Another record: Minnesota's budget surplus hits $17.6 billion

Minnesota's budget surplus has soared to a projected $17.6 billion, giving Democrats the ability to reshape the state budget as they take full control of the Capitol for the first time in a decade.

The projection includes $12 billion left over from the current two-year budget cycle, because the state Legislature failed to agree on a grand bargain to spend much of it in 2022. The other $6 billion comes from a projection of how the surplus will grow through June 2025. Higher-than-expected tax receipts and lower-than-anticipated spending contributed to the glut of money, budget officials said.

Yet budget officials cautioned that the state's outside forecasting firm, IHS Markit, now expects the U.S. economy to enter a mild recession at year's end that will last nine months. A recession would hurt future tax collections on income, sales, and corporate earnings.

"We enter that in a very strong position," state budget commissioner Jim Schowalter told reporters.

This spring, the divided Legislature failed to pass an $8 billion tax cut and spending deal, leaving that money sitting in the state's coffers and continuing to grow as interest rates increased. 

At the time, both parties gambled that voters would give them more control. Democrats won the bet; voters gave them the House and Senate while re-electing Walz in November.

Speaking with reporters on Tuesday, Walz highlighted four priorities for spending in 2023: an expansion of child care, inflation relief for Minnesotans, increased road and bridge funding, and more money for public schools.

The governor said he would again propose rebate checks of $1,000 per adult and $2,000 per family. Smaller versions of the checks failed to pass the Republican-led Senate or DFL-controlled House in 2022. House Speaker Melissa Hortman later endorsed rebate checks after the session ended.

"We can do all of these things," Walz said. "It isn't an either-or."

DFL legislative leaders were noncommittal about rebate checks Tuesday, saying they plan to let their caucuses discuss the issue. A near-record number of lawmakers will be new to their positions in 2023.

The legislative leaders expressed interest in a paid family leave program, ensuring that all Minnesota workers have some access to paid leave. Earlier versions of the proposal relied on an increase in payroll taxes to fund the benefit.

Republicans said the DFL should focus on giving money back to Minnesotans.

"We know that Minnesotans are being overtaxed," said House GOP Leader Lisa Demuth of Cold Spring. "Tax hikes should be completely off the table."

Walz declined to go that far while responding to a FOX 9 question. 

"It's disingenuous to take it off the table," the governor said. Walz has proposed various tax increases in his first two budget plans. Among them: a gas tax hike in 2019 and increases to corporate taxes and the income tax on Minnesota's highest earners in 2021. None passed the divided Legislature. 

This story is developing and will be updated.