Minnesota Capitol

The state of Minnesota will head into 2022 with a record $7.7 billion projected budget surplus for the current two-year budget cycle, state finance officials announced last week.

The eye-popping figure would be enough money to pay more than $1,000 to every Minnesotan, if the projection holds.

But that won’t happen. Some of the money is already spoken for, and leaders of both political parties appear to have other plans for the rest — as do various interest groups that wouldn’t mind a piece.

So how will it be spent, or will it be spent?

Impossible to say at this point.

The projection — and it’s important to remember it is only a projection — set the pieces Tuesday for a chess match that will likely play out through May as the state’s politically divided government grapples with what could shape up to be an unprecedented sea of riches in an election year.

On Dec. 7, Gov. Tim Walz and fellow Democrats generally hailed the projected surplus as providing a historic opportunity to pay for programs and policies they’ve supported in recent years, such as creating universal paid sick leave and reducing the cost of child care. Republicans, on the other hand, urged caution, warning of the dangers of inflation and suggesting “tax relief” is in order to counterbalance the state’s largesse.

WHY SO BIG?

The ballooning projected surplus — in February it was projected to be $1.6 billion — is part of a national trend for state and federal government finances that is resulting mainly from an increase in tax revenues amid a pandemic recovery that continues to surprise economists.

Some $5.1 billion of the projected surplus comes from increased collections from personal income, sales, and corporate income taxes, according to the budget forecast, which was produced by the state Management and Budget office in consultation with the state economist and a private economics firm. A relatively small amount, some $364 million, comes from lower-than-expected state spending during the pandemic, mainly from making lower payments to public schools, which saw reduced student enrollment during the pandemic.

Some $870 million of the surplus by law will be siphoned off to restore the state’s budget reserve, also known as its “rainy day fund.”

The forecast lists a number of variables that make its projections inherently uncertain, including inflation, the problems with the global supply chain and the course of the coronavirus pandemic.

DEMOCRATS CLAIM VICTORY

While cautioning the pandemic isn’t over, leading Democrats claimed the projected surplus was vindication for policies they’ve supported.

Walz, for example, revisited an argument he made in 2020, when Republicans criticized his unprecedented COVID-19 restrictions, which included shuttering schools and many businesses to in-person activities, as lethal to the economy. Walz has frequently maintained there was a “false choice” between the economy and pandemic safety — when properly targeted government spending was used to provide relief for those hurt.

REPUBLICANS URGE CAUTION

House Minority Leader Kurt Daudt, R-Crown, said inflation, especially rising gasoline and energy prices, is putting the squeeze on Minnesotans, and “all of those things are the result of Democratic policies.”

“There is a pretty stark contrast right now between government’s bank accounts and regular Minnesotans’ bank accounts,” said Sen. Scott Newman, R-Hutchinson. “Government is flush with cash, but inflation is stealing more and more from people’s paychecks. Everything from gasoline to groceries to energy is getting more expensive.”

Republicans hold the majority in the state Senate, so their support is crucial for any state spending plan to succeed.

Newman said his “top priority will be making sure we provide serious, meaningful tax relief to the people who need it most.

In the House, Rep. Dean Urdahl, R-Acton Township representing District 18A, said in a statement that the surplus represented “a significant over-collection of state taxes.”

“Relief needs to be a top priority in the 2020 session,” he said. “These dollars could help offset increased costs people are suffering under inflation and should be put back in taxpayers’ hands.”

Rep. Glenn Gruenhagen, R-Glencoe representing District 18B, echoed Urdahl’s sentiments.

“This record-setting surplus gives us an opportunity to lower taxes and help make Minnesotans’ lives more affordable,” Gruenhagen said in a statement.

Potentially complicating matters politically: Walz is running for re-election, and two prominent Republican senators, Paul Gazelka, R-East Gull Lake, and Michelle Benson, R-Ham Lake, are seeking the Republican nomination, along with former state Sen. Scott Jensen of Chaska. In addition, every seat of the Legislature will be on the ballot next year.

House Republicans have also called for spending some state money to replenish the state’s unemployment insurance trust fund that was drained to pay jobless benefits during the pandemic. The state borrowed more than $1 billion from the federal government and must start paying off that debt this month.

Businesses will face payroll tax increases if the state doesn’t step in and pick up part or the entire tab. It could use some of its unused federal COVID dollars to address that debt.

“Minnesota is one of only 10 states that has not taken care of this issue and our state’s lack of action could cause businesses to face a UI tax increase of 15% or more to replenish the fund,” Urdahl said. “This should not happen any time, much less when the state has an unprecedented surplus.”

Walz and the 2022 Legislature, which convenes Jan. 31, will decide what to do with the surplus. If they can’t agree, nothing much will happen; the money would just sit there. Because the two-year budget to fund government operations was passed last year, there’s no risk of a state government shutdown.

The Leader’s Stephen Wiblemo contributed to this story.