Minnesota's budget surplus tops $1.5B despite coronavirus.

ST. PAUL, Minn. (AP) — Minnesota's projected surplus has inched up over $1.5 billion, state budget officials said Thursday as they delivered an updated economic forecast that added fuel to the political maneuvering at the Capitol over whether the Legislature should spend the extra money, save it or cut taxes.

The new estimate from Minnesota Management and Budget was $181 million higher than the agency's last budget forecast in November, just a slight increase that gets almost lost in a total state budget of over $48 billion.

Democratic Gov. Tim Walz, administration officials and legislative leaders from both parties said they didn't expect the global coronavirus outbreak to affect the budget picture much. They're already talking about setting aside $5 million of the surplus in case its needed to respond to the threat.

A small increase in tax revenue projections and a small reduction in spending estimates drove the improvement, Budget Commissioner Myron Frans said at a briefing for reporters. Minnesota's economic outlook remains stable, and the agency is still projecting slower growth in future years.

“This budget forecast is good economic news for Minnesota,” Walz said. “We must build upon the smart decisions that that got us to this strong position."

Walz told reporters his top priority is putting $491 million of the surplus into the state's budget reserve so that the rainy day fund remains at nearly $2.4 billion in the next budget period, which starts in July 2021. He also wants to use part of the surplus to pay the interest on his proposed $2 billion public construction borrowing proposal, also known as a bonding bill.

But leaders of the House Democratic majority reiterated their calls for spending much of the surplus on early childhood education. They also want to tap it to take advantage of low interest rates to pass a larger bonding bill than Walz has proposed.

“It's only a surplus in the true sense of the word if Minnesotans feel that we've invested all that we need to in education, health care and family economic security,” House Speaker Melissa Hortman told reporters.

But Republican leaders said the $1.5 billion one-time surplus shows that the state can afford to permanently cut taxes by about $1 billion if it reins in future spending. Their top priority is exempting all Social Security income from personal income taxes, which would cost about $400 million annually. They also want to allow farmers and small businesses to deduct the entire cost of equipment purchases up front, conforming with the federal tax code. And they want a modest income tax cut for everyone.

House Minority Leader Kurt Daudt said the surplus means the question isn't whether the Legislature will pass a tax bill, “but how big will that tax relief bill will be.”

Democrats opposed expanding the state's partial exemption for Social Security income, saying it would primarily benefit wealthier Minnesotans while creating a permanent loss of tax revenues.

Questions about whether the coronavirus outbreak will disrupt the economy enough to affect the state budget cast a shadow over the day's discussions about the surplus.

The state bases its budget projections partly on national economic forecasts from the consulting company IHS Markit, which last week said it expects only temporary and modest effects on the U.S. economy from the coronavirus outbreak, State Economist Laura Kalambokidis said.

“However, every day brings new understanding of the public health effects of the disease, and the economic impact remains uncertain,” she said. “If the impact of the outbreak becomes more prolonged, or widespread, than it appeared at the time IHS constructed their February outlook, U.S. economic growth would be slower than forecast.”

Republican Senate Majority Leader Paul Gazelka said he isn't concerned that the economic impact of the outbreak will affect the state budget dramatically.

“If the coronavirus is more than we think it's going to be, we will find resources," he said. "I'm not worried about that at all.”