How Walz’s proposed ‘tax cut’ would actually raise $108 million a year to help state budget

When is a tax cut not a tax cut? When it is both a tax cut and a tax increase at the same time.

Gov. Tim Walz on Thursday proposed a budget outline for the next two years that includes moves to cap the growth in some of the state’s fastest growing areas and to offer what he termed the first sales tax cut in history.

By reducing the state portion of the sales tax from 6.875% to 6.8%, the state would receive $95 million less a year in a state budget that spends about $33 billion a year. Walz called it historic and a response to concerns about inflation. The DFL governor also said it would be a buffer against any tariffs imposed by the Trump administration on some imported goods that could lead to increased consumer prices.

But the same plan would further a DFL policy pillar that the wealthy don’t pay their fair share of taxes despite national assessments that Minnesota’s tax system is among the most progressive, meaning those able to pay more are taxed at higher rates. In addition, many lower-income residents pay no income tax and benefit from generous refundable tax credits. Walz proposes collecting the state sales tax on a set of services not currently taxed that way — financial services, stock brokers, banking and accounting.

Related: Minnesota’s ‘most progressive’ tax state designation explained 

Walz called it a fairness issue that services purchased by low- and middle-income Minnesotans like health clubs, lawn maintenance, dry cleaning, alarm services, towing and parking are subject to the sales tax but that financial services more common among wealthy residents are not. 

“Why would you pay sales tax on your tires when you wouldn’t pay it on adjusting your trust fund?” he said.

State Revenue Commissioner Paul Marquart said the change would also be a response to different spending patterns by Minnesotans, where less is being spent on goods like appliances and home improvements and more on services.

That change would increase state tax collections by $203 million a year. So, between decreasing the tax rate and expanding the purchases subject to the tax, the proposal would increase state tax collections by $108 million a year.

Walz also proposed raising money by increasing a surcharge on health maintenance organizations. That would raise about $90 million a year and was also described as a way to get insurance companies to pay their fair share.

Republicans in the Legislature, who will have a veto of any legislation regardless of how the current quorum battle in the state House turns out, were not supportive.

“Any tax increases are off the table,” said Rep. Lisa Demuth, the Cold Spring Republican who was elected House Speaker in a disputed session Tuesday.

Said Senate GOP Leader Mark Johnson of East Grand Forks: “Republicans will stand firm against budgeting tricks that raise fees and taxes on regular Minnesotans.”

Related: Minnesota leads again: No other state has ever begun a legislative session without clear majorities

The proposed budget would spend $65.9 billion over two years. That compares to the current two-year plan that will spend $70.7 billion, a number driven partly by one-time spending from surpluses generated by pandemic relief funds and their impact on the economy. The previous budget covering 2022-2023 was $52 billion.

But Walz also proposed something that could be more controversial than the tax cut/tax hike: He wants to cap the growth in two areas of spending that have seen growth that far exceeds inflation. One is special education, and the other is long-term care for the disabled and elderly.

Walz would cap the annual growth of a program called disability waivers that allows people who might otherwise need nursing home care to get home or community services. Rather than allow it to grow by health care inflation rates, it would be capped at 2%.

“We are not changing that Minnesota is a generous state, Minnesota is a state that cares deeply that every individual should live the fullest quality of life that they can,” Walz said. “But this is the biggest driver. If we don’t make the move, by the end of the 2029 fiscal year, this will be an eighth of the entire budget, projected to go up from there.

“This one has to be addressed,” Walz said.

Minnesota already pays the nation’s highest per person costs for Medicaid expenditures for people with disabilities — $53 billion in 2022 while the median cost for people in the program is $25,639. He insisted that no one would be turned away and that the state would not have a waiting list as some other states do. But the growth in costs would be tamped down.

For special education transportation, Walz would end the 100% state reimbursement to school districts and replace it with a 95% reimbursement.

Both changes would also spur negotiations by health care providers and efficiency moves by school districts, the governor said.

The proposed spending caps also drew complaints from GOP legislative leaders.

“Walz’s proposal today ignores Democrats’ runaway spending, does nothing to address the massive expansion of free benefits to illegals, and won’t address the long-term systemic issues with our disability and special education services,” Johnson said in a written statement. “True budgeting reform will protect those most in need as much as it protects the taxpayers’ investments.”

“House Republicans will push for a responsible budget that makes life more affordable for families, not one that raises their costs and hurts our seniors,” Demuth said. 

But Walz said his reductions will resolve a looming budget problem. While the upcoming two-year budget has enough revenue to cover expected costs, the next two-year budget starting in July 2027 would be in deficit.

The proposed 2026-2027 budget plan would end with a surplus of $2.1 billion rather than $1.5 billion. And it would reduce what is termed the “structural imbalance” in 2028-2029 from $3.5 billion to $1.7 billion. While a deficit is still projected for that future budget, Walz said it would reduce the work that would need to be done when that budget is prepared by the 2027 session of the Legislature.

Related: State economists project a modest budget surplus, but future deficits loom

All of the budget numbers Walz unveiled Thursday are conditional. That is because they are based on the November economic and revenue forecast, while the actual budget passed this year will be tied to the next forecast due in late February. As of this proposal, there are no significant program cuts projected and all of the major changes made by the DFL trifecta in the 2023 session would remain intact.

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Editor’s note: Peter Callaghan wrote this story for MinnPost.com. Callaghan covers state government for MinnPost. 

This article first appeared on MinnPost and is republished here under a Creative Commons license.

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