In their new Budget agreement, Gov. Walz and the DFL have missed a golden opportunity to cut taxes and make Minnesota more competitive

According to the U.S. Census Bureau, there were 5,717,184 people in Minnesota as of July 2022. So, if the state’s historic $17.455 billion surplus was divided among all residents equally, each Minnesotan would get a hefty $3,000.

That number goes even higher if we are only counting taxpaying Minnesotans. Using the most recent data from the Minnesota Department of Revenue, each Minnesota paying income tax would get $5,800 back from the state government if the state’s historic surplus was to be shared equally among taxpayers.

Under the agreement by Governor Tim Walz and legislative members of the Minnesota Democratic-Farmer-Labor Party (DFL), however, a lot of Minnesota taxpayers will be lucky to see anything coming back to them from the state government. That is because the DFL and the governor have unsurprisingly agreed that they want to spend nearly all of the surplus to increase the scope and size of government in the state, giving only a tiny portion back as tax relief.

Specifically, in their new budget,

State public schools would see the biggest funding increase under the DFL agreement, getting $2.2 billion more over the next two years. The budget also includes $3 billion for tax relief, $2.3 billion for an all-cash infrastructure bill that can be passed without GOP support, $1 billion for housing and nearly $670 million for a proposed statewide paid family and medical leave program.

All in all, the total surplus —  and then some — will be entirely wiped out under this agreement.

What this means for the budget

In the 2022-2023 biennium, the Minnesota state government spent a total of $51.6 billion. A $17.9 billion surplus, therefore, presents a little over a third of the total state budget. Granted that $3 billion of that would be going back to Minnesotans in some form via tax relief, that still means a 29 percent hike in the budget.

Source: Minnesota Management and Budget

Certainly, some of this spending is one-time, so it would not roll over into the 2026-2027 biennium. But that still leaves a significant portion of this spending — $8.2 billion — in the baseline, which would roll over into the future and force Minnesotans to contend with a bigger government (and the consequences that come with that).

What proportion will go back to Minnesotans?

Compared to Republican legislators, DFL legislators — including Governor Walz — have certainly shown a higher affinity for spending than tax relief when it comes to the surplus. So it is not too surprising that they have agreed to spend most of it on government programs. However, prior to this agreement, Walz had suggested using more of the surplus for tax relief than what they have currently agreed on.

Specifically, in his supplemental budget proposal, Walz suggested a total of $8 billion — about 45 percent of the total surplus — in spending on tax relief for things like rebate checks, tax credits, and an expansion on social security exemption. In the new agreement, however, that number is about $3 billion — a mere 17 percent of the total surplus.

Given the type of proposals being suggested, it is likely that any type of relief will be very targeted. Walz for example, suggested sending $1250 checks to single taxpayers earning less than $75,000 and $2,500 to married taxpayers filing jointly, with an additional $200 for each dependent — up to three. However, that proposal cost nearly $4 billion. So, if lawmakers agree to send checks to Minnesotans, the proposal would have to be scaled down quite a bit to match the money that they have set aside. This means it is very unlikely that high-income Minnesotans — who shoulder the majority of the tax burden in the state — would see any tax relief.

And if they even decide to go ahead with expanding exemption on social security, that means even fewer funds available for rebates or any other type of tax relief. All in all, Minnesotans will get less in total, and even less for every taxpayer — if anything at all.

What is even more problematic is that refundable tax credits, which are at the forefront of proposed tax relief, are essentially an expenditure for the state government. If the state goes with tax credits, not only would it be collecting fewer taxes from some families, but it would have to spend more on these refundable credits.

A missed opportunity

A lot of states have seen their tax revenues skyrocket during the pandemic. This is mainly due to the money that the federal government dumped into the economy. Minnesota has been unique, however, in the sense that we have some of the country’s highest tax rates. This has allowed the state to capture an even bigger share of the state’s income, at least compared to most states.

High taxes are, however, detrimental to our state. As research from American Experiment has shown time and time again, Minnesota’s economy has been lagging behind that of other states in recent years. And while we do need to improve productivity by attracting highly skilled, highly productive workers, we have been losing them to other states.

With about half of the other states (and counting) cutting down taxes in response to their surpluses, Minnesota is in an even worse situation than we were prior to the pandemic. With each passing day, we are becoming less competitive, both in this country and globally.

The historic $17.5 billion surplus was our golden opportunity to change that. Looking at the budget targets set by the DFL and Walz, however, Minnesotans will have to say goodbye to any chance for meaningful tax relief.