislator on the Capital Investment Committee, which is tasked with putting together the bill. Along with his fellow committee members, Jasinski has been traveling the state, touring projects that could potentially see state investment.
Given the size of the surplus, Jasinski indicated that it’s possible that the state could invest a portion of the surplus in infrastructure projects it would normally otherwise bond for. However, he emphasized that he is committed to giving the bulk of the money back to taxpayers.
“If we’re collecting that much in taxes, then we’re collecting too much,” he said.
Republicans are expected to focus on tax relief, with Jasinski and his Republican colleagues touting their plan to exempt Social Security benefits from taxes. Currently, Minnesota is one of just 14 states that taxes Social Security.
Although Minnesota was ranked as the seventh best state for doing business by CNBC earlier this year, it has relatively high tax rates when compared to most states. In addition, a report published earlier this year by the Minnesota Center for Fiscal Excellence shows the system is also one of the nation’s most progressive.
However, the state’s high levels of taxation on the wealthy and businesses doesn’t sit well with Jasinski, who said he is concerned that the state could see an exodus of higher income Minnesotans moving to lower tax states such as Florida.
Similarly, Rep. Susan Akland, R-St. Peter, said she is focused on making Minnesota a more tax friendly state for businesses. A key component of that, which enjoys bipartisan support at the Legislature, is filling the $1 billion deficit in the state’s unemployment insurance trust fund.
Currently, Minnesota is one of 10 states that owes the federal government $1.13 billion for covering deficits in the state’s Unemployment Insurance Trust Fund. If that money is not repaid, businesses across the state could see significant automatic payroll tax hikes.
Sen. Nick Frentz, DFL-North Mankato, wants to see a portion of the surplus go towards restoring the Unemployment Insurance Trust Fund, but also called for tax credits and rebates aimed at working families, as well as investments in affordable housing.
Frentz said that he’ll also work to provide additional funding for local law enforcement and public safety agencies to recruit and retain the staff they need to keep their communities safe. Resignations and retirements of law enforcement officers have spiked nationally, according to a June survey from the Police Executive Research Forum.
Given the intensity of Minnesota’s ongoing workforce shortage, addressing the state’s childcare crisis is likely to be a higher priority than ever. Even before COVID-19, greater Minnesota had a shortage of about 40,000 childcare spots — and that number has only increased.
Childcare investment has long been a priority of the Coalition of Greater Minnesota Cities, and this year, the coalition is calling for $20 million in bonding to build childcare facilities, as well as licensure reform to help mid-sized providers.
Compared to the Twin Cities, greater Minnesota’s child care system is heavily reliant on smaller providers, which makes the market less stable. Low pay is also a hallmark of the job, further discouraging providers from staying or entering the childcare market.
Rep. Todd Lippert, DFL-Northfield, said he strongly supports using part of the surplus to make additional investments in programs benefiting children and families. By investing in childcare specifically, he argues the state could help both long-struggling providers and businesses struggling to find workers.
“This is a place where we can address multiple challenges at once,” Lippert said.
For Lippert, another priority will be helping families to lower their energy bills through increased investment in weatherization programs. Given spikes in the cost of electricity, natural gas and propane, Lippert noted that energy bills have been more of a concern than ever this winter.
Given that the Legislature remains divided between a DFL-controlled House and a Republican-controlled Senate, neither side can expect to achieve their full vision. Instead, Frentz said that finding common ground is likely to be the name of the game.
“I think that the money has to go to benefit Minnesotans, and that will take compromise between the House, Senate and governor,” he said.