Breaking down Minnesota's budget forecast

Minnesota Capitol building is shown
Minnesota finance officials say another surplus is expected, but down the road there could be a possible deficit.
Kerem Yücel | MPR News

There’s mixed news Tuesday from Minnesota finance officials about the shape of the state’s budget.

In the short run, another surplus is expected. But down the road, there could be a possible deficit. Budget officials will answer questions reporters Wednesday afternoon when they discuss the economic forecast.

MPR News politics editor Brian Bakst broke down the numbers with MPR News host Cathy Wurzer.

Use the audio player above to listen to the full conversation.

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Audio transcript

[MUSIC PLAYING] CATHY WURZER: There is mixed news today from Minnesota finance officials about the shape of the state's budget. In the short run, another surplus is expected, but down the road, there could be a possible deficit. Budget officials will answer questions from reporters later this hour when they discuss the economic forecast. MPR's political editor Brian Bakst is here right now to talk about what we know so far. Hi, Brian.


CATHY WURZER: Let's start with the positive news. How big is the surplus?

BRIAN BAKST: For the current budget period we're in-- it started in July and goes through June of 2025-- the Minnesota management and budget report predicts a $2.4 billion surplus will build up. That's about one third bigger than they thought would be there.

Tax collections remain strong. People are buying stuff, driving up sales tax collections. Corporations are posting big profits, so the state is pulling in more taxes there, too. And healthy employment trends mean more people are working and, therefore, paying income taxes as well.

CATHY WURZER: OK. How about the long term?

BRIAN BAKST: Yes, the other shoe. For the first time in a while, finance officials are raising the prospect of a deficit. It's nothing immediate, but for the next budget-- so the one that starts in July of 2025-- they say there's an imbalance between revenue and spending. In other words, a money shortfall. The information released early this morning didn't say how big the gap is, and we'll learn more this hour.

A major caveat here is that it's a ways away, and the legislature will set a new two year budget before that, so there are ways to bring everything back in line before the problem sets in. By law, Minnesota lawmakers must have a balanced budget.

CATHY WURZER: Some lawmakers call this a structural fiscal imbalance. I'm wondering how this would affect what happens when the legislature returns to action in February of next year.

BRIAN BAKST: Yeah. This is where the blinking lights on the horizon could have an effect. Lawmakers approved a new state budget this year, but there were still ideas for new programs, added investments, or hope for tax cuts that didn't get included. Some legislators were hoping to make more progress in the coming session.

This might put a damper on the expectations. DFL legislative leaders were already trying to reduce appetites, and this could help. Also, things with a one time impact-- so think road projects or other building construction-- they could get a leg up because they won't contribute to ongoing budget pressures.

CATHY WURZER: OK. Let's talk about that because it's going to be an even year session. Usually, that's a so-called bonding session.

BRIAN BAKST: It is. Lawmakers have been touring the state, and there are billions of dollars in requests in already. State agencies are seeking money for fix ups or new construction. So are local governments.

House Speaker Melissa Hortman thinks a borrowing bill could reach as high as $1.7 billion. But if they can't win the necessary 3/5 votes to pass that, the DFL is willing to put out an all cash version of this in the ballpark of $800 million. There will be a lot of twists and turns, Cathy, before that result shakes out.

CATHY WURZER: OK. So let's talk politics. Could the budget forecast, especially the warning about a deficit, have any political ramifications? I mean, 2024 is a pretty big election year.

BRIAN BAKST: Yeah. I have little doubt that Republicans will use it to say Democrats win on a spending spree when they won full control of the legislature and the governor's office. They were setting up that theme at the end of last session, calling the DFL budget unsustainable. In a special election held this week, the GOP sent out mailers that criticized the DFL for wasteful spending.

And we've already gotten reaction today from House Minority Leader Lisa Demuth who says that this potential deficit stems from reckless and insatiable spending, in her words. We'll get another forecast in before the 2024 election. That comes in February.

But Cathy, remember that this is a presidential year. A high stakes White House campaign could be all consuming. Legislative elections have been increasingly following national trends anyway. So in short, we'll have to see.

CATHY WURZER: And I say it's a big election-- yes, presidential, but also, all the state house seats are up, right?

BRIAN BAKST: That's right. All 134 house seats. The Democrats have 70 seats now to the 64 for Republicans, so it's a narrow gap that the Democrats will be defending.

CATHY WURZER: Hey, you probably heard me talk about a story that you had posted this morning about those tax rebates that the legislature passed this session. Many Minnesotans got them this fall, but it looks like some of that money might be headed to the federal government.

BRIAN BAKST: Yeah, it's going to be a holiday season downer for recipients of those rebates. They could have to pay anywhere from $26 to $286 in federal taxes on the rebate when they file their returns next year, and that's based on revenue department estimates. The rebates ranged from $260 to $1,300 depending on household makeup.

State officials had hoped the IRS would view Minnesota's rebate in the same way as 20 some other states that distributed money in 2022. The IRS saw those other rebates as disaster aid during a health pandemic. But the national emergency around COVID-19 ended just before Minnesota lawmakers approved their rebates, and the IRS says it will view the rebates here as ordinary income, and therefore, tax it.

Revenue Commissioner Paul Marquart told me yesterday that he's disappointed, but there's not much else the state can do. He did stress that the rebates won't be taxed at the state level. But Cathy, the overall rebate was about $1 billion. By preliminary estimates, the amount the feds will gobble up through taxes could top one $100 million.

CATHY WURZER: All right. I know that you are busy. You have to listen to the budget forecast presentation and then get reaction. Thanks so much.

BRIAN BAKST: Yeah. And you should listen for Dana Ferguson to give a full report on what state finance officials and lawmakers say this afternoon.

CATHY WURZER: We will. Thank you, Brian.

BRIAN BAKST: You're welcome.

CATHY WURZER: That's MPR's political editor Brian Bakst.

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