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ST. PAUL (AP) — An updated forecast put Minnesota’s budget surplus Monday at a still-enormous $17.5 billion, reflecting an improvement in the state’s fiscal picture and setting the stage for the nitty-gritty of the Legislature’s debates on spending and taxes.

While the figure from Minnesota Management and Budget is down slightly from the $17.6 billion projected in November, the forecast now factors in the impacts of inflation on future spending for the first time in 20 years, as mandated by a new state law. As a result, projected spending for the next two-year budget rose about $1.4 billion to nearly $55.5 billion.

The new figure also accounts for a little over $100 million that the Legislature already has spent since it convened last month, mostly on bringing the state tax code into conformity with federal regulations, which resulted in a tax cut for many. It also reflects rising individual income and corporate tax revenues. But most of the surplus is still one-time money left over from the current budget.

“Underneath all of this forecast and all of the projections is a solid economic outlook with continued growth in the economy, slightly lower inflation and a slightly milder recession than previously anticipated,” Jim Schowalter, budget commissioner, said at a briefing for reporters.

The Legislature will use the new projection to craft the next two-year budget, which takes effect in July. The surplus means there’s still money for priorities laid out earlier by Democrats, who control both chambers of the Legislature and the governor’s office for the first time in eight years.

Gov. Tim Walz’s proposed $65 million budget includes a combination of spending increases and tax credits to return some of the surplus to taxpayers, as well as reductions in taxes on Social Security income. He said he’ll tweak his plans in light of the new forecast, but they will still include “the largest tax cut in Minnesota’s history.” And he said there’s room to spend more money on public safety.

“Our budget surplus means that our state is in a strong position to take decisive action to solve big challenges,” Democratic House Speaker Melissa Hortman, of Brooklyn Park, told reporters, listing her caucus’ priorities as education, health care costs and economic inclusion.

Republicans, who will announce a “Give It Back” plan Tuesday, want permanent tax cuts, but their influence is diminished now that they’ve lost control of the Senate.
Walz said he wants to give the money back too, but he wants tax cuts that target “working Minnesotans,” rather than the wealthiest, in ways that put the money back in their pockets right now. He continued to reject total elimination of taxes on Social Security, as Republicans and some Democrats advocate. He said his plan would cut taxes on Social Security for over 386,000 Minnesotans as it is.

Hortman and Democratic Senate Majority Leader Kari Dziedzic, of Minneapolis, were noncommittal about whether they’ll support the governor’s call for direct tax rebate checks of as much as $2,600 per family. The House and Senate tax committees will hold hearings on this budget this week. Hortman said there’s strong support in her caucus for tax credits aimed at families with children.

“I think we’ll spend some time talking with the governor, and with our tax chairs, and with the revenue commissioner about the best way to structure tax cuts for the people of Minnesota,” Hortman said.

One of the few Republican levers of power is over a public infrastructure borrowing package known as a bonding bill. Taking on more debt requires a 60% supermajority in both chambers. Senate GOP leaders have said their price for the needed Republican votes would be some kind of tax relief.

“With single-party control, Democrats’ priorities focus only on spending the surplus on more government and divisive social policies,” Republican Senate Minority Leader Mark Johnson, of East Grand Forks, said in a statement. “It is clear Democrats are not thinking about everyday Minnesotans and the struggles we face in managing our daily budgets in the face of intense inflation.”