Walz’s revised budget maintains tax hike on high-earners, corporations

Last month’s better-than-expected state revenue forecast has allowed Gov. Tim Walz to revise a budget he initially proposed in January. But despite having more money, the DFL governor maintained the heart of his plan — increased taxes on wealthier Minnesotans and new programs he said will help those hit hardest by the economic fallout from COVID-19.

The revisions now include two new tax cuts that have already been approved by the state Senate — no state income taxes on most of the money businesses received under federal paycheck protection plan loans and tax relief for jobless residents who benefited from the $600 weekly payment topoff. Both were key provisions of the federal CARES Act last spring.

Walz does not go as far in granting PPP tax relief as Republicans do. He would exempt the first $350,000 from income for forgiven loan amounts, claiming that about 90 percent of the loans received by Minnesota businesses are under that threshold and will receive the full tax exemption. He also matches federal exemptions on COVID jobless benefits, exempting up to $10,200 collected in 2020. 

Those tax cut recommendations reduce the net value of the Walz tax increases from $1.66 billion to $670 million. But the largest tax increases remain. He still wants a new fifth-tier income tax that would raise $403 million from married couples earning $1 million a year or single filers earning $500,000. Tax increases for capital gains stays in his plan and raises $486 million. And while he slightly reduces a higher corporate profits tax rate from 11.25 percent to 10.8 percent, the higher rate is still in his request and would increase state revenues by $330 million.

The governor and his political allies are portraying the tax plan as a reaction to the pandemic-induced recession, which hit lower-income residents hard but left many workers unharmed and saw some high-income earners with their wealth increased. Walz’s tax strategy is similar to those used in other states, even though Minnesota’s tax system is considered one of the most progressive in the U.S (specifically: fifth-most in one rating). If adopted, these tax changes would likely improve the state’s ranking. 

The governor is no longer asking for a cigarette and snuff tax increase, but he does keep a broadened vaping tax in his proposal.

That Walz is holding on to his high-earner tax hikes despite a projected surplus — and the coming flow of federal money from the American Rescue Plan — isn’t surprising; it’s been signaled by his administration for weeks. Shortly after the February forecast was released, state MMB Commissioner Jim Schowalter told a Senate committee that both pots of money are what budgeteers call one-time funds. That is, they are real dollars but don’t reflect an ongoing improvement in state tax collections that could be relied on to pay for the spending increases he wants.

“As we set the budget and as we set obligations going forward, we need to think about that and take it into account,” Schowalter told the Senate Taxes Committee last month. “Understanding the nature of the money, that more of it is one time instead of structural, is a really important consideration.”

What was released Thursday are revisions to a two-year budget plan — what Walz termed his COVID-19 Recovery Budget — first offered in January. The bulk of that remains in the governor’s request. It adds spending in public education for both general support and summer school, small business assistance, child care grants, tuition assistance for job changers and other social and economic supports tied to the pandemic.

The revised budget would spend $52.269 billion — $2.18 billion a month over two years. The current budget is $48.3 billion.

Both the January budget and this revision are more negotiating starting points than concrete plans. The GOP-controlled Senate has already put down a no-new-taxes flag and is pushing for spending reductions that are not in the Walz plan.

A final budget will come — perhaps — in end-of-session negotiations in May. The state must have a balanced budget agreed to before the end of the state’s budget fiscal year,  June 30.

Presenting two budgets to lawmakers even before they have produced one is the result of the wild fluctuations in the state’s economic forecasts during the pandemic. Last May the state expected the current two-year budget would end $2.42 billion in the hole on a base two-year budget of $48.3 billion.

That improved in November to a $641 million surplus with any deficits pushed off into the 2021-22 budget. The state’s finances then improved further last month with the current surplus growing to $940 million and no projected deficit in the next budget period.

Walz and his management and budget commissioner had planned to release the revised budget in a press briefing. That was abandoned when the governor was potentially exposed to a staff member who tested positive for COVID-19. Instead the new numbers came via press release.

“Minnesotans have met the challenges of COVID-19 pandemic as they always do when faced with hardship—with grit and resiliency,” Walz said in that release. “But we know that our students, working families, and small businesses have borne the brunt of this pandemic. That is why, with the recent good news that Minnesota now projects a positive budget balance, we’re recommending additional investments to support working families, ensure students catch up on learning, and help small businesses stay afloat while driving economic recovery.” 

Not unexpectedly, the revised plan was praised by DFLers and their allies — and criticized by Republicans and business groups.

“This proposal provides a clear contrast to Senate Republicans’ proposed budget targets that try to hide their significant cuts to education, public health, and investments like broadband,” said Senate Minority Leader Susan Kent, DFL-Woodbury. “To truly build back a stronger Minnesota, we need to make investments in our communities statewide to address the disparities and close the gaps statewide to support all Minnesotans, and the Governor’s revised budget proposal recognizes that need.”

What the Senate GOP released this week wasn’t a budget but a list of general state government spending areas and the dollar amounts to be spent in each. These too are negotiating starting points and sometimes don’t even have the support of GOP committee chairs. Totaled, those so-called targets are $51.9 billion, have no tax increases and include complete PPP tax forgiveness.

House Minority Leader Kurt Daudt, R-Crown, took aim at the tax hikes and the less-than-full PPP loan exemption. “Taking money from struggling businesses is indefensible when state government is flush with cash,” Daudt said. “We have billions of dollars available to fully protect workers and businesses from unnecessary tax hikes, and ensure that government is not profiting off relief dollars intended to help Minnesotans.”

Minnesota Chamber President Doug Loon said this: “With billion-dollar surpluses, billions in reserves and billions more in federal dollars expected, we should not be imposing additional – and permanent – tax increases and costs on Minnesotans.  

“Minnesota should join our neighboring states and fully conform with federal law to prevent a tax hit to the over 100,000 small businesses that received this loan lifeline to retain their employees during the worst economic downturn in over 70 years.”