Improved economic forecast boosts chances for spending, tax cut proposals in Minnesota Legislature
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The budget table is set for the rest of Minnesota’s legislative session, and a richer spread reflected in a new economic forecast could satisfy more lawmaker appetites.
For now, though, some want to stick to the diet they expected the Legislature to be on coming into the year.
"There are some things that we need to spend on, but our caucus is very, very committed to being frugal,” said Senate Majority Leader Erin Murphy, DFL-St. Paul.
The state’s newest economic forecast, released Friday, paints a rosier financial picture. The state’s projected surplus for the next 16 months is now $3.7 billion — up $1.3 billion from just a few months earlier. A projected shortfall that had been building for the next two-year budget is now forecast to turn toward a $377 million surplus.
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In the context of a $70 billion two-year budget, that’s not a lot of wiggle room.
So while the improvement was welcome news to state officials, it still left lawmakers in a cautious posture with many unknowns that could easily swing things in the other direction.
House Speaker Lisa Demuth, a Cold Spring Republican and a leading candidate for governor, said tax cuts should take center stage and perhaps be offset by additional spending restraints.
“We have to be smart, but we also have to make sure that job creators and job providers can do what they need to in the state to grow our economy and then still make things affordable for Minnesotans,” she said Friday.
DFL Gov. Tim Walz said the forecast doesn't change his calculus all that much.
“Collectively, all of us together, a top priority is to get the bonding bill done, make sure we're able to do that,” he said. “That's always very bipartisan. It has to be. So I think that's going to be a priority. But I think you'll see limited, limited expenditures.”
There is much uncertainty: worries about scaled back federal funding for health programs, continuing seesawing on tariffs, fallout from the prolonged immigration enforcement and, as of this weekend, instability in the Middle East and other parts of the world.
“This forecast comes with the biggest asterisk ever,” said House DFL Leader Zack Stephenson, DFL-Coon Rapids.
With that kind of volatility, Department of Minnesota Management and Budget Commissioner Erin Campbell gave lawmakers some advice.
“Alignment of spending and revenue will need to be addressed. The sooner we begin looking for additional ways to do that, the less likely we are to face a future fiscal cliff,” she said. “Given these considerations, it's our recommendation that policy makers should, at a minimum, strongly consider offsetting any new spending with spending reductions.”
Democrats and Republicans have different ideas about where any surplus might go.
Leading Democrats want the state to offer financial help to those adversely impacted by immigration actions. They're also pushing school safety measures and a robust construction projects bill.
Murphy, the DFL Senate leader, said she’s also paying close attention to federal funding cuts threatened by the Trump administration. That’s a reason to be measured, she said.
“So that we are in a strong position going forward, and perhaps we can weather whatever comes from the Trump administration.”
Republicans say it shouldn't be about spending. They want to cut costs and perhaps deliver some tax relief.
“We’ve got to make sure that we are focusing on the needs of Minnesotans for affordability,” said Senate Minority Leader Mark Johnson, R-East Grand Forks. “That means tax conformity. That means making sure that we're lowering things such as tab fees for vehicles. That means that we're focusing on things that affect things, like property taxes.”
Tax conformity is a big push for Republican leaders. It means the state adopts the tax changes made in a giant federal tax-and-spending bill that was passed last summer. Adopting those changes, however, would decrease state revenues by hundreds of millions of dollars per year.
Minnesota House Research estimates that state revenues would drop by $366 million in the current budget if the state adopts the no taxes on overtime pay provision. Adopting the no taxes on tips provision, $126 million would draw from state revenue.
“That is a hefty amount when we're looking at where the budget is,” Demuth said. “But I want to remind you of where we were in 2023 and 2024 with excess taxes, excess spending. We had the $18 billion surplus, and what we didn't do for Minnesota families then is we didn't give them relief.”
Some Democrats are less enthusiastic about adopting each of the federal tax changes. Stephenson said many of those mainly help the ultra wealthy.
“The wealthiest people and the richest corporations did very well in that federal tax bill,” he said. “And I don't think that they need to continue doing very well by the decisions we make in Minnesota's government.”
Still, Stephenson said there will be “a really serious conversation about conformity. But we can't just cheer on the federal government.”
As far as spending, state lawmakers might have to plug holes from federal pullbacks that are either temporary or ongoing. Many of those are in the health care delivery area. Lawmakers will also consider a construction projects borrowing bill, which involves taking on debt to finance work but would add to interest payments the state then must make.
School safety proposals, which have bipartisan support, would involve money to shore up physical defenses. The amount isn’t yet clear. Mental health programs could likewise see a boost.
More division surrounds financial rescue plans for Minnesota businesses or renters put in a precarious spot during the immigration crackdown pursued by the Trump administration. Some tallies put the price tag for those into the hundreds of millions of dollars.
The tied House and the nearly evenly split Senate will mean compromise on any of these issues will be key to getting them across the finish line. The session must end by May 18.
“We have a lot of work in front of us,” Johnson said. “And we're going to be buckling down here now with the forecast out.”
