Walz unveils slimmer Minnesota budget, pitches sales tax cut

Gov. Tim Walz on Thursday pitched a tighter two-year budget, complete with spending pullbacks and other measures to keep a potential deficit at bay. He also proposed a lower state sales tax rate but called for extending the tax’s reach to financial services.

The more restrained fiscal approach comes after Democrats who’d controlled the governor’s office, House and Senate passed a roughly $70.7 billion two-year plan in 2023 that included one-time spending that won’t automatically carry forward. It was the state’s highest-ever budget total.

Walz’s proposed spending plan comes in at just under $66 billion.

Briefing reporters Thursday afternoon, Walz said Minnesota government would keep its focus on helping people despite the spending curbs.

“We are not changing that Minnesota is a generous state,” he said. “Minnesota is a state that cares deeply that every single individual should live the fullest quality of life they can. We will continue to be able to do that, but there are things that we can do.”

Documents accompanying the budget release showed the state general sales tax rate would slip from 6.5 percent to 6.425 percent, amounting to a 7.5-cent break per $100.

But the tax would be extended to legal, accounting, brokerage and trust services and some bank service charges for consumers — raising an additional $205 million in 2026-27.

The move to expand sales taxes to cover those services was a “fairness issue … an incremental, really long overdue change in the tax code,” Department of Revenue Commissioner Paul Marquart told reporters.

Walz called the rate reduction the first-ever cut in the state sales tax and said, “At the end of the day, taxes for Minnesotans will go down.”

Republicans panned the Walz proposal, saying it did little to bring the state budget under control following record spending the past two years when Democrats controlled the Legislature and governor’s office.

“Democrats already used their one-party control to raise taxes on Minnesotans by more than $10 billion … and spent us into a looming deficit,” House Republican Leader Lisa Demuth, R-Cold Spring, said in a statement Thursday following Walz’s budget release.

“Any tax increases are off the table,” Demuth said. “House Republicans will push for a responsible budget that makes life more affordable for families, not one that raises their costs and hurts our seniors.”

Other Republicans were more optimistic about the outline.

“I think he’s got some good ideas in here and so I’m looking forward to digging into it deeper,” said Rep. Greg Davids of Preston, the top Republican on the chamber’s tax committee.

Among the budget’s other noteworthy items:

• Walz is proposing that “excessive speeding,” defined as 35 miles per hour over the posted limit, could result in a driver’s license revocation. That’s a penalty now for people caught at speeds faster than 100 mph.

• His plan calls for the creation of an online option for driver’s license renewal every other time a person needs to renew. That means a trip to the licensing bureau only once every eight years for a new photo and vision screening.

• Drone show enthusiasts may get a break. State law requires commercial drones be registered at a cost of $25 per drone, a fee operators say can create a hardship when putting on events that might involve hundreds or thousands of drones. Walz proposes dropping the fee to $2 for commercial drones used for those kinds of single-day events.

Schools, kids and learning

Education remains the largest piece of the budget, with funding from early education through college making up more than 40 percent of proposed spending. After years of solid growth, though, Walz’s plan calls for an incremental 3 percent increase in spending from early ed through 12 grade and a 5 percent cut to higher education.

“It certainly sets up challenging budget situation for school districts,” said Scott Croonquist, head of the Association of Metropolitan School Districts, which represents more than 50 districts mostly in the Twin Cities area.

Croonquist said his members were thankful the the prior Legislature built inflation into the student funding formula, “but we don’t really see any additional funding beyond that.”

Walz also wants schools to tap more of their general education money to pay for the growing costs of transporting special education students from home to school and back.

He also supports ending the Alternative Teacher Professional Pay program, a nearly 20-year initiative that’s let participating districts pay bonuses and stipends to teachers doing extra professional development or mentoring work. 

He’s also proposing to add three employees to the Minnesota Department of Education to help identify and stop fraud. It comes following the notorious Feeding Our Future case in which vendors stole taxpayer money by pretending to feed children.

The budget plan includes $9.5 billion for the Department of Children, Youth and Families, a fledgling agency overseeing children and family programs. It will also play a role Walz’s anti-fraud effort — money is earmarked for a one-time fund to modernize and improve the child welfare information technology system so it’s more accurate in monitoring usage.

