Gov. Tim Walz on Tuesday proposed a $52.4 billion budget, which includes an extensive revamping of tax laws, targeting large corporations and Minnesota’s highest-earners.
Walz’s spending blueprint is the first gambit of the legislative debate over how Minnesota will close an $883 million budget deficit. The Legislature and Walz, the first-term Democratic-Farmer-Labor governor, have until June 30 to pass a balanced budget.
Walz’s budget includes a series of tax increases, which would generate about $1.66 billion in new revenue.
.@GovTimWalz is proposing a $52.4 billion budget, which includes $745 million in new funding for education: $300 million of that is for an increase on the per-pupil funding formula. Budget also allocates $25 million for school districts suffering from student disenrollment
— Ricardo Lopez (@rljourno) January 26, 2021
Here are six highlights from Tuesday’s budget plan, as well as reaction from legislative leaders.
Tax the rich
Walz said COVID-19 has laid bare the glaring income inequalities that have disproportionately hurt low-wage workers and Minnesotans of color. To that end, most of the tax increases are aimed at the wealthiest Minnesotans.
Walz’s plan would create a fifth tier income tax rate for married households earning more than $1 million and $500,000 for single filers. The Walz administration estimates that about 21,000 households would see an average tax increase of $8,072.
Walz also proposed an additional tax of 1.5% on capital gains and dividend income between $500,000 and $1 million for individuals, trusts and estates. Walz also wants a higher corporate tax rate, rising to 11.25% from the current 9.8%. His administration estimates a revenue gain of $424 million by taxing profitable corporations.
“This is more than a fiscal document,” Walz said. “It’s a moral document.”
Tapping the rainy-day fund
Walz is proposing lawmakers take $1 billion from the budget reserve, leaving about $800 million in the account for any future economic downturns. Minnesota’s fiscal picture, while concerning, is generally in better shape than many other states. A robust reserve gives lawmakers and the governor more options to find funding for their priorities, but Walz is still leaving money in the fund, which is expected to grow if the economy recovers.
Tobacco and vaping taxes proposed
Walz defended proposals to increase taxes on cigarettes and vaping products. The tax, which falls disproportionately on people who make less because lower income people are more likely to smoke, is important to reduce the public health impacts of nicotine addiction. Minnesota has been grappling with a rise in youth nicotine addiction due to vaping. The cigarette tax increase is expected to raise about $139 million in the upcoming biennium, while the vape tax would raise about $12 million.
No new taxes, GOP says
In recent days, Senate and House Republicans have been voicing opposition to any new tax increases. Senate Majority Leader Paul Gazelka, R-East Gull Lake, tweeted his initial reaction to Walz’s plan: “We must keep life affordable by not raising taxes on anyone, much less small businesses that found a way to thrive in a pandemic, which will be hit by the 5th tier,” Gazelka said. He also pushed back against “regressive tax increases on tobacco.”
The Minnesota Business Partnership, which represents the state’s largest corporations like 3M and Target, also criticized Walz’s tax proposal, which would fall on many of its members. “The cost of doing business in Minnesota is already among the highest in the nation, even without these proposed tax hikes,” said Charlie Weaver, executive director. “These tax increases would threaten the state’s recovery and put our state’s businesses at a competitive disadvantage against competitors in other states and globally.”
Covering rebuilding costs from the civil unrest, riots
One of the brewing battles of the legislative session will be over how to pay for rebuilding efforts in Minneapolis and St. Paul after the damage from the civil unrest and rioting that followed George Floyd’s killing last summer. Walz is proposing the state authorize $150 million in redevelopment bonds to support rebuilding efforts for small businesses and damaged private property..
Just this week, Senate Republicans held a hearing on legislation that would amend the definition of state-declared disasters to exclude “catastrophe caused by civil unrest.” State Sen. Julie Rosen, R-Fairmont, the sponsor of that legislation, did not outright reject the Walz proposal for redevelopment bonds, saying it would spark “good discussion.
Education gets big boost
Walz’s budget includes $745 million in new funding for education, including $300 million to increase per-pupil funding. His spending plan also provides $25 million in one-time funding for school districts suffering from lower enrollment due to the pandemic. Because schools get funding based on enrollment, the rise in homeschooling and exodus of students out of public schools is expected to cause economic pain for some districts.