Gov. Tim Walz's $52.4 billion budget raises taxes on wealthiest Minnesotans

Gov. Tim Walz proposed a $52.4 billion state budget Tuesday that would raise taxes on the wealthiest Minnesotans, corporations and tobacco products while trying to ease the pandemic's burden on students, lower-income families and small business owners.

Walz said the next budget needs to address the uneven economic toll the coronavirus has exacted. He planned to raise taxes for families earning more than $1 million while offering a tax cut to about one million couples making less than $39,810.

"This is a starting point. This is a budget that reflects Minnesota's sense that those who COVID hit the hardest we need to help," Walz said. "It asks folks to pay their fair share."

Republican lawmakers sharply rejected any tax increases in the next budget.

"We don't need to raise taxes, we need to get the vaccine out, we need to get kids back in school, we need to get kids in sports without masks. Simple, basic things," said Senate Majority Leader Paul Gazelka, R-East Gull Lake.

The governor's budget comes as national questions with major financial consequences — including the speed of COVID-19 vaccinations and President Joe Biden's chances of passing a $1.9 trillion economic relief package — remain unanswered. Walz said there's a good chance there will be another relief bill that would change his spending plans, but he cannot bank on federal help.

Instead, he is looking at extensive tax increases and using some of the state's reserves to support his additional spending and tax breaks and address a projected deficit of nearly $1.3 billion in 2022 and 2023. Walz's proposal is the first step in the complicated path to a budget deal. He must reach an agreement with the Legislature, where Republicans control the Senate and Democrats wield the majority in the House.

Senate Finance Chairwoman Julie Rosen, R-Fairmont, called Walz's budget "unsustainable."

"We have a spending problem with this governor," said Rosen, who is proposing a 5% cut across all state agencies, excluding human services programs that provide direct care and those for veterans. She plans to target administration and operating expenses in state government.

While Walz and Republicans diverge on tax increases and cuts, they both suggested dipping into the state's reserves to help make up for a budget gap. Walz's management and budget director Jim Schowalter said their plan would use about $1 billion in reserves, leaving roughly $847 million in the fund.

State leaders get an updated economic forecast next month and are hopeful it will show the estimated budget shortfall has shrunk. The House and Senate release their own budgets in March and spend the next couple of months hashing out differences with one another and the governor. The new budget takes effect July 1. House Speaker Melissa Hortman, DFL-Brooklyn Park, echoed Walz's goals and his theme of making sure people are "paying their fair share."

"We can and should use the budget to invest in Minnesota and in Minnesotans to ensure economic opportunity for everyone," she said.

One of Walz's tax proposals Republicans condemned would raise the tax on a pack of cigarettes by $1, with a similar increase on moist snuff. The cigarette tax is currently $3.04 a pack. Walz also wants to create a new tax on the retail sale of vape products. His office estimated the cigarette and vape taxes would raise a combined $151 million.

"When the governor says he's making people pay their fair share, this tax is taxing low-income people, period," said House Minority Leader Kurt Daudt, R-Crown. Walz acknowledged tobacco taxes would hit lower-income Minnesotans harder, but he said they are trying to discourage the behavior.

The biggest-ticket tax hike would land on corporations, and on capital gains and dividend income of more than $500,000. The additional tax on those gains — netted when someone sells assets like stocks or a home — would raise $486 million in the next budget. An increase in the corporate franchise tax rate, from 9.8% to 11.25%, is expected to funnel $424 million into the next two-year budget.

The governor proposed reinstating a lower estate tax exemption and revived a push to tax repatriated foreign income, suggesting that doing so retroactively to 2016 would raise $336 million. Walz also wants to create a fifth tier income tax rate for married couples making more than $1 million or a single earner netting $500,000 or more. About 21,000 households would see their taxes increase by $8,072, on average, with that change.

Meanwhile, Walz would provide a tax credit to help about 300,000 working families and would expand the first tier income tax bracket to aid a million lower-income Minnesotans. Revenue Commissioner Robert Doty said, on average, someone in that first tier would pay $36 less in taxes.

Walz's tax increases would help pay for various spending proposals, including an additional $745 million for the state's education system. Walz wants to add academic opportunities and mental health services for students over the summer and next school year, and give one-time cash to help schools with declining enrollment during the pandemic. His budget has longer-term education investments, such as expanding the number of schools that offer community services and guaranteeing state funding to help students who aren't meeting performance standards.

Walz also suggested a one-time, $750 payment for low-income families in the Minnesota Family Investment Program. And he's proposing a 12-week statewide paid family leave and medical program for serious medical conditions and up to 80 hours of paid time off for health care workers who have exhausted their leave.

For small businesses hit hardest by COVID-19, Walz is pitching a $50 million forgivable loan program. He wants to use $50 million to expand broadband access, and $7 million for an angel tax credit to support startups. His budget would also borrow $150 million to help repair businesses and private property that were damaged during civil unrest following George Floyd's killing by Minneapolis police.

Gazelka said they will consider Walz's relief proposal for the Twin Cities, but he added, "many of us don't think that the entire state should be responsible for some of the costs Minneapolis is asking for."

"As one Minnesota," Walz said, "like we do whether it's flooding, whether it's tornadoes, whether it's crop damage … we work together to try and make a fund to help folks out."