Surplus is $1.9 billion: Now what?

Capitol construction waits for no man, woman, caucus or announcement. So, naturally, Friday’s presentation of Minnesota’s economic forecast was punctuated with the frequent noise of some powerful, unseen drill, grinding away somewhere in the bowels of the building.

Aside from that, everything sounded pretty good.

Prior to the day’s news, most observers had expected the state’s budget picture to be slightly better than it had been in November. They were wrong: In fact, it’s much better.

Minnesota Management and Budget (MMB) estimates a nearly $1.9 billion surplus for the 2016-17 budget, or $832 million higher than the November forecast. The sizable boost to the bottom line comes as a result of strong economic growth, higher-than-expected tax revenues and slightly lesser expenses than previously budgeted.

In the days that followed, legislators undertook the work of poring over the details of the report, looking more deeply into economic trends and considering measures that would “spend” a large chunk of the surplus through significant tax cuts. On Friday, though, the governor and leaders from both legislative chambers had to fulfill their more immediate duties: Taking credit, assigning blame and testing the waters, both on spending priorities and new partisan attack lines.

The greatest gains in state revenues come thanks largely to growth projections in income taxes, according to State Economist Laura Kalambokidis. Kalambokidis explained the trend on Friday, and again during a Monday morning hearing before the House Ways and Means Committee.

Kalambokidis told legislators that the estimated income tax collection increase — some $393 million higher than projected in November — could be attributed both to higher wages across the state economy and capital gains realizations.

With both low-level employees taking home more in wages and investors reaping greater returns, nearly all the trend lines seem to be going in the right direction. Speakers in each of the four Friday press conferences responding to the forecast were generally positive, even making time for jokes. Commissioner Myron Frans, presenting his first February forecast since taking over at MMB, said his notes included a reminder to “pause to smile” after announcing the $1.869 billion figure.

“Our long-term budget outlook is strong,” Frans said. He added: “Over the last few years, we have righted the ship.”

The commissioner’s former statement is beyond dispute, but the latter is up for debate.

Republicans met the surplus by immediately criticizing tax increases Democrats passed over the past two years, saying the $1.9 billion amount showed how unnecessary the $2.1 billion in new taxes had been. House Speaker Kurt Daudt pledged to find ways to give “most” of the surplus back to Minnesotans, and vowed to block Dayton’s desired gas tax increase to raise money for transportation.

Daudt argued Democrats had received the positive financial news from the forecast but missed the lesson buried deeper in the MMB report. The state economy had continued to improve at least in part because of lower gas prices, and raising the cost at the pump would only prove a setback to that progress, Daudt said.

“I think Democrats can stop talking about a gas tax,” Daudt said.

They did not — at least not on Friday. Dayton said he was open to using some of the surplus money for one-time transportation spending, but he said that would not solve the long-term problem.

Interviewed several days after the surplus announcement, Rep. Jim Knoblach, R-St. Cloud, chair of the House Ways and Means Committee, said he did not think the forecast spike would affect Republicans’ earlier plan to spend some $200 million in cash on transportation projects. Combined with another $500 million the Department of Transportation (MnDOT) has in its reserves, and about $300 million worth of available trunk highway bonds, Knoblach said the GOP approach would make about $1 billion available for new work on roads and bridges.

“There is a limit, though, in terms of just how much you can push through MnDOT in a biennium,” Knoblach said, adding that the higher surplus might allow for “a little” more in new spending.

The governor, meanwhile, was more interested in allocating the money elsewhere, saying he wants to devote $238 million to universal pre-kindergarten, which was only partially funded in his initial budget offering.

Dayton also named higher education as a spending priority, and he planned to spend $65 million to assure a tuition freeze from the University of Minnesota. Another $95 million would be earmarked for the same in the Minnesota State Colleges and Universities (MNSCU) system; MNSCU would be responsible for finding one-fourth of the cost of a tuition freeze through administrative savings.

