Minnesota Legislative Update: Governor Walz’s First Budget

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Authors: Donovan M. Hurd , David H. Johnson

The unveiling of Governor Walz’s biennial budget dominated conversations at the Minnesota Legislature this week. Governor Walz’s first budget contains significant tax and spending proposals that were cautiously embraced by House Democrats while being rejected by Senate Republicans. The February forecast will be released by Minnesota Management and Budget next week, after which both the House and Senate will begin crafting their own biennial budget plans.

Committees began accelerating consideration of legislative proposals, mindful that the first policy deadline is only three weeks away. The pace will continue to accelerate. Also on Monday, at a joint meeting of the House and Senate higher education committees, legislators endorsed candidates for four Board of Regent positions. The six-year terms up for election represent the Fifth Congressional District, one student statewide at-large seat and two statewide at-large seats. Recommended to have their name placed before a joint convention of the Legislature are: Janie Mayeron, Mike Kenyanya, Mary Davenport, Sandra Weise and Kao Ly Ilean Her.

Governor Walz Releases Budget Recommendations

On Tuesday, Governor Walz released biennial budget recommendations reflecting his “One Minnesota” vision. On the spending side, his $49.6 billion biennial budget proposal represents an 8.6 percent increase over this biennium’s $45.5 billion budget. Governor Walz’s proposal significantly increases investments in K-12 and higher education, health care, transportation and transit, and local government aids. It also includes proposals to conform the state’s tax code to the recently enacted Tax Cuts and Jobs Act (TCJA) and proposes tax relief to working families and some social security beneficiaries.

To cover this increased spending Governor Walz also recommends a number of proposals to increase state revenues, including a 20 cent per gallon gas tax increase. Other proposed tax increases include a 1/8 percent metro wide sales tax for transit, an increase in the sales tax on automobiles, an increase in car registration fees (and changing the depreciation schedule), a repeal of the sunset for the state’s provider tax; a reinstatement of the inflator for the state’s commercial/industrial tax, increases to taxes on tobacco and estates and several corporate tax increases.

The following are key provisions of the Governor’s budget in the areas of health care, education, and transportation and transit, and taxes:

Education

Governor Walz, a former teacher, has proposed significant increases in education spending, including a $733 million increase in E-12 education and $158 million in funding for the state’s public higher education institutions.

The Governor’s proposed budget includes a 3 percent increase to the general education formula in the first year of the biennium, followed by a two percent increase the following year, totaling $523 million in new funding for public K-12 schools. While Governor Walz’s proposal did not include funding for universal pre-K, his budget did include a $59 million investment in preschool programs. This investment was recommended to target underserved populations and areas where there is limited access to pre-K.

The Governor also has his sights set on increasing affordability and accessibility of Minnesota’s postsecondary education options. Governor Walz recommended a 3.6 percent increase in base appropriations for the Minnesota State system while proposing a 3 percent increase for the University of Minnesota. The two higher education systems were allocated $150 million in bonding under the Governor’s Capital Investment Bill. The Governor’s education package also included a $62 million increase to the state grant program.

Health Care

Governor Walz’ budget contains a number of health care proposals designed to address increased access to affordable and comprehensive health care.

First, his budget proposes the creation of a subsidy program to reduce by 20 percent monthly premiums for Minnesotans who receive their health insurance through MNsure. Up to 80,000 Minnesotans would be eligible, with the subsidy being applied directly to their premiums. The Governor also proposes a health care buy in option to be offered by the Minnesota Department of Human Services called ONECare. This buy-in option will have a provider network and benefit set similar to the MinnesotaCare program, including dental and vision benefits and behavioral health services. Finally, the Governor has proposed establishing a state-based health insurance tax credit starting in the plan year 2021. Almost 50,000 Minnesotans could be eligible for this tax credit and see a reduction in their health insurance premium costs by 2023.

