Dig into Gov. Tim Walz’s massive $65 billion two-year budget proposal with roughly $11.2 billion in new state spending and $5.4 billion for the ‘biggest tax cut in state history’ and you’ll also find tax and fee hikes.
Walz’s proposal includes a new payroll tax for workers and businesses to fund paid leave, a hike in the seven-county metro sales tax, higher capital gains taxes, increased fees on car registrations and more.
While outlining his budget proposal, Walz noted that some of the new spending he wants, including tax credits for families and tying some school funding to inflation, have steep ongoing costs. Walz hopes some residents won’t mind paying more to fund them.
“Minnesotans are fair about their taxes,” Walz said. “They’re willing to pay them if they believe they are fair and they believe they’re going to do things to improve life.”
It is unclear if fellow Democratic-Farmer-Labor Party members will support the governor’s ideas.
Republican leaders, now in the minority in both chambers, didn’t think Minnesotans would look as kindly on proposed tax hikes when the state has a historic budget surplus. They say residents want permanent tax cuts.
“In a time when there is a record surplus, $17.6 billion, Minnesotans are expecting to have that back,” House Minority Leader Lisa Demuth said Tuesday. “If we can’t cut taxes now, when can we?”
Here’s a breakdown of the tax and fee increases proposed by the governor:
Walz’s plan would tap $668 million of the state surplus to kickstart a universal paid leave program to provide as much as 12 weeks off to recover from an illness or care for a loved one. After that, a 0.7 percent employment tax, which could be split between workers and employers, would raise about $1 billion a year to pay for the new benefit.
Metro sales tax
An eight-tenths of a cent sales tax increase in the seven-county metro would help offset anticipated shortfalls in the state’s mass transit budget. The increase would raise about $93 million in 2025 and help fund bus rapid transit, light rail and other transit services that are projected to have a $260 million deficit by the 2026-27 budget.
Walz wants to implement a 1.5 percent surcharge on stock profits over $500,000 and a 4 percent new tax on profits over $1 million. Doing so would raise about $661 million in new revenue for the general fund in the coming budget.
Walz is also proposing a 15 percent tax on cannabinoid products, such as hemp-derived drinks and gummies, to take affect in October as well as a 15 percent tax on adult-use cannabis beginning in 2025.
Democratic lawmakers in the House have proposed a lower rate of less than 10 percent that would be focused on funding oversight of the cannabis market place. Taxes on adult-use cannabis are expected to generate more than $100 million annually once it becomes legal.
Walz’s budget proposal includes some increased fees for things like fishing licenses and state park passes. One of the biggest revenue generators is a hike in registration fees for newer vehicles, which would raise about $167 million in the next two years.
The proposal would increase the cost of registering a new vehicle in the first year and by 10 percent in subsequent years.
The governor is also proposing several tax reductions, which would come from the state’s budget surplus. They include:
About $3.9 billion from the surplus would fund rebates worth $1,000 to individuals or $2,000 to households with annual income limits of $75,000 and $150,000 respectively. Families with children could receive up to $200 per child for a maximum of $600.
Child tax credits
A new child tax credit of $1,000 per kid, with a cap at $3,000, would be phased out for families earning more than $50,000. Additionally, child care credits of $4,000 per child up to $10,500 would be available to families earning up to $200,000.
Both child-related tax credits would reduce state tax revenues by about $1.65 billion annually.
Walz has proposed lowering, but not eliminating, state taxes on Social Security. About 350,000 households would see a reduction and state revenues would drop by about $219 million over the next two years.
That’s significantly less than the more than $600 million per year cost state officials estimate for a full repeal of state Social Security taxes. Minnesota is one of a dozen states that tax the benefit.
Walz’s budget proposal is just that, a proposal he’s required to present to lawmakers by the end of January. Now, House and Senate committees will examine the details while crafting proposals of their own.
Democrats have narrow control of both chambers of the Legislature, so Walz may get a lot of what he wants. But DFL lawmakers have competing proposals, including some hoping to totally eliminate taxes on Social Security.
A completed budget is due before the Legislature adjourns in late May.