ST. PAUL — Minnesota lawmakers are headed back to the Capitol this week with an unexpected challenge: How to spend a historic budget surplus.
What was supposed to be a legislative session focused on a bonding bill and policy provisions got flipped on its head in December when state budget officials announced that Minnesota posted a $7.75 billion budget surplus.
While state economists early in 2021 predicted that the pandemic would slow the state’s economy, Minnesota tax collectors saw income tax filings and corporate filings climb month after month. The pandemic may have caused disruptions, but businesses and workers in many sectors did well, they said.
And that resulted in the biggest budget surplus the state had ever reported.
Immediately, stakeholder groups around the state started asking for part of the surplus. They pitched lawmakers proposals to pay the money back to taxpayers, boost funding for front-line workers, local governments, schools, mental health services, caregivers, state projects and more.
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Heading into the 2022 legislative session, conversations around spending are now expected to take center stage in a year that typically is focused on passing a borrowing bill to fund local projects.
State lawmakers passed and Gov. Tim Walz last year signed into law a $52 billion spending plan for the state. And while Minnesota has seen smaller surpluses in recent years, posting a surprise bonus of that magnitude stunned economists and legislators alike.
Legislative leaders and the governor agreed to some uses for the funding, like repaying the federal government and replenishing the state’s unemployment insurance trust fund. They estimated that will cost about $2.7 billion but some of that funding could come from federal money the state has to manage through the pandemic.
And while they disagree about how much should be spent on tax relief, both Democrats and Republicans said some of the money ought to go back to taxpayers.
“When you have a tax cut that large it simply means one thing: That the state is collecting too much from the taxpayers,” Senate Majority Leader Jeremy Miller, R-Winona, said. "And we’ve heard loud and clear from the people, 'Give the money back.'"
GOP lawmakers said that if they had their way the bulk of the funding would go toward a permanent tax law change that would cut tax rates across the board and eliminate the tax on social security benefits. That plan could impact the amount the state brings in and, in turn, the services it could provide in the future.
They also prioritized making grant funds available to help recruit and retain police officers around the state and boosting penalties for those who commit violent crimes and those involved in carjacking.
But they didn't immediately share details about how much those tax cuts would be and what the price tag would come out to.
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House Democrats and the governor, meanwhile, said the state still had needs not met in the current budget and they proposed using the funds to boost child care, education, health, safety and worker programs.
“Is that really fully funding your budget when you have folks who are doing some of the most important and most valued work in society and their wages aren’t what they should be?” House Speaker Melissa Hortman, DFL-Brooklyn Park, said. “Now that we have the $7.7 billion projected surplus, we have an opportunity to do a better job where we knew eyes wide open that we weren’t investing enough in the prior budgets.”
They said the surplus could also help pay one-time checks for low- and middle-income earners.
While the leaders said having the extra money could be an asset in reaching deals quickly at the Capitol, they noted that in prior legislative sessions more money hadn’t always made for easier discussions.
“It should allow us to reach a pragmatic deal that has some Republican-supported spending and some Democratic-supported spending," Hortman said. "Unless there's anybody who is just more committed to an impasse than getting things done."
Lawmakers convene for the 2022 legislative session beginning on Monday, Jan. 31. They are scheduled to adjourn in May.
