What can Minnesotans expect from the 2020 legislative session?

Legislators gather in St. Paul today for the opening of the session. Three facts will frame much of the discussion:

1) This is a bonding session

2) The state government has a forecast $1.3 billion budget surplus for the coming biennium

3) All 201 House and Senate seats are up for election in November.

What shape will the bonding bill take, and what will happen to the surplus? The two questions are closely linked.

The bonding bill

Governor Walz has proposed a bonding bill of more than $2 billion for repairs and improvements to state buildings, college and university campuses, roads, bridges, and water systems. House Democrats say that their plan will be significantly bigger than the governor’s, perhaps as high as $3.5 billion, possibly the largest bonding proposal ever and the maximum commensurate with the state maintaining its AAA bond rating. Senate Republicans have said that their “2020 vision for transportation includes more funding for road and bridge construction, including making it a priority in the bonding bill,” and would support a bill about half the size of the governor’s.

Unlike biennial budgets that the Legislature must pass, there is no constitutional requirement that lawmakers pass a bonding bill if they can’t agree. It would seem likely, however, given the positions of Governor Walz and the Republicans, that a deal will be done, focused on infrastructure. Economically speaking, borrowing to fund genuine investment like infrastructure – that which will increase the economy’s productive capacity in the future – can make sense. The question is how much fat will be added to this.

The surplus

Differences are, perhaps, even greater over the question of what to do with the state government’s forecast budget surplus.

Republicans have said that their “2020 vision for the economy will build on these successes and use any available budget surplus money for further tax relief such as cutting small-business and agriculture taxes and finally exempting all Social Security income from Minnesota taxes.” Democrats, on the other hand, want to spend every cent of the surplus, particularly on education.

It is not a budget year, so none of this needs to be passed. The main pitfall to avoid is to assume ongoing spending commitments based on a one-off projected surplus. If that money isn’t there at some point in the future, what happens then? More than likely, it will be an excuse for taxes to be raised. There is more justification for using this money to pay for some of the things in the bonding bill, for example, which are one off expenses.

Doesn’t this also apply to tax cuts? If it makes no sense to raise spending on the back of a one-off surplus, does it make any more sense to cut taxes on the back of one?

In Minnesota’s case, I don’t think the two are the same. As I wrote recently, between 2010 and 2019, adjusted for inflation, state government all funds expenditures rose from $33.3 billion to $42.6 billion in 2019 dollars – an increase of 28%. In real, per capita terms, government all funds expenditures rose from $6,270 in 2010 to $7,548 in 2019 – an increase of 20%. There is no real reason for it to increase further in the near future. So, holding spending constant, with continued economic growth* and current tax rates, the forecast surplus will continue to grow. In those circumstances, a tax cut is easily affordable.

As this is an election year, we will probably see a number of policies with little chance of being passed getting loudly pushed for campaigning purposes. It promises to be a busy session.

*The state’s economic consultants, IHS Markit, calculate tax receipts as a function of economic growth.

John Phelan is an economist at the Center of the American Experiment.