Bigger MN budget surplus sets up battle over taxes

Minnesota State Capitol entrance
The front entrance of the Minnesota State Capitol.
Steve Mullis | MPR News 2009

Updated 1:15 p.m. | Posted 9:18 a.m.

A new forecast released Friday shows Gov. Mark Dayton and the Minnesota Legislature will have even more money to work with as they set the state budget for the next two years.

The forecast from Minnesota Management and Budget shows the state's previously forecast $1 billion surplus for the next biennium has grown to $1.87 billion.

That's an increase of $832 million over the previous forecast, according to MMB. Much of the change comes because revenue was about $616 million higher and state spending was $115 million lower than projected.

Gov. Mark Dayton presents his budget proposal.
Minnesota Gov. Mark Dayton, Jan. 27, 2015.
Jim Mone | AP file

Dayton hailed the news of the expanding surplus, but said it was due to the economic success of the state, not the tax increases he and the DFL-controlled Legislature enacted two years ago.

"Fortunately, Minnesota's economy has turned around," Dayton said. "Our state has led the nation's economic recovery."

Dayton said it would be a bad idea to use the bulk of the surplus to cut taxes. He said it's better to invest in education and transportation while times are good, which he said will pay off for the state for years to come.

That put him at odds with Republicans.

"This should put an end to talk in St. Paul about [increasing] the gas tax," said House Speaker Kurt Daudt, R-Crown.

Noting that lower gasoline prices contributed to the surplus, Daudt said Dayton's transportation plan which relies on a higher wholesale tax on gasoline along with vehicle registration fees and metro area sales tax should be off the table.

Instead, Republicans want tax relief, he said.

"We're going to give some of this surplus back to Minnesotans," Daudt said. "From this forecast, we've learned that that's what is going to help Minnesota families and that's what is going to help Minnesota's economy."

He said he will propose using about half of the extra money for higher education and early education.

The revised budget plan he will propose the week of Mar. 9 will provide enough money for the University of Minnesota to freeze tuition for the next two years and for the Minnesota State Colleges and University system to freeze tuition for a year, he said, with the understanding that MnSCU would make administrative cuts to cover a freeze for a second year.

House GOP Minority Leader Kurt Daudt
Minnesota House Speaker Kurt Daudt, Nov. 5, 2014.
Alex Kolyer | File for MPR News

Dayton also said he will propose adding more than $200 million to his plan for universal pre-kindergarten for Minnesota 4-year-olds, which he said would be enough to cover every four-year-old in the state.

His early childhood education plans will also include more scholarships for families to gain access to high quality child care and increasing the state's tax credit for child care.

He said he will also recommend restoring $3.7 million for the Minneapolis Park Board which he had earlier said he would withhold because of ongoing disagreements over the proposed Southwest Corridor light rail transit line.

The park board on Friday announced that it would end its quest to run trains through a tunnel underneath a channel between Cedar Lake and Lake of the Isles and go along with plans for a bridge.

Overall, Minnesota's economic outlook is improving because the U.S. economic outlook is improving, state finance officials said.

State economist Laura Kalambokidis cited two reasons: sharply lower oil prices and a stronger dollar. That translates to savings for consumers, and lower product prices due to lower petroleum prices, she said.

Wage growth is now expected to bump to 5.4 percent in 2015, higher than the 4.4 percent projected in November. That means means higher income and sales taxes are now expected.

Officials also noted that Minnesota's 3.6 percent unemployment rate is lower than what it was during the last economic expansion in 2007.

Kalambokidis said that wage growth isn't a surprise, and that officials had been expecting a bump for a while due to improved economic activity.

"It's something we've been waiting for," she said. "It was a guest that was a little late to arrive."

On the spending side, fewer children enrolled in schools than projected, and the number of children in school who are considered impoverished didn't increase since last year.

That means the state is spending less than previously expected on special funding for schools with a high number of poor children.