For Minnesota’s DFL lawmakers, when it comes to Republican opposition to tax hikes proposed this year, the response has been: What about 2019?
That year, Republicans were set against tax hikes at a time when the state had more than a $1 billion budget surplus and a healthy rainy day savings account. This year, the surplus is $1.6 billion, the rainy day fund is unchanged and the federal government is sending the state billions in American Rescue Act money.
Those numbers have appeared to further arm Republican leaders — especially those who control the state Senate — to stand against the tax hikes that have been proposed by Gov. Tim Walz and passed by the DFL-controlled House. Yet when confronted with GOP statements of opposition, DFLers point back to 2019.
Walz had two tax proposals that year: a 20 cent per gallon gasoline tax hike for transportation projects; and the renewal of the Health Care Provider Tax on medical bills and hospital stays, which was to sunset at the end of that year.
The latter, dubbed by some Republicans as the “sick tax,” had been in place for 27 years and raised around $700 million a year for the health care access fund, which pays for MinnesotaCare and other health programs benefiting some 1.5 million Minnesotans.
And while the gas tax never surfaced during the 2019 session, the provider tax was renewed, permanently, though at a lower rate. It was a surprise concession by Senate Republicans, and both sides admitted that a budget compromise would have been much tougher, if not impossible, without it.
Legislative deja vu all over again?
So is 2019 precedent for 2021?
House Speaker Melissa Hortman suggests it could be. “In 2019 we heard from Republicans that they would not raise taxes,” the Brooklyn Park DFLer said earlier this month. “But to get a budget that served the people of Minnesota, we did preserve the provider tax and that brought in substantial revenue.
“So what seems possible now is not necessarily what will look possible at the end of session, when we’re trying to find common ground,” Hortman said.
The House Taxes Committee Chair Paul Marquart, DFL-Dillworth, echoed those comments last week in touting the House DFL’s $1 billion tax increase plan. The hikes on the income tax of high earners would be revenue neutral during the next budget because they would pay for tax cuts, especially on the jobless benefits provided during the pandemic and on paycheck protection plan loans that have been forgiven. But the DFL plan would raise revenue in the succeeding budget period for increased DFL spending on education, social programs and small business aid.
“We heard that this plan is DOA when it goes over to the Senate,” Marquart said. “Well, let me tell you what happened in 2019. We had a $1 billion surplus but the final bill that passed the Democratic House and the Republican Senate was basically revenue neutral like we have.” But it raised not $100 million or $200 million or $400 million or $600 million, Marquart recited, it raised $700 million.
“It’s not like this hasn’t been done before,” Marquart said.
How the 2019 deal was done
The Health Care Provider Tax was one of the main points of disagreement between legislative DFLers and Republicans in 2019. Placing a sunset on the tax was one of the concessions made by former Gov. Mark Dayton in order to end a 19-day government shutdown in 2011, a move that was considered a victory for the GOP at the time.
But losing that revenue after 2019 would have made the state’s health and human services budget difficult to balance without cuts — cuts that many in GOP Senate Majority Leader Paul Gazelka’s own caucus didn’t favor.
“The fact of the matter is, the provider tax generates about $700 million a year,” said then-Human Services Commissioner Tony Lourey, a former DFL senator. “It doesn’t matter who’s in charge. If you erase 1.4 billion from a biennium in the middle of the HHS spreadsheet, we’re not going to be able to keep the promises that we’ve collectively made to the people around the state of Minnesota.”
As the 2019 session was reaching its deadline, the two sides were still exchanging offers that were far, far apart. On the last possible day — and after yet another closed-door meeting between Walz, Hortman and Gazelka — a deal was announced.
Gazelka admitted it was a hard deal to reach. “Both sides, when you have divided government, want to win,” he said. “Both sides don’t want to lose and sometimes instead of win or lose it’s a draw. That’s what we have here today, it was a draw, and it’s good for Minnesota.”
While he said then he could argue that he won a rate reduction in the provider tax — from 2 percent to 1.8 percent — he acknowledged it was a serious concession. “It’s 10 percent less, I could maybe argue that, but the point is those were things I had to swallow,” Gazelka said.
In return, Gazelka stopped a gas tax increase and won a small tax cut for middle-income Minnesotans — the first in two decades. He also kept a program known as reinsurance, which helps medical insurers cover the cost of high-use premium holders and allows them to keep overall rates lower.
Gazelka: ‘Wishful thinking’ to believe 2021 is like 2019
Yet Gazelka said this week that DFLers have learned the wrong lesson from 2019 — that the circumstances are vastly different this year.
For one, he said, he never closed the door on extending the provider tax in 2019, though he got pretty darn close. “The provider tax has already been signed and meant to go away,” he said early in the session that year. “For it to not do that, we have to do legislation to do something different, which we’re not really favorable towards.”
Gazelka also pointed out this week that two years ago, while he was adamant on gas tax hikes, he was less so on keeping the provider tax. “It was supposed to sunset and the hospitals said, ‘How are you going to help us, then?’” Gazelka said. “I never talked about the health care access fund as far as saying we weren’t going to do anything there.”
This year’s DFL tax proposals are different, he said, because they come as the state is emerging from a pandemic-induced recession and as the state has a projected $1.6 billion surplus; a rainy day account that Walz proposes topping off at $2.243 billion; and $2.6 billion in funds coming directly to state government from the federal American Rescue Plan.
Use of that federal money is being held up while Minnesota and other states wait for guidance from the U.S. Treasury on how it can be spent. The $1.9 trillion bill includes $350 billion for state, local and tribal governments, and can be used to replace lost revenue from the recession and other efforts to address the economic and public health consequences of the pandemic. But further details on using the money aren’t due until May 10 — the final week of Minnesota’s 2021 session.
Tax collections have been increasing as well, a development that led Walz to remove some tax hikes from his initial January plan and led the House DFL to propose even less of an increase than Walz’s revised plan.
“There’s absolutely no reason for any tax increases,” Gazelka said. “I have been saying we’re not going to do it.”
And he called believing he will walk away from his no-tax pledge this year “wishful thinking.”
A key position for the DFL
Soon, Gazelka and Hortman will announce what are called joint targets for the Legislature: the numbers conference committees must use for final budget deals. But those numbers are dependent on how much money the state will have to spend — and that is dependent on whether there will, or won’t, be a tax hike.
Are the tax hikes necessary?
In the short term, probably not. The resources available make it possible to balance a budget without taxes. But that would require Walz and the DFL to give up on a key position: that most of the surplus, the rainy day fund and the federal dollars are one-time resources. That is, they won’t be around in the next budget period or the one following that. To have ongoing funding for their spending increases requires increased tax revenue this year.
Their willingness to walk away from the tax hikes hasn’t surfaced yet. “Understanding the nature of the money, that more of it is one time instead of structural, is a really important consideration,” Minnesota Management and Budget Commissioner Jim Schowalter told a Senate committee.
“That is why we have revenue in our proposal,” Hortman said of the one-time nature of the money. “We think it is critically important for Minnesota now and into the future.”