Why Budget Day (days, really) was so much fun for Gov. Tim Walz and how surplus spending will make Minnesota history

When a student at a St. Paul grade school last week asked Gov. Tim Walz why he wanted to be governor, he quickly said: “For this day. For THIS day,” referring to the release of a $5.2 billion boost for education and families with kids, part of a $65.2 billion proposed budget.

Coming up with a two-year budget plan is far more fun when a governor gets to increase spending and cut taxes, and a $17.6 billion surplus means Walz gets to do both. In fact, the fun volume this year is at levels perhaps never seen before, as past state surpluses have mostly been in the $1 billion range.

“This is a balanced budget, but it is far more than that,” Walz said Tuesday in the fourth of five events convened over the past week or so to roll out different segments of the plan (that much money requires five press conferences). “It is a transformational budget.”

Historic was the watchword, as in the biggest in Minnesota history. Historic investments in education. Historic spending on housing. Tax cuts that are the largest by dollar amount in history. And, of course, historic spending totals.

If it was all accepted by the Legislature — and a lot will be with DFLers in control of both the House and Senate — Walz will spend all of the surplus over the next four years. He’ll leave just $47 million on the bottom line when the 2026-27 budget comes to a close on June 30, 2027.

Rebate checks and tax credits

Most residents of the state may well focus on kitchen table issues. If a family makes less than $150,000 a year, they would get rebate checks. For a family with three kids with income of $75,000 or less, the check would total $2,600. Walz’s rebate proposal a year ago did not have income caps, something that attracted criticism from some DFL legislators who want tax cuts and rebates directed at middle and lower income residents.

Lower income families would also be eligible for a child tax credit that the administration says would reduce childhood poverty in Minnesota by 25 percent. There’s also a child care credit for families with incomes up to $200,000 for any child five year old or younger.

“If you are a family of three with one child who is three or four years of age, just the tax credit and the dependent child care credit, you will not pay any taxes any taxes or get a refund if your income is $105,000 or less,” said state Revenue Commissioner Paul Marquart. A family of four with one child below age five, would need an income of $127,000 to pay state income taxes, he said.

“This is putting real dollars into the pocketbooks of people around the state,” he said. “This is transformational. This is going to make a huge difference.”

But if you are among the estimated 3,600 Minnesotans who sell assets and enjoy a profit worth $500,000 or more, you would be on the hook for a new capital gains surcharge.  The governor called the capital gains surcharge a tax fairness issue that would hit about 3,600 Minnesota taxpayers. He also includes a small sales tax — 12.5 cents on a $100 purchase — in the seven county metro area that would raise $87 million a year to respond to a projected deficit in the Met Council’s bus services.

A swelling surplus

If no changes are made to spending and taxes, the two-year Minnesota budget starting this summer would be $54 billion. Walz wants the state to spend $65.2 billion over the next two years, starting July 1. In addition, through a combination of rebate checks, partial relief from taxes on Social Security and both new and increased tax credits for low-income families and for child care help, Not all has been this fun for the DFL governor first elected in 2018. There was a global pandemic, the murder of George Floyd that made the state the center of a worldwide reckoning on race. And there was a violent crime surge that led to calls for state intervention and direct criticism of the governor’s role in it all.

One thing the DFL governor didn’t have to face, however, was a budget deficit, at least not one that he and the state Legislature had to act on. A forecasted deficit that began with the pandemic was gone by the time the next budget debate came around.

But the surpluses that greeted Walz after his first inauguration are budget dust compared to what he is facing now. The quick recovery from that brief pandemic recession plus the impact of the tens of billions of dollars put into the state economy via federal pandemic relief bill created three of the largest surpluses ever. The current surplus could allow Walz to spend on programs and initiatives like no governor has in a long time — maybe ever.

Walz, who rarely misses a chance to talk about his days as a teacher in Mankato, wants to spend nearly a third of the surplus this budget — and well over half of it for the next budget — on schools and financial support for children and families. He would bump the per-pupil school funding formula by 4% in the first year of the budget and 2% next year. That will cost $717 million this budget and $1.48 billion next budget. He would then grow the funding formula by inflation after that.

He will also increase by $722 million over the next two years and $840 million in the next two-year budget cycle the amount of general money Minnesota school districts would get for special education. Known as the special education cross subsidy, school districts now have to front a larger share of the cost for special education because federal and state dollars tend not to cover the full cost.

“My message to families, to students, to teachers, to support staff is this is the budget for many of us who fought for decades, this is the budget we’ve been waiting for, this is the transformation moment,” Walz said at a St. Paul grade school after showing off his education plan.

Jim Schowalter, the director of the office of Minnesota Management and Budget noted that many areas of new individual spending are as large or larger than entire budget surpluses of late that have ranged from $265 million to $1.51 billion. Big then, small now.

For example, Walz wants to put an additional $1 billion into homelessness and affordable housing. He wants to put $670 million in to jump start a new proposed paid family leave insurance program that would include a new payroll tax on employers. He supports paying $388 million to convert the school meals program from an income-based eligibility to universal free meals. He proposes spending $300 million to increase recruitment and pay for adult care workers. He again wants to distribute $300 million to cities and counties to increase public safety spending.