To offset administrative and operating costs, the agency plans to sublease a building so it has some more financial wiggle room.

The plan does call for a reduction in grants for restorative practices initiatives that were transferred to the new agency.

Environment

Environmental and clean energy groups said they were pleased with the governor’s proposal to expand a tax credit to support the production of sustainable aviation fuel, known as SAF, in Minnesota. It can be made from wood or crop waste, used cooking oil or other biomass, and is part of airlines’ plans to reduce carbon emissions that contribute to climate change.

But environmental groups say not all sustainable aviation fuels are equal. They like that the tax credit would provide a bigger incentive for producing ultra-low carbon fuel made from sources that provide other benefits, such as clean water and healthier soil.

“Basically, more carbon efficient or low-carbon fuel will get more generous tax credit,” said Justin Fay, with the nonprofit Fresh Energy. “That’s something that we thought was missing from the original program, and we’re happy to see that in there.”

Walz’s proposal also includes funding to boost recycling of electronic waste, like old TVs, laptop computers and batteries. And there’s almost $12 million for the state health department to address PFAS, or forever chemicals, including more staff and testing equipment to detect potentially harmful PFAS in drinking water.

Public health and nursing homes

As the state nears the 5-year anniversary of the start of the COVID-19 pandemic, infectious disease prevention and control is a priority in the Walz budget plan.

The state is proposing more than $1 million in funding to hire more epidemiologists and lab staff at the Minnesota Department of Health who will help investigate emerging disease threats and identify outbreak sources.

As for nursing homes, Walz proposes $3 million more over two years to improve health and safety oversight, paid for in part by a $50 per-resident increase in the licensing fee.

The budget document notes that the number of providers has risen over the last few years. The agency needs the money to keep up with that paperwork and to enforce safety rules.

Tighter budget cushion

Minnesota lawmakers discovered last month they’d have less fiscal wiggle room than expected in their upcoming budget negotiations.

State officials reported Minnesota’s projected financial cushion through June 2027 had shrunk to $616 million — $1.1 billion lower than previously forecast. The cushion estimate doesn’t include possible changes to funding levels or inflation.

Walz and state legislative leaders have said they’ll look to cull the next spending plan to stave off a possible shortfall on the horizon in the 2028 and 2029 fiscal years, which could reach into the billions.

Lower-than-expected sales and income tax projections into the future along with higher spending for long-term care and special education have led to the concern over Minnesota’s finances. Economic growth is also likely to taper, officials reported last week.

Walz said that he would aim to limit projected growth to disability waiver services – in-home or in-community services for people with disabilities — and special education transportation. He said the proposal wouldn’t deprive Minnesotans of needed services and would keep the state among the top for funding support services for people with disabilities.

Walz’s Thursday budget reveal comes as Democrats and Republicans continue to fight it out over who will control power inside the Minnesota House. A key House race currently set for a Jan. 28 election will be crucial in deciding whether the House is split evenly at 67-67 or whether Republicans gain a 68-66 controlling edge.

DFLers boycotted the start of the session this week to prevent a quorum and stop the House from conducting any business. Republicans, though, showed up in the half-empty House and promptly elected Demuth as the House speaker — a move that Democrats and DFL Secretary of State Steve Simon decried as illegitimate.

Both parties are preparing now for court battles funded in part by taxpayers.

As that controversy grinds on, state lawmakers will review the Walz proposal over the coming weeks. A new economic forecast will be released in late February.

The governor suggested it should be a relatively easy negotiation this year, since he prioritized many top concerns for Republicans like addressing improper spending in state government and sending more money to taxpayers in the form of a tax cut.

After the February budget forecast, the House and Senate will craft their own budgets. They’ll need to reach a deal that can pass both chambers of the Legislature and secure the governor’s signature before July 1. If they fail to do that, all or parts of the state government could shut down with services curtailed.

MPR News reporters Erica Zurek, Elizabeth Shockman, Kyra Miles, Kirsti Marohn and Peter Cox contributed to this report.