Minnesota's fiscal outlook: stable, but use caution

Opinion editor's note: Editorials represent the opinions of the Star Tribune Editorial Board, which operates independently from the newsroom.

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The big news coming out of this week's February economic forecast for Minnesota wasn't the surplus amount. At $17.5 billion, the amount barely changed from the November estimate.

But this forecast, for the first time in decades, rightly restores inflation projections. That makes for a more accurate financial picture that will serve this state well. The legislation was only recently signed into law by Gov. Tim Walz, although it came in time for this forecast.

There were other highlights: Minnesota's economy remains strong, with record-low unemployment. Diverse and vibrant, it is well positioned to weather the short, mild recession predicted for the first half of this year. In the detailed update and long-range look provided Monday, state officials said revenue is expected to exceed spending through 2027.

However, as historic as the projected surplus is, the fact remains that two-thirds of it is nonrecurring revenue, much of it the result of last year's legislative gridlock that left billions in projected revenue unspent. About a third is expected to be ongoing.

And, with the inclusion of inflation, it's projected that in the upcoming budget cycle it will cost an additional $1.4 billion to deliver the same services as today. In the 2026-27 budget period, that inflationary impact doubles to about $3 billion.

The Minnesota Center for Fiscal Excellence, a nonprofit policy group that includes former state revenue and finance commissioners, noted approvingly that "the forecast has now been transformed from 'only a planning tool' into a useful budgeting tool," adding that "arguments about 'government spending on autopilot' are overstated."

Senate Majority Leader Kari Dziedzic, DFL-Minneapolis, has the right idea when she notes that "we understand that much of this surplus is one-time money and can't be relied on in future years. And with the threat of inflation continuing, we need to budget wisely."

Walz in his budget proposal outlined a package of spending increases for education; $5 billion in tax relief, including rebates; a reduction in Social Security taxes and child tax credits that he said would reduce childhood poverty.

DFLers have not yet released their full spending proposals. Republicans on Tuesday released their "give it back" plan, which includes the full elimination of taxes on Social Security.

The Star Tribune Editorial Board previously called Walz's plan ambitious but pricey, and cautioned about the scale and scope of his tax relief, spending and the $1.5 billion in new taxes and fees he is proposing. As the board noted, tax credits, higher spending, rebates and other tax relief must remain within the scope of what is sustainable.

Certainly Republicans have already signaled that they prefer to return most of the surplus in the form of tax cuts. On Tuesday Senate Minority Leader Mark Johnson, R-East Grand Forks, said as much, promoting a plan that would eliminate Social Security taxes even for the wealthiest Minnesotans, and cut income taxes and property taxes.

Tagged at $13 billion for the upcoming budget cycle, some of these items would prove far costlier in the future, given Minnesota's aging population. Inflation would add to that impact.

Politicians are fond of equating government budgeting to kitchen-table finances. In that vein, a worker who gets a big bonus might treat his or her family to a nice vacation, maybe even staying someplace fancy. The new car? That would probably have to wait for an actual pay raise, to sustain new and higher car payments.

The state has a big bonus and a smaller amount of higher, ongoing revenue. There is room in it for improvements that will advance the health and safety of Minnesotans and further develop its economy, along with tax relief. Minnesota is fortunate — that's not the case in all states.