‘It was a draw’: State budget deal includes extension of provider tax, no gas tax increase

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Sunday started like just about every day last week, with closed-door negotiating sessions between the DFL governor and the leaders of the two majority caucuses in the Legislature. Talks began, then broke up, then started again.

But at around 5 p.m., when Gov. Tim Walz’s press secretary stuck his head out of the meeting to announce that a press conference involving all three leaders would take place and made a passing reference to “white smoke,” it was clear that the state of Minnesota either had a deal to break the budget impasse … or a new pope.

Turns out it was a budget deal.

Walz, House Speaker Melissa Hortman and Senate Majority Leader Paul Gazelka announced a sweeping deal to settle deep differences on the budget and taxes. At the news conference announcing the deal, the three were all smiles and handshakes; they complimented one another on their willingness to compromise and stay with the closed-door talks that lasted more than a week.

The deal triggers a frantic week — or perhaps longer — for lawmakers at the Capitol. Agreements on 10 different spending and policy omnibus bills will have to be reached and prepared for consideration by the House and Senate, both of which will then debate and pass the measures.

After the deal was struck, work began immediately by the House-Senate conference committees now that they know how much they can spend. But the deal Walz, Hortman and Gazelka made go beyond top-line numbers.

Here’s what was agreed to on Sunday:

• Overall spending for the next two years is to come in at $48.3 billion, compared to the Walz request of $49.3 billion and the GOP plan of $47.7 billion. Without a tax hike, that number will be met with the use of $491 million from state reserve accounts.
• The state’s provider tax — currently set to sunset at year’s end — will remain in place, but at 1.8 percent instead of 2 percent. That is a major concession by Senate Republicans, who had called the sunset provision one of their major victories coming out of the 2011 state government shutdown.
• The provider tax renewal relieves funding pressure on health programs and insurance plans, such as Medicaid and MinnesotaCare. But the GOP gets a concession with the creation of a blue-ribbon panel to look for waste and abuse in social service delivery programs.
• There will be no increase in the gasoline tax or other taxes that provide money for transit. That is a big concession by Walz and House DFLers, who made transportation infrastructure spending a major policy plank this year. The failure also impacts the general budget, since the gas tax increase would have returned proceeds from sales taxes on auto parts to the general fund.
• While transit did not get the regional tax hikes Walz wanted, which would have allowed Metro Transit to expand bus rapid transit and make other improvements, there was a bit of good news for DFLers: additional state funds for Metro Mobility. That service provides transit to the elderly and disabled and had been consuming ever larger chunks of transit revenue.
• A tax bill to conform to federal tax changes will have a zero net impact on tax collections. This is another victory for the GOP though the details on how that will happen have to be negotiated by the tax committee chairs. It will, however, include a slight rate decrease for middle-income Minnesotans, the first such cut in 20 years.
• Education funding will increase 2 percent in each year of the biennium. Both parties often support boosts to education funding, but the deal more closely reflects the DFL’s position going in the talks. The Democrats had proposed hikes of 2 percent the first year and 3 percent the second, while the GOP had proposed hikes of half a percent per year.
• Under a pledge Gazelka gave Walz and Hortman, the $6.6 million in state grants available to Minnesota under the federal Help America Vote Act for cybersecurity will be appropriated.
• A $500 million bonding bill to pay for construction projects was agreed to, including $60 million in housing bonds. This is somewhere between the GOP plan of zero this year and the Walz request of $1.2 billion. The wrinkle is that general obligation bonds require a 60 percent vote and House GOP Leader Kurt Daudt said he had not been asked to help pass those bonds.
• A GOP plan from 2017 called reinsurance will be continued for two more years. The plan helps health insurance companies offering individual and small employer plans with higher-than-average users of health services. Walz has wanted a system of tax credits and subsidies to help premium payers rather than insurance companies.

The three leaders were happy to announce the deal, though all had moved on something they had pledged not to. For Gazelka, it was the provider tax. For Walz, it was the gas tax, though the governor also said the deal was proof that Minnesota could make divided government work.

“We did something that in 2019 is a big deal,” Walz said. “Divided government with vastly different visions and vastly different budgets that came together in a manner that was respectful. Instead of dysfunction and shutdowns and yelling, we got compromise and agreement and we’re still friends.”

Walz called Gazelka a friend and Hortman a “true partner.” Gazelka, he said, sincerely listened to everyone’s point of view and Hortman dragged them back to the table when things got tense.

Hortman, who had pledged to do budgets more openly, said she couldn’t change the culture of St. Paul immediately, but said the details of the deal will be worked out by House and Senate committee chairs and Walz’s commissioners in open meetings.

“There are three leaders here who have devolved a lot of power out of the negotiating room and into the hands of the commissioners and chairs of the committees,” she said. “We are leaving it to the leadership of all of the members of the Legislature and commissioners to work out the agreements with the input of the public.”

Said Gazelka: “Both sides, when you have divided government, want to win. Both sides don’t want to lose and sometimes instead of win or lose it’s a draw. That’s what have here today, it was a draw, and it’s good for Minnesota.”

Hortman and Walz seemed especially relieved that the provider tax will not be going away. That provides $700 million a year for health programs, including MinnesotaCare, Medicaid and the individual market reinsurance plan. “The total removal of the provider tax we felt would have put too many people at risk,” Walz said. “These are compromises that work.”

All three defended the secrecy of the final talks. Gazelka said he needed to be able to make proposed offers to see how they would work without having them publicized before they were final. “There are things you take risks on — what if we did this or that — sometimes those types of questions are more difficult if you have the media when you start talking about that,” he said.

At one point, that meant kicking some reporters out of the hallway outside his office, a move he apologized for Sunday night: “It’s all part of trying to get done in the end, that’s one of the reasons I did it,” he said.

Walz gave some credit for the budget deal to the way he and Republicans worked out a solution to the disastrous MNLARS licensing computer system. They agreed to have outside examiners look at the problem and accepted the recommendation to use private software rather than a state-created system.

Generally, members of the minority aren’t needed to pass legislation. But if bond sales are involved, a 60 percent majority is required. They also need to help suspend House rules to let bills be passed on the day they are introduced.

House Minority Leader Kurt Daudt was not happy with the general agreement, especially the extension of the provider tax. He said he hadn’t been asked for votes on anything and also said thoughts of a short special session — a day, perhaps — were unrealistic, especially because the deal struck on the provider tax does not involve a new sunset provision. “My members are going to want to talk an awful lot about why that’s bad for Minnesotans,” he said.

Senate Minority Leader Tom Bakk also offered an assessment of the deal. “I’m deeply disappointed in the Senate Republicans’ fierce objections to funding transportation infrastructure and jobs,” he said. “Using the state’s rainy-day fund to prop up spending in the next biennium is a significant concern going forward. That type of shift jeopardizes Minnesota’s long-term fiscal health and the state’s AAA bond rating.”

Early on in the negotiations, Walz and the two leaders would come out in sequence to describe their offers and criticize those of other party. Realizing the lack of progress that was causing, the trio eventually went in the opposite direction — offering no comments, sneaking through side doors in and out of negotiating sessions and, if all are to be believed, not even briefing members of their own caucuses on the process.

The positive news extended to what had been a disagreement over details of how to fund a response to the opioid epidemic. Both the House and Senate agreed on fees on manufacturers and distributors of the painkiller, but they could not agree on how potential civil suit settlements with the drug makers might impact those fees.

But on Saturday, Sen. Julie Rosen offered a compromise that would let the fees run for five years and then be reduced if settlement proceeds reached $250 million or more.