Both of those topics mark shared interests between Dayton and legislative Democrats, particularly in the Senate. Dayton’s plans, as of Friday, would still leave about $400 million of the budget surplus unallocated, and he said he looks forward to hearing ideas from the Legislature on where to spend it.

The governor’s response was by far the most specific of the three elected branches, though Sen. Richard Cohen, DFL-Maplewood, did say that caucus would probably agree to something “very similar” to Dayton’s approach on higher education.

The Senate DFL has also pushed a bill that would grant free tuition at the state’s community and vocational colleges, and Cohen said Friday that proposal — at an estimated cost of up to $106 million, depending on enrollment — is still under consideration.

Knoblach, for his part, said he was encouraged by Dayton’s interest in fully funding MNSCU.

“If you look at the financial shape of the MNSCU campuses, they’re in worse shape than the University of Minnesota,” said Knoblach, whose own district includes St. Cloud State University. “I’m pleased to see the governor recognized some of the needs there.”

Anticipating the GOP push to redirect the surplus to taxpayers, Dayton argued the state had done that for two consecutive years under Gov. Jesse Ventura, only for the state economy to crater in subsequent years.

“I’d rather see us invest the money,” Dayton said, adding that spending on education and other areas had “made Minnesota successful — more successful than other states.”

Daudt, as is his wont, was hesitant to spell out details of where the GOP might agree to spend the surplus, though he said education and long-term care could both receive budget increases.

“[Long-term] care is an area where the governor has really not come forward,” Daudt said.

The Republican leader was even less committal on where to reduce taxes, but offered income tax cuts for Social Security or veterans’ benefits as possibilities.

Proposals to cut the state excise for veterans have already been introduced, including from Rep. Bob Dettmer, R-Forest Lake, whose bill has already been approved by the House Veterans Committee, which he chairs.

Dettmer presented that bill, along with another that would offer a tax to encourage the hiring of veterans, during a Tuesday hearing of the House Taxes Committee. In the same hearing, bills that would eliminate or phase out the state’s Social Security tax, including a pair authored by committee chair Rep. Greg Davids, R-Preston, were also discussed. One bill would subtract 10 percent of the tax annually, leading to its elimination in 2024; another would cut more aggressively, with a 32 percent reduction starting in 2015 and 2016, and fully removing the tax by 2022.

Nan Madden, director of the Minnesota Budget Project, testified against those proposals, warning that expensive, phased-in tax cuts might seem like a wise idea in times of surplus, but could look foolish in the event of an economic downturn.

“If we look at recent history, we should not assume Minnesota will be in a good position to fund new tax cuts for the next eight to 10 years,” Madden said.

Testifying in support of the bills was former GOP legislator Ted Lillie, now president of the Taxpayers League of Minnesota. Lillie said the state risked losing many of its retirees, who, he said, had already begun to move to states with a friendlier tax climate for Social Security benefits.

On Friday, Daudt repeatedly brought the conversation back to the DFL’s backing of a new Senate office building and Dayton’s recent attempt to raise executive branch salaries as examples of that party’s misplaced priorities.

Both are consistent with Democrats’ insistence on raising the gas tax, Daudt said, as “out of touch” with mainstream Minnesotans.

“Let’s invest in them, let’s invest in their families,” said Daudt, who later said Republicans would look for “at least” $900-some million in tax cuts, “if not a lot more than that.”

Dayton acknowledged that tax cuts are an “appealing option,” but he seemed uninterested in offering them as part of his supplemental budget, which, he said, would be released during the second week in March.

After that, the ball will be back in the Legislature’s court, as both chambers work to set their committee targets in response to Dayton’s plan. Taking after his caucus leader, Knoblach generally balked at the chance to spell out priorities during an interview with Capitol Report, instead choosing to speak in “big picture” generalities.

“I think you will see a House Republican proposal spending substantially less than the governor,” Knoblach said.