Politics and Government

Walz budget would hike taxes on highest earners, boost school spending

Plexiglass shields a man speaking at a podium.
Gov. Tim Walz seeks to raise taxes on those with incomes over $1 million and on corporations that didn’t get stung by the coronavirus-caused recession.
Peter Cox | MPR News 2020

Updated: 2:45 p.m.

Battling the prolonged COVID-19 pandemic and a projected state deficit, Gov. Tim Walz proposed a new two-year, $52.4 billion budget Tuesday that he said would help Minnesota dig out from both problems.

His proposal seeks to raise taxes on those with incomes over $1 million and on corporations that didn’t get stung by the coronavirus-caused recession. In turn, the DFL governor would send more aid to small businesses that were pinched, provide a lift to those with lower incomes and position schools to help their students make up for lost ground.

“Not every Minnesotan was impacted by the COVID-19 pandemic equally. We know the COVID-19 pandemic hit our working families, small businesses, and students particularly hard. They need our help,” Walz said. “The budget I am unveiling today will make significant strides in helping those Minnesotans stay afloat.”

Walz was quick to point out that only a small percentage of Minnesota families would see higher income taxes.

“Just so people out there are listening, if your family is making less than $20,000 per week, this isn’t going to hit you,” he said. “This is $20,000 per week that we’re talking about, and it’s 1 percent on those folks.”

Specifically, Walz is proposing raising revenue by imposing:

  • A new fifth-tier income tax rate for household incomes above $1 million

  • Increasing the corporate tax rate for large companies

  • Taxing foreign income when it is returned to the United States

  • Revising the estate tax for individuals, while keeping changes clear of small businesses and farms

  • Imposing a 4 percent tax on capital gains over $1 million for individuals, trusts, and estates 

Walz also proposed a $139 million increase in tobacco taxes, both on vaping products and cigarettes. He would use the money raised by the tax increases in part to:

  • Cut taxes by $95 million for more than 1 million of the state’s lowest income households

  • Expand the Working Family Tax Credit for more than 300,000 eligible Minnesota households

  • Create a statewide program providing 12 weeks of paid leave for those with a serious medical condition, for use to care for a family member or a new child

  • Make a one-time payment to families in the state’s welfare program of up to $750. He says it would assist about 32,400 Minnesota families, including 64,000 children

  • Create a $50 million forgivable loan program for small businesses to help cultural, entertainment and hospitality industries recover from COVID-19 disruptions

  • Add $3 million per year to existing aid programs for small businesses that have been hit especially hard by COVID-19

  • Add $1.3 million for emergency grants to help more college students who are struggling to find food and housing because of the pandemic

The governor’s budget also increases spending on education by $745 million, in addition to recent federal spending of $649 million for COVID-19 education recovery.

The plan opens a budget debate that will last well into May. Legislative Republicans, who will have a strong say in an eventual final deal, didn’t even wait for the details to declare his tax call out of bounds.

“A budget that increases taxes is not a Minnesota priority,” Senate Majority Leader Paul Gazelka, R-East Gull Lake, said on Twitter. “We can recover by vaccinating people as fast as possible, safely reopening, and getting kids back in the classroom.”

There was other criticism as well.

“Proposing tax hikes is shockingly tone deaf after Minnesota families and businesses have endured nearly a year of the governor’s shutdowns and constantly-changing executive orders,” House Minority Leader Kurt Daudt, R-Zimmerman, said in a news release. “The governor knows they have no chance of becoming law. We are ready to roll up our sleeves to pass a bipartisan budget that funds our priorities while asking government to tighten its belt to close the budget deficit without tax increases.”

Republicans say the state should cut state agency budgets and tap into a budget reserve rather than raise taxes.

The headline proposals Walz put forward will get the most attention in the weeks and months ahead. But the Walz plan is a broad blueprint for how to pay for state agency operations, determine how many dollars schools get to educate each student, whether people qualify for subsidized health care and dictate how prisons, parks and public service counters are maintained.

The COVID-19 pandemic has posed big challenges for state government.

For one, it soured tax revenues, taking Minnesota from a budget surplus to a shortfall in short order. The latest estimate predicted a $1.3 billion deficit for lawmakers to address in the coming two years, although some strength in recent revenue boosted hopes the problem isn’t as big as once thought.

The public health emergency also forced the Walz administration to refocus its agenda. Some state workers were reassigned to help administer and track testing, manage other COVID-related logistics or pitch in for a swamped unemployment insurance program.

Minnesota Management and Budget Commissioner Jim Schowalter said 1.8 million hours of the executive branch work force has been spent responding to COVID-19.

“It’s raised the challenge of urgency and innovation,” Schowalter told lawmakers Tuesday.

Walz’s budget plan reflects the fallout and his plan for a rebound.

Walz and the Legislature hope to reach an accord by the end of this session in mid-May. But there is a cushion beyond that. This budget wouldn’t take effect until July 1.

Schowalter said whatever budget results won’t be uniformly embraced. He said that’s become apparent over his time in state government, which spanned the Ventura, Pawlenty, Dayton and now Walz administration.

“It’s the uniform distribution of disappointment,” he said. “It is a document that tries to take balance — balance the competing needs of our current financial situation, of our citizens, of our different areas of activity and try to find some way through it to best serve Minnesotans.”

Gov. Walz budget proposal press conference