1. PAUL- Prospects for Minnesota’s next two-year state budget got a huge shot in the arm Friday when budget officials projected that there will be a $1.6 billion surplus for that period, erasing the dire specter of multi-billion-dollar shortfalls predicted just months ago.

A combination of higher than anticipated revenues, lower state spending, and an increased surplus for the current fiscal year have contributed to a dramatic reversal in the state’s budget projections, which just seven months ago predicted a whopping $4.7 billion deficit. The picture had improved by November, but MMB was still looking at a shortfall of $1.27 billion.

 “I feel like we’ve been on a yearlong roller coaster,” said Jim Schowalter, commissioner of the Department of Minnesota Management and Budget. “With today’s fiscal information, we know that we’re able to weather last year’s volatility without untimely cuts.”

A significant difference between the current projection versus that in November, according to state economist Laura Kalambokidis, is the inclusion of a projected boost to economic activity from two federal coronavirus stimulus packages – a $900 billion stimulus passed in December and the anticipated passage of the $1.9 trillion package currently working its way through Congress.

Kalambokidis cautioned that there are assumptions built into the projections that are subject to uncertainty. It assumes a continued decline in the coronavirus pandemic. She noted that the impact of December’s stimulus is still uncertain. The projection assumes increased consumer spending, but consumers chose to save a great deal of last spring’s stimulus checks rather than spend them. There is also the inherent uncertainty of making a projection 28 months into the future.

“Small changes can cause big changes,” she said.

Schowalter pointed out that about $1.4 billion of the projected surplus comes from one-time infusions of cash. A once-predicted budget shortfall in the current year’s budget has changed to a projected $940 million surplus due to better than anticipated tax revenues. Schowalter said this was largely a result of lower wage earners bearing a higher burden of the pandemic’s economic downturn than high wage earners.

Another $491 million of the projected surplus is attributed to a mandatory disbursement from the state’s budget reserve fund, a move passed in 2019 as part of that year’s compromise over the 2020-21 biennium budget.

“The bulk of this money is from one-time resources,” Schowalter said. “We’ll have to be careful and manage it appropriately.”

 Still, the news is undoubtedly positive, and none were more upbeat about it than Gov. Tim Walz.

“It’s good news that our fundamentals are strong,” Walz said. “There is every reason to be optimistic about the future.”

As the legislature works on the budget for the next biennium in this new fiscal scenario, Walz emphasized that they should look to address the hardships experienced by the small business community and hospitality industry during the battle against the pandemic.

“We went to war in this thing, and we sent some to the front lines,” Walz said. “Whenever we do that we pay hazard pay to our soldiers.”

Tax hike debate

When Walz introduced his $52.4 billion “COVID-19 Recovery Budget” for the biennium at the end of January, the state was still looking at a $1.27 billion deficit, and to counter that Walz proposed $1.6 billion in tax increases that would impact Minnesota’s wealthiest individuals. Republicans immediately fired back, with Senate Majority Leader Paul Gazelka saying “We are not going to increase taxes on anyone.”

Now, with a projected surplus roughly equal to the tax increases Walz proposed, the already slim shot at generating more tax revenue is even less likely.

Minnesota Chamber of Commerce President Doug Loon released this statement today, following the release of the February budget forecast.

“Today’s budget forecast shows that our economy is ready to start growing again, but many businesses across Minnesota are still in danger of closing their doors forever,” he said. “It’s time for lawmakers to help struggling employers, employees and communities; not create permanent tax increases and barriers to growth. Preventing a state income tax hit to those employers who took the federal PPP loan lifeline to maintain staff throughout the pandemic is a critical first step.”
House Minority Leader Kurt Daudt also was quick to take the opportunity to reinforce the Republicans’ opposition to new taxes.

“Raising taxes  will slow our economic comeback and make it harder to bring back jobs and paychecks to where they were before the pandemic,” Daudt said. “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. We’re ready to roll up our sleeves and work together to pass a responsible budget without raising taxes.”

When questioned about the proposed increases in a Friday afternoon press conference, Walz said he was open to having conversations with Republicans and reaching some compromise, although he stopped short of saying what such a deal might look like.

This is a developing story. Look for an update in next week’s edition of the Timberjay.