Governor Mark Dayton released a cautious supplemental budget yesterday, leaving significant unspent resources on the bottom line both in the current FY 2016-17 and the upcoming 2018-19 biennia. While being careful not to break the bank, Dayton does designate a portion of the state surplus to important investments on education and broadband, while at the same time increasing tax fairness.

Some of the new expenditure items in Dayton’s supplemental budget (as described in the Minnesota Management & Budget item-by-item summary) include:

• $100 million in the current biennium for the “Border-to-Border Broadband Grant program, which funds the build-out of infrastructure to promote the expansion of broadband service to areas of Minnesota that are unserved and/or underserved.”
• $125 million spread over the next three fiscal years (FY 2017 to 2019) for “a high-quality, voluntary prekindergarten program.” Spending on this program would ramp up from $25 million in FY 2017 to $60 million in FY 2019. The Governor has argued that pre-K education provides an excellent return on investment—a conclusion supported by research from multiple sources.*
• $36 million divided fairly evenly over the next three years “to address the state teacher shortage issue by providing funding to recruit and retain teachers.” The proposal would increase and diversify the teacher workforce through multiple approaches, including reduced tuition and funding for recruitment of teachers who agree to work in areas of teacher shortages.
• $188 million over the next three fiscal years (increasing from $17 million in FY 2017 to $94 million in FY 2019) to increase the maximum reimbursement rates for the Child Care Assistance Program (CCAP). These rate increases “will encourage more providers to participate in the CCAP program and increase access to high quality, early care and education options.”
• $63 million spread out evenly over each of the next three years for the Minnesota State College and University (MnSCU) system, which “will allow MnSCU to maintain the planned tuition rates for the 2016-2017 school year without reducing services.”
• $46 million for a one-time increase in city Local Government Aid (LGA) and County Program Aid (CPA) in FY 2017 (corresponding to aid payments made in calendar year 2016). This is among the more curious items in the Governor’s budget, in that (1) the aid is being provided in a budget year that is already nearly one-quarter complete and (2) the additional funding is for FY 2017 only, so the LGA and CPA appropriations will return to the current law level in FY 2018.

On the tax front, the Governor is targeting tax relief to low and moderate-income households through an expansion of the Minnesota Working Family Credit (WFC) and the Child and Dependent Care Credit. The WFC is patterned after the federal Earned Income Tax Credit and is equal to a percentage of earnings, up to a maximum amount; the amount of the credit is phased-out as earnings increase. The WFC is credited with providing needed tax relief for low-income families while still encouraging work. The Governor’s supplemental budget increases the WFC by approximately $36 million annually through increases in the credit amount and by increasing the amount that a family can earn and still receive the credit.

The Minnesota Child and Dependent Care Tax Credit offsets qualifying care expenses for Minnesotans who are working or looking for work and who have income below a certain level. The amount of the credit has failed to keep pace with escalating care costs over time. Dayton’s supplemental budget will increase the credit by a projected $47 million in FY 2017, ramping up to $56 million by FY 2019.

According to the 2015 Minnesota Tax Incidence Study, Minnesota’s state and local tax system is regressive, meaning that low and moderate income households pay a higher percentage of their income in state and local taxes than do high income households. Both the WFC and the Child and Dependent Care Credit are effective ways of reducing tax regressivity in Minnesota.

The Governor’s supplemental budget also includes seven proposals from his 2015 budget for eliminating various corporate tax breaks. These corporate tax reforms will generate a modest amount of new revenue ($7 million in FY 2017, ramping up to $11 million by FY 2019). According to the MMB budget document, these reforms will “level the playing field” between different types of businesses and make “corporate taxes simpler by providing clarity to current laws.”

Outside of the general fund, Dayton’s supplemental budget proposes a 6.5 percent gross receipts tax on gasoline, increased motor vehicle tab fees, and an additional $2 billion in trunk highways bonds over the next decade to fill “the estimated $6 billion gap that exists between funding needs and revenues in the next ten years.” A recent North Star report noted that dedicated state highway tax revenue in inflation-adjusted dollars per lane mile has declined by 16 percent from FY 2003 to FY 2015, contributing to deteriorating road conditions and worsening traffic congestion.

Mindful of the possibility of deteriorating economic conditions and the fact that inflationary pressures could take a big bite out of the $1.2 billion surplus projected for the upcoming FY 2018-19 biennium, the Governor proposes leaving a significant amount of the surplus on the bottom line. His supplemental budget leaves unspent $202 million in FY 2016-17 and $369 million in FY 2018-19.

Dayton’s budget represents the opening gambit in the 2016 legislative process. In coming weeks and months, the Minnesota House and Senate will respond with their own supplemental budgets. The session is expected to conclude on May 23.

*For example, see Frede, Ellen, & Barnett, W. Steven, Why Pre-K is Critical to Closing the Achievement Gap and Mead, Sara, Pre-K: Starting Early to Close Achievement Gaps and Boost Student Achievement.