State finance officials released the updated outlook on Friday. The surplus is bigger than one projected a few months ago.

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ST. PAUL, Minn. - Minnesota's long term fiscal outlook is brighter than its been since Jesse Ventura's first year in office, back in 1999.

The state's budget chief announced Friday that the projected surplus for the current two-year budget cycle is $1.2 billion, nearly $400 million higher that projected in November. In other words, the state is projected to take in $1.2 billion more in revenue than it will spend during the biennium that ends June 30, 2015.

"It's the economy, the number of jobs, the things that are happening that help people get more income and ultimately pay more taxes," Jim Schowalter, the commissioner of Management and Budget, told reporters.

The state's economy is chugging along well, according to State Economist Laura Kalambokidis, although the impact of the coldest winter in years remains a point of uncertainty. Another unknown is how non-wage income, earnings from stock transactions, will change as a result of fluctuations in the stock market.

When asked if the performance of state economy has been hampered at all by 2013 legislature's tax increases, including an income tax hike for the wealthiest taxpayers, Kalambokidis said that hasn't been the case.

"If the tax increases, or tax changes, of last year have had a dramatic change in the economy we're not seeing that in the data right now," she said.

Long term stability

What's even more remarkable is that the long term projection for Fiscal Years 2016 and 2017 points to a $2.6 billion surplus, referred to as a "structural" surplus that bond rating agencies value highly.

"You have to go back to the late 1990's to see another forecast like this," Schowalter remarked.

"And I think that's part of the cautionary tale, is that you never quite know if you're closer to the next recession than you are from the last one."

In December of 1999 the Ventura administration announced a $500 million projected surplus. It was described by one official at the time as "boat loads of cash," but it didn't last long.

In the ensuing year rebate checks were issued to taxpayers and permanent tax rates were reduced. When the national and state economy slumped in 2001, tax receipts dropped.

That sequence of events paved the way for a decade of fiscal policy battles at the Capitol, normally against a backdrop of projected deficits and actual shortfalls, resulting in "unallotment" actions by then-Governor Tim Pawlenty.

Throughout the last decade Minnesota lawmakers also resorted to one-time fixes such as tobacco revenue bonds and "accounting shifts" -- withholding part of school aid payments -- to make ends meet. A cigarette tax increase, labelled a "health impact fee" was the only permanent new revenue source added to the mix prior to 2013.

What happens to the surplus

The legislature will most likely use the surplus on a combination of tax breaks, one-time spending and rainy day savings. And, along the way, there will be plenty of rhetoric about which side is protecting the taxpayers' interests.

"Bolstering the budget reserve to reinforce our state's fiscal stability is something I think you'll hear talked about a lot in this short legislative session," Sen. Katie Sieben, a Newport Democrat and assistant majority leader, told reporters Friday.

The House Tax Committee has already passed a $500 billion package of tax reductions that, should it become law, would carve into that surplus. The bill would repeal some of the popular business-to-business sales taxes, such as the warehousing tax and equipment repair tax.

It would also bring Minnesota's tax deductions into conformity with federal tax deductions, including one designed to avoid the marriage penalty. House and Senate leaders are divided on how quickly those tax changes should be passed and given to Gov. Mark Dayton for a signature.

House Speaker Paul Thissen, a Minneapolis Democrat, asserted the bill should be passed before people file their tax returns, so they can take advantage of the new breaks. Senate Majority Leader Tom Bakk said he believes it's too late for the legislature's actions to be reflected in tax filing software used to 2013 tax returns.

Republicans endorse those changes, but want to see a more robust rollback of taxes. GOP legislative leaders brought a "Give it Back" sign to the fiscal forecast press conference Friday.

"Let's give it back to the people that need it," House Minority Leader Kurt Daudt said.

"State government does not need this money. Minnesota families need this money, so let's give it back."

The one piece of new spending that both parties endorse is an increase in state payments to nursing home operators, to augment their employees' salaries and other operating expenses.

"We think it's a promise that needs to be kept that's been made in previous biennium's and there's broad bipartisan support for it," Senate Minority Leader David Hann said.

Sen. Bakk said interest groups should not start lining up for spending boosts.

"They need to remember that this is not a budget year," he said, referring to the fact that budgets are passed in the odd year of the two-year sessions in Minnesota.

Credit and blame

Democrats said the healthy economy was good news for all Minnesotans, and proved their controversial tax increases hadn't harmed growth.

"It shows that the gloom and doom predictions of the Republicans is not bearing out," Rep. Thissen said.

"They were claiming that our 2013 budget was going to collapse the economy. They're wrong."

Republicans countered that there's always a lag between tax changes and reactions by small companies and high income earners. They asserted that the economy's high performance was instead a product of their refusal to enact income tax hike in 2011, during a standoff with Gov. Dayton that led to a temporary government shutdown.

"What we're seeing now is a result of the budgetary tactics we employed, are due in large part to our policies," Sen. Hann said.

He said returning $500 million this session doesn't make up for raising $2 billion in new revenue in 2013.

Thissen noted that the 2013 budget enacted by a Democrat majority didn't just bank $2 billion. It also paid for an increase in school funding, repayment of remaining IOU's to schools stemming from the accounting shifts, increases in state aid to local government and a boost in property tax refunds to individuals.

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