Ramstad: Walz tries to slow runaway spending, moving to political middle

Gov. Tim Walz’s budget proposal contained three surprises that suggest a move to the political middle.

First, by proposing a smaller budget in response to a forecast deficit, he signaled to all Minnesotans, especially his fellow Democrats, that there are limits to growth of state government.

That comes two years after he and the Legislature, then dominated by the DFL and managing a large surplus, made the biggest increase to state spending since the 1970s.

Second, he recommended curtailing growth of the two areas where state spending is growing fastest: Medicaid services and special education.

That’s bold. He’s already taking heat from people on both sides of the aisle who don’t recognize it’s both necessary and efficient to tackle the biggest problems before they get worse.

Third, he attempted to widen Minnesota’s sales tax to a variety of services, such as tax preparation and investment advising.

That recognizes a major economic change: Consumers spend greater portions of their incomes on services, while sales taxes apply mainly to goods. Legislators are unlikely to go along with that idea, though.

“There’s going to be some tweaks in there. There’s going to be some things they bring back,” Walz said in an interview Friday, the day after rolling out the proposal. “But this is pretty solid.”

His plan for $66 billion in general fund spending in the fiscal biennium 2026-27, which begins July 1, is the opening salvo in a negotiation with a Legislature that’s about as evenly divided as possible — with Minnesota House leaders still warring over who has control there.

That’s less than the $71 billion spent in the 2024-25 biennium, which was made possible by a huge jump in state revenue and the holdover of a surplus.

Walz said he expects budget talks to last until the end of the session in May, because that’s how these things go. He said he’ll oppose both across-the-board spending cuts and spending above his target. He also ruled out big changes in taxes and rates, with the exception of broadening the sales tax.

The governor and Legislature are required by law to balance the budget, which is the overarching force on his proposal. In the interview, he described how uncertainties about the U.S. economy and the new Trump administration also affected it.

“I am still not fully convinced we’re out of this thing,” Walz said, referring to the nation’s nearly two-year battle to bring down inflation without triggering a recession.

Walz’s spending target is $1 billion below what state budget forecasters had in the outlook model presented last month. And it helps wipe out a deficit they projected for fiscal 2028-29.

Walz said he’s worried about President Donald Trump’s plan to impose tariffs and deport undocumented immigrants; it will slow Minnesota’s overall economic growth. I share that worry, as do many Minnesota business owners and farmers.

“You think he’ll follow through on that?” Walz asked. He added with a laugh, “The irony I find myself in is sounding like a Republican from the 1980s.”

Walz and I, as in previous interviews, discussed how Minnesota’s workforce remains about 1% smaller than it was at its pre-pandemic peak. As Kamala Harris' running mate last fall, Walz mentioned worker shortages on the campaign trail. It wasn’t enough to break the Trump narrative that the U.S. economy is under siege because of a surge of immigrants.

All the budget drama Walz and our currently-in-chaos Legislature will go through this spring may be upended if Trump and the Republican-led Congress make changes in federal tax policy that affect state revenue. If that happens, this year’s budget deal will be renegotiated next year.

Contrary to what critics say, legislators and Walz didn’t spend the entire $17 billion surplus that the state had at the start of the 2023 Legislature. About $3 billion carried forward to this year and is being applied in Walz’s budget proposal. This helps cover the fact that projected revenue for the 2026-27 biennium will be about $1.75 billion lower than spending — at least for now.

The latest revenue projection (a new one comes out next month) doesn’t include the likelihood that income tax collection will rise this year and next year; the strong stock market in 2023 and 2024 raised Minnesotans' investment incomes, which in turn will increase the state’s revenue.

Walz is also trying to arrest runaway spending in education and human services, which account for three-fourths of the state budget. Critics in both parties portrayed his proposals on Medicaid services and special education as “spending cuts” when they are actually slowdowns in the rate of spending growth.

“I’m not going to find allies right away because nobody wants to touch it,” Walz said. “But we have to make the case. No one’s going to be denied services.”

Medicaid spending for people with disabilities is far greater in Minnesota than any other state, around $53,000 per person annually, and it’s permitted by state law to rise 6% a year. Walz wants to take such growth off autopilot.

Meanwhile, the state currently must reimburse school districts for 100% of transportation to special education students no matter the cost. Lowering that reimbursement rate, Walz said, should encourage districts and counties to find cheaper alternatives.

Walz is also likely to be criticized from his left for expanding the state’s research and development credit by $45 million, a business-friendly move prompted in part by Wisconsin’s similar incentive. “We have got to stay competitive on that,” Walz said.