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By Dana Ferguson

Gov. Tim Walz on Thursday pitched a tighter two-year budget, complete with spending pullbacks and other measures to keep a potential deficit at bay. He also proposed a lower state sales tax rate that would be widened to include some financial services.

The more restrained approach comes after Democrats who’d controlled the governor’s office, House and Senate passed a roughly $70.6 billion two-year plan in 2023 that included one-time spending that won’t automatically carry forward. It was the state’s highest-ever budget total.

Walz’s proposed spending plan comes in at just under $66 billion.

Briefing reporters Thursday afternoon, Walz said Minnesota government would keep its focus on helping people despite the spending curbs.

“We are not changing that Minnesota is a generous state,” he said. “Minnesota is a state that cares deeply that every single individual should live the fullest quality of life they can. We will continue to be able to do that, but there are things that we can do.”

Documents accompanying the budget release showed the state general sales tax rate would slip from 6.5% to 6.425%, but the tax would be extended to legal, accounting, brokerage and trust services and some bank service charges for consumers — raising an additional $205 million in 2026-27.

The move to expand sales taxes to cover those services was a “fairness issue,” Department of Revenue Commissioner Paul Marquart told reporters.

“If you’re building your home and suffer flood damage, that clean up is taxed. So we already do all of these things. This is the real fairness issue,” he said. “This is a incremental, really long overdue change in the tax code.”

Walz called the rate reduction the first-ever cut in the state sales tax. “At the end of the day, taxes for Minnesotans will go down.”

Among the budget’s other noteworthy items, Walz is proposing that “excessive speeding,” defined as 35 miles per hour over the posted limit, could result in a driver’s license revocation. That’s a penalty now for people caught at speeds faster than 100 mph.

And in the vein of convenience, the budget calls for the creation of an online option for driver’s license renewal every other time they need to re-up. That means a trip to the licensing bureau only once every eight years for a new photo and vision screening.

Tighter budget cushion

Minnesota lawmakers discovered last month they’d have less fiscal wiggle room than expected in their upcoming budget negotiations.

State officials reported Minnesota’s projected financial cushion through June 2027 had shrunk to $616 million — $1.1 billion lower than previously forecast. The cushion estimate doesn’t include possible changes to funding levels or inflation.

Walz and state legislative leaders have said they’ll look to cull the next spending plan to stave off a possible shortfall on the horizon in the 2028 and 2029 fiscal years, which could reach into the billions.

Lower-than-expected sales and income tax projections into the future along with higher spending for long-term care and special education have led to the concern over Minnesota’s finances. Economic growth is also likely to taper, officials reported last week.

Walz said that he would aim to limit projected growth to disability waiver services – in-home or in-community services for people with disabilities — and special education transportation.

Curbing state spending for those programs could meaningfully impact Minnesota’s bottom line, Walz said. And he said the proposal wouldn’t deprive Minnesotans of needed services and would keep the state among the top for funding support services for people with disabilities.

State lawmakers will review the Walz proposal over the coming weeks. A new economic forecast will be released in late February. The governor suggested it should be a relatively easy negotiation this year, since he prioritized many top concerns for Republicans – like addressing improper spending in state government and sending more money to taxpayers in the form of a tax cut.

After the February budget forecast, the House and Senate will craft their own budgets. They’ll need to reach a deal that can pass both chambers of the Legislature and secure the governor’s signature before July 1. If they fail to do that, all or parts of the state government could shut down with services curtailed.

Walz’s Thursday budget reveal comes as Democrats and Republicans continue to fight it out over who will control power inside the Minnesota House. A key House race currently set for a Jan. 28 election will be crucial in deciding whether the House is split evenly at 67-67 or whether Republicans gain a 68-66 controlling edge.

Ahead of the budget reveal, Republicans at the Capitol said they expected to see cuts to current spending levels and no increases in taxes or fees.

“Minnesotans are well over-taxed at this point, Minnesota has a spending problem,” House GOP Leader Lisa Demuth, R-Cold Spring, told reporters on Wednesday.

“Hopefully the governor will exercise just common sense from what people across the state are asking to have done to reduce the cost of government, reduce the waste in government and then shrink it, rather than growing it.”