Gov. Tim Walz presented his budget proposal at the Department of Revenue building in St. Paul on Jan. 16, 2025. Photo by Michelle Griffith/Minnesota Reformer.
The state of Minnesota is spending more money than it’s bringing in, and if current trends continue, the state will spend down the current balance as soon as 2027.
DFL Gov. Tim Walz wants to address the issue mostly by slowing state spending on disability services, one of the major drivers of the state’s escalating costs. He also proposed changes to the state sales tax that would shift the tax burden on to wealthier Minnesotans, while generating more revenue for the state.
Walz’s proposed budget would cut the structural imbalance — the difference between state revenues and spending — by about half, averting a deficit in the near-term.
Overall, Walz proposes general fund spending of $66 billion during the two years starting July 1. Because of some extraordinary one-time spending in the current biennium, comparing the next two years to the two years prior is complex, but it’s safe to say Walz is confronting fiscal reality by tapping the brakes on significant spending increases.
The budget proposal comes with some major caveats: the economic picture isn’t entirely clear yet, and lawmakers will come to the negotiating table with their own ideas for balancing the budget while advocacy groups lobby for their piece of the pie. The incoming administration of President-elect Donald Trump is also promising to pass an aggressive economic agenda that could have major ramifications for state budgets.
Walz will also need to garner bipartisan support for his budget proposal, as the Senate is currently tied 33-33 between Republicans and Democrats and the GOP has a 67-66 majority — at least temporarily — in the House. A special election in a north metro district at the end of January is expected to deliver another Democratic member and bring the chamber back to a 67-67 tie.
If Walz and lawmakers can’t agree on a two year budget by June 30, state government — including payments to school districts and state workers — will shut down.
Senate and House Republicans quickly rebuked Walz’s proposal shortly after he presented it, attacking an expanded sales tax and cuts to senior programs.
State budget officials will present an updated economic forecast at the end of February or early March. That forecast will give the governor and lawmakers a clearer picture of state spending and revenue trends, as well as economic conditions — and officials may be better able to project the impact of Trump’s promised tariffs and other fiscal policy changes.
Most of the savings proposed in Walz’s budget would come from slowing the projected growth in services for people with disabilities and the elderly, which is the largest driver of spending increases over the next few years.
The state automatically increases the reimbursement rate for Medicaid providers every two years based on inflation. Walz is proposing capping the automatic rate increase at 2% per year, slightly under the Federal Reserve’s projected national inflation rate of about 2.3% over the next two years.
The cap, plus other reductions in state spending on services for disabled people, would save the state an estimated $1.3 billion over the next four years.
It’s also sure to put pressure on providers — who say they already struggle to make ends meet — to find ways to cut costs.
Interest groups wasted no time voicing their disapproval.
“Today’s proposal is nothing short of a slap in the face to Minnesota’s seniors, who are already facing a crisis in diminished access — particularly in rural Minnesota,” the Long-Term Care Imperative, which represents over 2,000 senior living facilities in Minnesota, said in a statement. “This budget leads us to conclude that the governor does not consider Minnesota’s seniors a priority.”
Walz during his budget presentation anticipated the criticism and said his administration was acting responsibly so the state can continue to fund disability and long-term care services for the long haul.
“(To) those who say … ‘We don’t care, we’re trying to balance the budget on the backs of this’ — nothing could be further from the truth,” Walz said.
Some of the savings will be offset by a reworking of the state sales tax. Walz is proposing lowering the state sales tax rate by .075% — saving Minnesotans 75 cents for every $1,000 they spend on taxable goods.
Walz’s plan would also tax professional services that are currently exempt from sales tax, including legal, banking, brokerage and accounting services. Department of Revenue Commissioner Paul Marquart said there are certain services that will be exempted from the new sales tax, including legal programs for low-income Minnesotans, pension services and business-to-business transactions.
“We’re asking for fairness in this,” Walz said. “Why are you paying tax on your damn tree trimmer, and they’re not paying it on going to their broker or going to a lawyer or going to an accountant?”
Although the sales tax rate would decline, the new tax on professional services means that, taken together, the changes would cost Minnesotans $185 million over the next two years. Republicans said that proposed tax increases were nonstarters.
“A budget that raises taxes on Minnesotans and cuts funding for long term care is not a budget that values the people of Minnesota,” Republican House leader Rep. Lisa Demuth, R-Cold Spring, said in a statement.
Walz’s budget also proposes shifting some of the cost of special education transportation to local school districts; increasing the state surcharge for health maintenance organizations; and boosting spending on fraud prevention.