Minnesota’s projected surplus soars to $17.6 billion

Minnesota’s streak of historic surpluses continues, giving the first DFL-controlled government in nearly a decade a projected $17.6 billion to craft the state’s next two-year budget.

State budget officials said Tuesday that strong tax collections and a large leftover surplus from the spring have left a record-high level of resources available to lawmakers through June of 2025.

“That’s an incredible balance, any way you look at it,” Minnesota Management and Budget Commissioner Jim Schowalter said. “The governor and the lawmakers have more options than they have usually had to invest in Minnesota and address the needs of Minnesota’s families, businesses and communities.”

The state budgeting agency touted Minnesota’s economic outlook as “stable and resilient,” with revenues expected to exceed spending over the next several years. But state officials said a “mild, three-quarter recession” is expected to begin now — in the fourth quarter of 2022.

“Economic headwinds are coming our way,” Schowalter said, issuing a reminder that inflation is not factored into the budget forecast.

The state heads into that projected recession in strong financial shape with one of the lowest unemployment rates in the country, Schowalter said. Minnesota’s budget reserves are also at “record levels” with about $2.8 billion.

The forecast looks at how the economy is affecting state finances and will help shape the budget conversation over the next few months. Flush with resources, Democrats will contend with pent-up demand from allied groups after years of divided government in Minnesota.

Part of the surplus is money left on the table last session, when lawmakers failed to finalize a sweeping package to spend what was left of a historic $9.3 billion budget surplus on tax cuts, classrooms, health care and public safety initiatives.

DFL Gov. Tim Walz laid out an ambitious spending vision during a news conference on Tuesday.

A share of the surplus should be returned to Minnesotans in the form of direct tax rebate checks, Walz said, adding he will again propose $1,000 for individuals and $2,000 for families as a starting point.

Walz also called for increased funding for schools, climate change initiatives, public safety, child care and infrastructure improvements, while also calling for Social Security income tax cuts.

“We can do all of these things. This isn’t a choice of either-or,” Walz said. “There’s golden opportunities for us to do things on so many fronts.”

The governor vowed to make Minnesota “a leader in addressing climate change and the creation of green jobs.”

Legislative Democrats, who kept control of the Minnesota House and narrowly took power in the state Senate in the midterm election, have signaled a desire to spend some of the surplus on setting up a statewide paid family and medical leave program in Minnesota.

Senate Majority Leader Kari Dziedzic and House Majority Leader Jamie Long, both Democrats from Minneapolis, listed investments in affordable housing, child care and climate change among their top priorities.

During a joint news conference, Dziedzic and Long were lukewarm about Walz’s call for direct rebate checks but suggested their caucuses will consider the proposal. The two legislative leaders were more skeptical of cutting Social Security taxes, citing concerns about the budget hole it could leave.

“I’m on the record for having deep concerns about that,” Dziedzic said.

The surplus could grow or shrink by the February economic forecast, which will kick off the Legislature’s budget work.

Republicans, who will be in the minority in both chambers next session, said the massive surplus means Minnesotans are being overtaxed and warned against overreach from Democrats.

“That money needs to go back to Minnesotans,” said House Minority Leader Lisa Demuth, R-Cold Spring. “Tax hikes should be completely off the table.”

Demuth said she’s open to Walz’s tax rebate check proposal and wants to end state taxes on Social Security benefits. She said she hopes to work together with Democrats on issues such as affordable housing and child care.

With inflation and energy costs still high — plus a possible recession looming on the horizon — Senate leader Mark Johnson, R-East Grand Forks, said Minnesotans need ongoing relief.

“The last time Democrats had single-party control, we saw a plethora of new government programs requiring billions in permanent tax and fee increases,” he said in a statement. “We simply can’t afford to see government grow faster than our paychecks.”

Walz said he’s willing to discuss tax cuts for seniors and middle-class Minnesotans, but not for those in the highest income brackets.

State lawmakers removed inflation from the forecast two decades ago when facing significant deficits. With inflation rates still high, budgeting groups are pushing to add rising costs to the state’s February numbers.