Minnesota lawmakers size up expected $1 billion surplus, raising possibility of swift tax cuts

ST. PAUL, Minn. — Tax-cut talk came quick on the heels of Thursday's report that Minnesota government leaders will have a $1.037 billion budget surplus at their disposal.

Lawmakers sized up options though urged restraint among groups already lining up for the slice of money. The surplus, projected through July 2017, came in a new economic forecast that contained mixed news about the state's long-term outlook, and the extra cash could be swallowed up almost entirely if legislators simply covered inflationary pressures in existing programs.

Still, top Democrats and Republicans separately raised the specter of a swift tax cut. Senate Majority Leader Tom Bakk said he supports lining up more of Minnesota's income tax deductions and credits with those offered in the federal tax code, a process known as conformity that lawmakers strive for but can't always afford.

Bakk, DFL-Cook, didn't spell out precisely which Minnesota residents could be in line for a break but said it's his preference to act sooner so that next year's tax filing is easier. Senate Minority Leader David Hann, R-Eden Prairie, embraced the call, as did the new House Republican leader.

"We know it's important. We know the timeliness of it is important as we approach tax season," said Speaker-to-be Kurt Daudt, R-Crown.

Gov. Mark Dayton also put tax changes toward the top of his to-do list on Thursday. He wants to expand eligibility for a child-care tax credit by removing an income cap — a change that would affect 137,000 taxpayers and carries a $175 million price tag.

Dayton, who must submit a two-year budget proposal by Jan. 27, said additional spending on early childhood learning scholarships and broadband Internet development programs are also priorities.

In any case, the surplus should make for a smoother path to a new budget and reduce the possibility of protracted standoff as Republicans take over the House in January. Lawmakers spent several years battling deficits, repaying IOUs and refilling rainy-day accounts, which now top $1 billion as well.

The surplus projection is drawn from economic growth estimates combined with tax and spending patterns. Total revenue for the two-year budget cycle that begins next July is projected to be just shy of $41.9 billion.

State law prevents financial analysts from including inflationary cost increases in their assessment of program budgets. So even as the cost of salaries, heating bills and other expenses rise, the forecast assumes static prices into the future with the exception of demographic shifts such as increased school enrollment.

Including across-the-board inflationary estimates in their prior forecast would have added about $900 million to state expenses in the next budget. Lawmakers say program advocates should have to make the case for higher spending and not bank on it.

The current fiscal year should close with $556 million in unspent money. Of that, $183 million will be automatically transferred to the budget reserve, but the rest could be parceled out for one-time needs, such as highway construction.