Minnesota projects $1.6 billion surplus, affecting tax debate at state Capitol

ST. PAUL, Minn. (FOX 9) - Minnesota's big projected deficit has swung to a $1.6 billion surplus for the next two-year budget cycle, which will affect debate over taxes at the state Capitol.

Higher than expected tax collections, federal stimulus and lower state spending contributed to flip the projected deficit, which had been $1.3 billion in December and $4.7 billion in May 2020, into an expected surplus, budget officials said.

But the rosy outlook comes with several caveats. Minnesota's budget forecasts do not factor in inflation because of a 2000s-era law, while the economic recovery has slowed.

"I feel like we’ve been on a year-long roller coaster," said Jim Schowalter, the state's budget commissioner. "I think it’s really important to note that Minnesota isn’t back to where it was prior to COVID-19."

Now the question is what to do with the projected surplus. Republicans quickly called for tax cuts, while Gov. Tim Walz, who has proposed more than $1.8 billion in tax increases, would not take any of them off the table.

"My commitment to a fair progressive taxation system is still there but I am more than willing to find some compromises that work," Walz told reporters, declining to say which tax increases he could do without. "At this point in time, I am not going to negotiate with myself."

Walz is proposing to add a new income tax bracket for Minnesota's top earners, increase the corporate tax rate, and hike the tax rate on capital gains. 

Walz has proposed using the revenue generated from tax increases to pay for increases in K-12 school funding, including a one-time payment to districts that lost students to private schools during the pandemic-related closures. He is also calling for a one-time payment to thousands of the state's lowest-income families.

Republicans and business groups immediately said the projected surplus was proof that lawmakers should stop talking about tax increases.

"We know the governor's tax hikes will not become law this year, and we can save ourselves weeks of headaches if the governor and Democrats acknowledge that now," House GOP Leader Kurt Daudt, R-Crown, said in an email.

In a video statement, Senate Majority Leader Paul Gazelka said the Senate would vote next week on a tax break for thousands of businesses that received Paycheck Protection Program loans in 2020. Businesses got the loans to keep workers on the payroll during the depths of the pandemic-fueled recession, and they are not subject to federal taxes.

The Minnesota Chamber of Commerce said the state should use the surplus to make PPP loans tax-free, a move that nonpartisan analysts have estimated to cost $438 million. Minnesota is the only state in the region that is taxing PPP loans as income. 

State Rep. Pat Garofalo, R-Farmington, said Minnesota should also wipe away tax bills for hundreds of thousands of Minnesotans who received $600 a week boosts in unemployment benefits last year. 

"People were skeptical about tax increases happening in the first place. That’s not going to happen at all," Garofalo said.

When asked by reporters, Walz expressed an openness to tax breaks on both unemployment benefits and PPP loans.

"I certainly want to work for a solution with them. Yes. I think a lot of those things will be out there and we’ll take a look at them," the governor said. 

Minnesota budget officials said the surplus was largely driven by federal stimulus boosting the economy and filling the state's coffers. The actual economy remains weak for many workers.

Minnesota had 248,000 fewer jobs in December 2020 than it had last February. Half of the losses were in leisure and hospitality, industries that Walz has restricted in an effort to gain control over the state's infection rate.