Minnesota Gov. Tim Walz proposes sales tax changes, spending cuts in his budget

Gov. Tim Walz is pitching his first budget under the new Trump era as a counterweight to the incoming president’s threats to impose tariffs, which he says will raise costs on everyday Minnesotans.

His plan would lower Minnesota’s sales tax rate for the first time in state history by .075% across the board while expanding it to cover some previously excluded services. Facing a projected multibillion dollar deficit in the following years, Walz also wants to reduce ballooning costs for special education and disability services.

“Tariffs will basically function as a national sales tax,” the DFL governor said on Thursday, using a PowerPoint presentation filled with charts and graphics to help make his case. “Every person in America knows, if they follow through on that it’s going to add costs.”

The rollout of his nearly $66 billion two-year budget is one of Walz’s first major actions since returning to the state following his failed bid for vice president.

Walz is facing a new political reality with the Legislature now narrowly divided between the two parties. He will also have to work to craft a deal with Republicans, who criticized Democrats for passing the largest state budget in history two years ago when they had full control of government.

Republican House leader Lisa Demuth said Thursday that expanding the sales tax to services is off the table.

“A budget that raises taxes on Minnesotans and cuts funding for long term care is not a budget that values the people of Minnesota,” Demuth, R-Cold Spring, said in a statement. “Democrats already used their one-party control to raise taxes on Minnesotans by more than $10 billion dollars, and spent us into a looming deficit.”

Passing a state budget is the main work on the agenda for this year’s legislative session. Lawmakers will get an updated economic forecast in February, but the governor is required under law to present his plan first. They face a July 1 deadline to strike a deal or risk shutting down government services.

Late last year, budget officials projected the state would have a modest $616 million surplus for the next two years, news that was overshadowed by the revelation that Minnesota’s budget is projected to be $5.1 billion in the red for the 2028-29 biennium.

State budget officials said long-term care for people with disabilities and transportation-related special education costs are the biggest drivers of the projected deficit.

Walz’s budget would substantially reduce projected state spending on Medicaid waivers that serve more than 70,000 low-income Minnesotans with disabilities. The waivers cover a wide range of services that help people survive and live more independently, including home health services, personal care and chores, transportation and employment support.

Minnesota’s generosity on those services for people with disabilities stands out nationally, Walz said, with per person spending at more than $50,000 a year.

The proposal would not decrease the number of people getting waivers, but would reduce the growth in how much money they get each year, Walz administration officials said. The state’s automatic increases for inflation in the waiver program have risen significantly and are projected to grow 6% annually in the years ahead, State Budget Director Ahna Minge said. Walz’s proposal would cap that around 2%.

The proposal comes as counties, which administer waiver programs, are seeing more expensive requests from people with complex needs who are struggling to hire workers amid staffing shortages.

Many people with disabilities are struggling to find support workers like personal care assistants and home health aides who can provide consistent, quality services, said Jennifer Walton, executive director of Advocating Change Together, which supports self-advocacy among people with disabilities.

Minnesota’s disability services system needs reform and she understands the budget pressures Walz is facing, Walton said. But she felt crushed by Thursday’s proposed changes.

“This is people’s lives. Their day-to-day lives and fundamental needs, fundamental rights,” she said. “This is just basic human rights and human dignity that continues to be cut.”

The budget also cuts state funding to private schools and includes a 5% reduction in reimbursement costs to counties for special education transportation, according to the governor’s office.

Walz’s sales tax plan would lower Minnesota’s 6.875% state sales tax rate to 6.8%, which equates to 7.5 cents for every $100 spent. It expands the sales tax to cover so-called “wealth services” provided by investors, bankers and lawyers that were previously excluded.

He described the cut as a cost-saving measure for Minnesotans, offering a first look at his messaging against the Trump administration on economic issues, particularly tariffs.

Walz said he assumes “they are going to keep their word” on imposing tariffs. “Let’s make the first move on this, reduce Minnesota’s sales tax and make it fair,” he said.

Republicans in the Legislature pushed back on expanding the tax to new services that were previously exempt.

“Republicans will stand firm against budgeting tricks that raise fees and taxes on regular Minnesotans,” Senate leader Mark Johnson, R-East Grand Forks, said in a statement.

Walz’s office said his plan would leave $2.1 billion on the bottom line in the current two-year budgeting period and $355 million in 2028-29.

The budget plan also includes some small spending increases, including nearly $45 million for fraud prevention efforts, with the bulk of the new spending focused on human services.

Walz wants to launch a pilot program in the Department of Human Services that would use artificial intelligence and machine learning to analyze Medicaid data and flag high-risk cases to investigate. He also hopes to license early autism intervention service providers and bolster oversight of that rapidly growing program.

A number of autism service providers are being investigated for Medicaid fraud, and the FBI recently raided two autism centers.

His budget doesn’t cut expenses for paid family medical leave, universal school meals or other proposals Democrats passed in the last state budget.

“We will not roll back this historic progress and we will not put the state in a position where that will ever be a question,” said Lt. Gov. Peggy Flanagan.

She appeared alongside Walz on Thursday for the first time since the election. Their partnership had been on ice following the election as Flanagan prepared to potentially serve as governor and run for re-election in 2026 if Walz ascended to the vice presidency.

Flanagan said their plan is to “continue to do incredible work together over the next two years.”

Democrats are expected to hold a one-vote majority in the Senate following a Jan. 28 special election to fill a vacant Minneapolis seat, but Republicans have a temporary 67-66 edge in the House until a Roseville-area seat is filled in a separate special election on the same day. That could restore a tie in the chamber.

House Democrats are boycotting the legislative session until that election and accusing Republicans in the chamber of moving ahead with illegitimate proceedings.

Walz said Republicans are “cosplaying right now” and the will of the voters was a tied House.

“Trying to use this vacancy to create a two-year majority that doesn’t exist is not the way to go about it,” Walz said.

Ryan Faircloth contributed to this report.