ST. PAUL - Much of a Minnesota budget surplus is thanks to the federal government.

As budget surpluses go, it is not a biggie; "razor thin" is the way Senate Minority Leader Tom Bakk, D-Cook, described the expected $329 million after it was announced Wednesday, Feb. 28.

State leaders said they will use caution when dealing with the surplus as they look at many places to spend money, ranging from providing tax cuts to funding a problem-filled vehicle licensing and registration system, from making schools safer to repairing a failed state system is to ensure safe care for the elderly.

Gov. Mark Dayton and legislative leaders Wednesday said they were not ready to provide a list of spending priorities. Dayton plans to release his proposal for budget changes on March 15.

"I am going to need to use this time to decide what is possible to do," the Democratic governor said.

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Two federal decisions drove much of the surplus.

First, State Economist Laura Kalambokidis said a new tax law that Congress passed and President Donald Trump signed should lead to more consumer spending, which will boost taxes Americans pay, at least for the short term.

Second, State Budget Director Margaret Kelly said that Congress recently decided to pay $178 million for a children insurance program that the state thought it would have to fund.

Wednesday's report, known as a budget forecast, means the state budget has flipped from being in $188 million in deficit late in the fall to surplus, but the added money is hundreds of thousands of dollars less than legislative leaders expected.

Minnesota Management and Budget, the state finance agency, projected the $329 million surplus for the current $46 billion budget, which ends July 1, 2019.

The report provides the basis for any spending and tax legislation lawmakers and Dayton consider during the legislative session that ends May 21.

Corporate taxes are expected to be up more than 5 percent, the biggest revenue hike. Individual income tax projections were up a bit and the sales tax is expected to jump 1.1 percent over earlier forecasts.

The state economy performed better than expected last year, the report indicated. There now are more jobs than there are people looking for work, and wages are rising modestly.

One economic downside is that homebuilding continues slower than could be expected in a growing economy. The report says there is a "persistent shortage" of homes for sale.

The home shortage means prices are rising.

Minnesota exports rose 5 percent last year, "more robust" than the national average. Exports to Canada and Mexico were especially good.

One positive in the report is an increase in taconite sales on the Iron Range. Mining and logging employment grew nearly 11 percent in 2017. In the third quarter of last year, taconite-related exports soared at "a remarkable 769 percent increase over a year ago," the report said.

However, iron ore prices are expected to drop this year as the supply increases and demand decreases. Prices could drop from 2017's high of $89 per ton to $59.

Late last year, the forecast showed a $188 million state budget deficit.

Notes of caution came from most state leaders.

"With this forecast, Minnesota's budget is back on track, but we should move carefully," said Commissioner Myron Frans of Minnesota Management and Budget.

Republican legislative leaders credited the GOP-led federal tax cuts, and said 2017 tax changes they adopted helped the forecast.

"The one thing I want people to think about is tax cuts are working," Senate Majority Leader Paul Gazelka, R-Nisswa, said.

Reaction began to flow in minutes after the surplus figure was announced.

For instance, local government officials quickly said they should share in the surplus.

"The state’s budget surplus should first and foremost be targeted towards under-funded county services that are both mandated and essential," said Isanti County Commissioner Susan Morris, president of the Association of Minnesota Counties. "This includes continued funding for statewide transportation needs as well as additional resources to help counties verify eligibility for those seeking medical assistance."

State revenue up

The key to Minnesota's projected $329 million budget surplus is higher tax collections than expected. Here is how much more tax now is expected than a couple months ago (when a deficit was forecast):

  • Individual income tax, $25 million
  • Sales tax, $119 million
  • Corporate tax, $131 million
  • Other revenue, $78 million