Minnesota Gov. Tim Walz proposes gas tax hike, more money for schools, roads

Hundreds of millions of dollars more for education, the expansion of a public option for health insurance and a 20-cent gas tax increase are key pieces of Gov. Tim Walz's two-year budget proposal presented Tuesday.

The Democratic governor's plan would spend $49.5 billion over two years, an 8.6 percent boost from the current budget cycle, with significant new spending on statewide transportation projects.

"Racial, geographic and economic disparities in education and health care hold back our state from reaching its full potential," Walz said Tuesday. "Minnesotans across the state struggle to find child care and housing that is affordable. Crumbling roads and bridges hamper our economy and threaten our safety."

Walz's proposal faces a tough political test in the months ahead, as he enters negotiations with Republicans at the Capitol who oppose tax increases and aim to hold down growth in state spending.

"This uncontrolled spending will give Minnesota the reputation of being 'cold California,' " said Senate Majority Leader Paul Gazelka, R-Nisswa. "And if we're not careful, we will move to the position of No. 1 taxed state in the union, which is not something that I will allow."

To help pay for the new spending, Walz's budget includes a 20-cent-per-gallon gas-tax increase phased in over two years and would boost the motor vehicle sales tax and registration tax. Those taxes are estimated to generate $11 billion over 10 years to pay for transit and road and bridge improvements. His proposal also continues a tax on health care providers and pulls more money from corporations through changes to the state tax code.

Along with political challenges, Walz's budget will be tested by economic uncertainty.

The next budget will likely also be defined by the upcoming economic forecast, which state economists and budget officials present next week. The state's tax collection revenue has been down in recent months, indicating the previous estimate of a $1.5 billion budget surplus is likely to dwindle. State leaders already expected the extra cash wasn't going to stretch too far, with predicted inflationary costs of almost $1.2 billion negating the bulk of the surplus.

Walz's budget nonetheless proposes significant new spending in education, including $733 million for prekindergarten through high school, as well as $158 million for higher education. The money would increase per-student spending by $319 over two years, help cover special education costs, support recruitment and retention of teachers of color and continue funding for prekindergarten access for 4,000 4-year-olds across the state.

Some of the priorities in his plan closely mirror the last budget former Democratic Gov. Mark Dayton presented. Walz has taken on the push for a gas-tax increase, which he said would continue to grow with inflation in the future, as well as the idea of allowing people to buy in to a public health insurance program.

Only residents below a certain income threshold qualify for the existing MinnesotaCare program, but Walz wants to create "OneCare," which could be widely used. Budget documents state that after an initial state investment, consumer premiums will pay for the costs of the program.

He also proposed a subsidy to keep insurance premiums down for Minnesotans who use the MNsure health insurance marketplace, as well as a tax credit to help prevent people from spending more than 10 percent of their income on health care. His budget did not include money for reinsurance, a program Republicans support that has kept premiums down by giving money to insurers.

Many of Walz's proposals, like the idea of spending $68 million to set up a paid family and medical leave benefit, will find backers in the Minnesota House.

"Minnesotans value providing world-class educational opportunities for all of our children, affordable and accessible health care, and greater economic security," House Speaker Melissa Hortman, D-Brooklyn Park, said in a statement. "Governor Walz's budget reflects these Minnesota values, and we share these goals."

The Legislature is politically divided, with a Republican majority in the Senate ready to provide a check on the governor's spending and tax plans. Republicans on Tuesday continued their strong opposition to Walz's plans to raise the gas tax and continue the health care provider tax.

Instead of tax increases, Gazelka said state agencies should be examined for waste and fraud, which could result in cost savings.

Gazelka said he needs to dig more deeply into Walz's proposed changes to the state tax system. Legislators and Dayton failed to come to an agreement in the last legislative session about how to alter the state's tax code to align it with the federal tax law passed in 2017. Taxes on corporations were one of many sticking points.

Walz's tax bill would tax foreign income and reduce special tax deductions for businesses. That revenue would instead go toward cuts to Social Security taxes, tax credits for farmers who provide buffer strips to protect water and a $100 million expansion of a tax credit program for working families.

Areas that have been bipartisan priorities — though the numbers will probably be a source of debate — are expanding access to child care and broadband service. Tuesday's budget included $44 million more for child care and put $70 million toward broadband, with the aim of giving all homes access to high-speed internet by 2022.

For Walz, one of the key pieces to improving the education and health of Minnesotans is putting more money toward housing. He proposed spending $133 million through a variety of programs, as well as spending $150 million for housing through state-backed borrowing.

He will present his full bonding proposal next week, but is proposing nearly $1.3 billion of bonding for capital projects this year. Transportation, higher education and the Department of Corrections would see tens of millions for such projects if his bonding bill is approved.

However, Gazelka said he supports a smaller bonding plan this year and a bigger bill in 2020.

In some areas of state government, Walz aims to bolster staff. After two corrections officers were attacked and died, he proposed hiring 120 more corrections staff members, in addition to filling 90 empty positions. Department of Corrections Commissioner Paul Schnell said Walz's budget includes a salary increase for corrections officers to help attract employees.

Walz also wants to spend $3.5 million this year to bolster customer service staff who work with the Minnesota Licensing and Registration System (MNLARS), Department of Public Safety Commissioner John Harrington said. The Walz administration's budget said increased fees on vehicle services and driver's licenses would support higher staffing levels into 2020 and 2021.

More work is needed on the problematic MNLARS, and the governor suggested spending nearly $38 million to finish it over the next two years.

Staff writer Torey Van Oot and University of Minnesota journalism student Isabella Murray contributed to this report.