Minnesota’s strengthening economy is pulling in extra money even before a $2.1 billion tax increase kicks in.

Stronger-than-expected tax collections have left the state with an extra $300 million that could even grow before the fiscal period closes June 30. That is allowing the state to fully replenish its reserves and pay down money it still owes local school districts.

Minnesota Management and Budget Commissioner Jim Schowalter said Monday that many of the key economic indicators are good, and that the state is on its best financial footing in years. In February and March, tax collections beat projections in all four major categories.

“We are in good financial shape,” Schowalter said.

DFLers, rattled by years of budget-busting deficit projections, recently enacted tax increases on the state’s top earners, cigarette smokers and others — moves they said were needed to smooth out the roller coaster of deficit dips.

Now, should the good economic news continue, Democrats could be on track to pay off the last of the money owed to local school districts and head into the 2014 election season with a sizable surplus. State leaders already are eyeing any extra money for new education spending, better roads or even targeted tax relief.

“If the economy continues to improve, that’s very possible,” said House Speaker Paul Thissen, DFL-Minneapolis.

How influx came about

Republicans say the influx of tax revenues above projection is rock-solid proof that their stubborn refusal to raise taxes during the downturn, when they were in power at the Legislature, spurred this new era of economic growth.

“The case we made two years ago, when we had a little standoff with the governor, was let the economy grow, let the economy rise out of the deficit situation. And it did,” said House Minority Leader Kurt Daudt, R-Crown.

Democrats say the GOP’s relentless cutting, shifting and borrowing is why voters booted them from power in the last election. State Economist Tom Stinson, a nonpartisan economic forecaster, said the state’s reliance on borrowing and shifting in those years caused lasting damage to the state’s credit rating.

Schowalter warned that numbers won’t be firm until the state closes its books June 30. Until then, revenues remain volatile as budget officials work their way through tax season.

“You don’t know how much you have collected, because you don’t know which envelopes you have opened,” Schowalter said. “The bottom line is that there are still buckets and buckets of hampers of tax returns. … We could be up several hundred million dollars, or we could be down.”

Repaying the public schools is a final step toward restoring the state’s fiscal balance after the worst downturn since the Great Depression. Over several years of recession, the state drained its reserves and then fell back on a rare accounting practice: It withheld $2.8 billion in payments to local K-12 school districts in order to balance the state’s budget.

By law, any revenue that comes in over projection must go to replenish the state’s reserves and then to repay the school debt.

Cash-pinched districts are eager for their windfall.

Left short by the state, many were forced to borrow to make ends meet, cut services or ask residents for money to prevent further reductions. In 2011, administrators in more than a third of the state’s 337 districts asked voters for levy hikes just to pay for operations. Of the 114 districts that sought more operating money, voters in about 90 of those districts approved the requests.

School officials said the surprise payment cuts were especially crushing after years of stagnant aid payments.

“There was virtually nothing new coming for a decade,” said Greg Abbott, a spokesman for the Minnesota School Boards Association.

Sen. Charles Wiger, chairman of the E-12 schools finance division, said that repaying the schools is “Priority One. We have a moral obligation and a legal commitment, too.”

Wiger said he expects the economy to continue improving and schools to be fully repaid by November, or next February at the latest. “Just like the rest of the country, we are getting through it,” he said.

Cautious optimism

As welcome as the money will be, school officials were not beating down the doors of the Capitol demanding their money back. They were mindful that pressing lawmakers for immediate repayment could crimp other state spending.

In the new budget that legislators recently approved, the state has pledged a sizable investment in early childhood learning and all-day kindergarten for every school that wants it. Those new investments would have been less likely if the state had to ante up the entire $850 million in one shot.

The issue of the school debt continues to be at the center of the budget fight between Democrats and Republicans.

“What you are seeing, in my opinion, is the fruits of our labor in the last budget solution,” said Sen. Sean Nienow, R-Cambridge. “The economy has the room to grow, the oxygen it needs.”

Senate Finance Committee Chairman Dick Cohen, DFL-St. Paul, said that the improving economy combined with revenue from tax increases will allow the state to do more than tread water.

“That makes next year a much different kind of legislative session,” Cohen said.