To help cover the increased costs of these proposals, Governor Walz has recommended the repeal of the sunset to the state’s provider tax, which is set to expire at the end of this year. The two percent provider tax was intended to support the Health Care Access Fund and fund programs such as MinnesotaCare and Medical Assistance.

Transportation and Transit

During the campaign, Governor Walz advocated for a significant gas tax increase to help fund the state’s transportation infrastructure. Making good on this promise Governor Walz’s budget has proposed a 20-cent gas tax increase indexed to inflation, which he believes is needed to generate the revenue necessary to fund repairs and improvements to roads and bridges across the state. The increase would raise approximately $6.5 billion over ten years. Governor Walz also proposes raising another $4 billion by increasing the registration tax from 1.25 to 1.5 percent and raising the base tax from $10 to $35. Governor Walz also proposes increasing the sales tax on auto sales from 6.5 to 6.875 percent, which would generate $300 million for roads and bridges and $200 million for transit over a decade. In addition to these increases, Governor Walz has proposed that the Legislature authorize $2 billion in trunk highway bonds between 2022 and 2030.

To fund metropolitan transit Governor Walz has proposed an eighth-of-a-cent sales tax increase in the seven-county metro area. This revenue, along with increased revenue from the increased sales tax on auto sales, would be able to eliminate structural deficits while developing new transit routes, increasing service frequency, growing ridership, and making strides in the electrification of their fleet. Governor Walz’s budget also proposes that Metro Mobility no longer be a part of the Met Council transit package and, instead, receive its own allocation of $241 million. Finally, the Governor requested the authorization of $20 million in bonding for transit projects.

The proposed changes to the gas tax, registration fees, and the motor vehicle sales tax would be fully phased in by FY 22-23, at which point they are forecasted to increase transportation funding by 30 percent.

Taxes/Federal Conformity

The Governor’s budget recommends that Minnesota conform to most federal changes to the business income tax. Under the Governor’s proposal, Minnesota’s corporate alternative minimum tax (“AMT”) is eliminated beginning in tax year 2018. The Governor proposed full conformity on Section 179 expensing and the federal bonus depreciation. The 80% add back would be eliminated from Sec. 179 but retained for bonus depreciation. The proposal conforms to most federal foreign income provisions such as the inclusion of global intangible low-taxed income (GILTI) but does not provide for the foreign-derived intangible income (FDII) deduction. Governor Walz’s recommendation included $20 million in funding for the Angel Tax Credit Program to be evenly distributed between FY 2020 and FY 2021.

For individuals, Governor Walz has proposed moving to Federal Adjusted Gross Income (“FAGI”) as the new starting point for calculating Minnesota income taxes beginning in tax year 2019. Current law uses federal taxable income as the starting points. Some of the key investments in the state tax code include expanding the Working Family Tax Credit by $100 million in FY 20-21, creating an increased credit for families with three children or more. In an effort to offset costs incurred by transportation investments, the Governor’s proposal includes a $100 tax credit for each head of household and $200 for each joint filing by married couples. Responding to the state requirement for farmers to implement buffer strips, his proposal includes a $50 per acre credit. Minnesota is one of a small number of states that currently taxes social security benefits. To address this, Governor Walz proposes increasing the maximum subtraction amount, providing relief to over 200,000 Minnesotans.

Paid Family Leave

Paid family leave legislation continues moving through the House with a hearing in the House Commerce Committee on Tuesday. HF 5, authored by Rep. Laurie Halvorsen (DFL-Eagan), provides for paid family and medical leave. In committee, an amendment was adopted that exempted employers that already have leave programs meeting certain minimums in place. These employers are no longer subject to the payment of premiums and instead pay a one-time surcharge. The bill passed as amended and referred to House Government Operations. The Senate companion, SF1060, authored by Sen. Susan Kent (DFL-Woodbury), is awaiting a hearing in the Senate Jobs and Economic Growth Finance and Policy committee.

As part of his budget recommendations Governor Walz signaled his support for this bill by providing $68 million to establish a paid family and medical leave program in Minnesota.