Minnesota’s budget rollercoaster shot up the tracks Friday when state finance officials predicted a $1.6 billion surplus for the coming two years, reversing what had been a projected deficit of comparable size.
This sets the parameters for lawmakers as they build the next two-year budget.
The economic outlook is stronger for several reasons. In December, a similar report estimated a small surplus for the current fiscal year but then a plunge into a $1.3 billion deficit for the next two years.
But state tax revenues are far outpacing prior projections. Spending is down. And the economy at large is on an upswing.
The feared post-holiday COVID-19 surge never arrived, allowing for easing of some precautionary restrictions. And the quickening pace of vaccinations is leading to expectations that more things will return to normal before long.
Even this report might not offer the full picture as Congress rushes to approve another massive stimulus package, which will send billions of dollars to local and state governments as well as assistance to school districts. The forecast won’t factor in how big of a share Minnesota will get because the package won’t be finalized for a couple of weeks.
And the Department of Minnesota Management and Budget warned: “Improvements to the economic outlook have not been spread equally as unemployment continues to disproportionately impact lower-wage workers.”
The spending reductions are a result of many factors. Among them are declining enrollment in public schools that mean lower state obligations. The federal government is picking up more health costs, but people on public programs are also accessing less care, which could mean they’re not seeking out preventative services as much.
Taken together, the fiscal developments are sure to stir up the debate over a $50 billion-plus state budget that must be approved before June 30.
Gov. Tim Walz, who called for a slate of new taxes to plug the prior budget hole and ramp up spending on schools, will have a chance to provide new recommendations.
On Thursday night, Walz told a virtual rally of people supporting his plan that he’s looking to level the playing field by focusing on helping people who struggled most during COVID-19 and asking more of those who got through it unscathed.
“It’s not punitive. It’s smart. It creates a well educated workforce. It creates stability in our community,” Walz said. He declared himself “more than willing to work with people to find compromise. But we’re not willing to compromise on our values.”
Senate Majority Leader Paul Gazelka, R-East Gull Lake, is equally firm in his stance that taxes won’t be raised.
The DFL-led House and Republican-led Senate were waiting for the budget forecast to begin crafting alternative proposals.
At a deeply divided Capitol, even good budget news doesn’t always land the same way.
Republican Rep. Kurt Daudt, the House minority leader, said a shrinking deficit should make the Legislature’s job easier. In a statement Friday, he said Walz should back off his tax increases to save lawmakers from a stalemate.
“Minnesota’s economy is bouncing back, and will continue growing if we let it,” Daudt said. “Unfortunately, Democrats will continue pushing for completely unnecessary tax hikes that would hurt struggling businesses and families. Raising taxes will slow our economic comeback, and make it harder to bring back jobs and paychecks to where they were before the pandemic.”
But some DFL lawmakers want Walz to stand firm in his call for higher taxes on top earners, corporations and smokers. They say it’s about tax fairness and societal opportunity as much as a deficit fix.
“If all we do by the end of this session is to balance the budget like a math problem, then we will have let Minnesotans down when they need us the most,” said Sen. Erin Murphy, DFL-St. Paul.
House Majority Leader Ryan Winkler, DFL-Golden Valley, said Thursday that underlying problems will still need to be confronted.
“I don’t think it changes anything,” Winkler said of an improved forecast. “We have significant needs for basic economic security and investing in a Minnesota that will work well and provide prosperity for more people in the future. And we have to keep having that conversation regardless of short-term budget numbers coming out.”