Yet, for some, it wasn’t enough.

The Coalition of Greater Minnesota Cities said a $30 million infusion into the Local Government Aid subsidy was inadequate and wouldn’t even keep up with the cost of inflation for local officials outside of the Twin Cities metro, according to the organization’s president, Thief River Falls Mayor Brian Holmer.

Walz reacted like a parent who heard that the tree-load of Christmas gifts wasn’t enough. He shot back that the budget plan would still increase funding and urged Holmer to look at the entirety of the sweeping budget plan before making a judgment.

“I would ask the mayor, though, to take into consideration what we’re doing on local property taxes for schools,” he said, adding that his budget also increases a tax credit meant to help school funding in areas where property taxes disproportionately burden farmers.

And Walz suggested that he expects difficulty in juggling all the requests for cash flooding in from every corner of the state.

“I know that the next four months are going to be those very questions from 100 different groups: ‘How about more for us? What about this?’” Walz said. “Those are fair questions, but I would ask us … holistically are we taking aim at the biggest issues in the state?”

The volume of numbers, and the blazing-fast pace of recent legislative action, even made it hard for legislative Republicans to react.

“When you look at the pace of what’s going on down at the State Capitol right now … What you’re finding is that even the press isn’t able to cover the amount of material coming out,” said Senate Minority Leader Mark Johnson at a Capitol news conference on Tuesday. “So it’s hard for people and staff and constituents to really get an understanding of what’s happening and it’s hard to build up alliances, build up coalitions that might be able to help on either side.”

“Huge government growth in agencies, huge government growth in taxation,” Johnson added.

House Minority Leader Lisa Demuth said Walz’s priorities for new government spending were misplaced. For instance, she said the $300 million for local governments to use on public safety efforts is appreciated after many voters expressed concerns about crime. But she said it pales in comparison to the $500 million price tag for renovating and expanding the office building used by House lawmakers.

On the other hand, Demuth said rebate checks are something Republicans are open to, though it’s still not the preferred approach for the GOP.

“I would much rather it go that way than into increased governmental spending,” Demuth said. “I would like to see it back in the pockets of Minnesotans. But permanent tax cuts are what we need to be looking at.”

Hearing the torrent of numbers can feel like being on the business end of a firehose. Even the highlights are a load. So put on your poncho.

Rebate checks: Walz again wants to use $4 billion of the surplus on one-time checks of between $1,000 and $2,600 to about 2.5 million taxpayers. But after receiving criticism from some DFLers that it wasn’t targeted at middle-and-low-income Minnesotans, Walz will cap the checks at those with incomes below $150,000.

Social Security: Walz and DFL leaders had agreed to a full elimination of state income taxes on that retirement income but the GOP left the deal on the table last May. Now Walz would increase the income thresholds at which retirees pay zero or reduced taxes. It would cost $219 million this budget.

Child Tax Credit: Families making less than $50,000 would get a $1,000 per child refundable tax credit up to $3,000. The credit, which becomes a payment for families who don’t have tax liability, phases out at higher incomes. It would cost $1.12 billion over two years.

Child Care Credit: Families with incomes up to $200,000 would get an income tax credit for each child up to age 5 worth up to $1,500. The credit exists but this would expand it to benefit an additional 100,000 families. It is worth $539 million over two years.

Housing: The budget puts nearly $1 billion into a variety of housing and homelessness programs such as a downpayment assistance plan for first-time buyers which would see $128 million more, $100 million for homeless shelters and services, $100 million to rehabilitate public housing.

Paid Family Leave: Walz would put $670 million into a proposed leave program for people after they give birth or who are caring for sick family members. Similar to unemployment insurance, it would be funded with a payroll tax but the upfront money would let it get started in July of 2026.

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Colleges: The budget would increase the state support for both the University of Minnesota and the Minnesota State system.

Transportation: The budget would use $722 million in cash to match the federal funds that flowed from the big congressional infrastructure bill last year but that weren’t matched when last year’s budget deal broke down.

MinnesotaCare Buy In: Walz again proposed to let more people buy health insurance through the existing program for low-income residents. Those whose incomes exceed limits could still pay the full-premium and get coverage as an option to the individual insurance market.

Broadband: the budget adds another $276 million in state spending on broadband infrastructure.

Local government help: In addition to the increases in Local Government Aid and County Program Aid and the cash for public safety, the proposal would further exempt local governments and nonprofits from paying sales taxes on construction costs. It is worth $250 million.

Outdoor Recreation: Walz would put $115 million for a Department of Natural Resources program meant to modernize outdoor recreation experiences.

US Bank Stadium: Walz would draw down $684 million in reserves from electronic pulltabs to pay off the bonds on the stadium early. It would also reduce, but not eliminate, Minneapolis’ share of the cost and pay for new stadium security fencing.

Correction: This story was updated to clarify the capital gains tax surcharge. A taxpayer would be assessed a surcharge if the profit from sold assets exceeds $500,000.