Walz, Lawmakers Mull Special Session
The Minnesota Legislature concluded the 2022 regular session on Monday, May 23. As you may have read, there was little resolution to some of the biggest items: tax cuts, spending bills, public safety and capital investment projects were all left undone.
The final week started with agreement on a tentative supplemental budget framework between the Senate Republicans, House Democrats and Governor Walz. We wrote about the basics of the agreement here, but the rough outline was: $4 billion in tax cuts/credits, $4 billion in new spending, and $4 billion left in the state’s general fund. They had until midnight on Sunday, May 22, to complete the deal.
On Wednesday, the House and Senate released more detailed spending targets for each budget area, but as the week wore on the deal seemed less durable. Most details were to be worked out in House-Senate conference committees, which often devolved into public and private bickering. Governor Walz even reportedly worked behind the scenes to kill part of a deal between House and Senate chairs over the final weekend
By Friday night, only the Tax Conference Committee had come to an agreement. Major items included:
- Full State Subtraction for Social Security Income (FY 23-25: $1.63 billion)
- Convert/Increase Renter’s Property Tax Credit to Income Tax Credit (FY 23-25: $764 million)
- Reduce First Tier Income Rate from 5.35% to 5.1% (FY 23-25: $660 million)
- Increase Child & Dependent Care Credit (FY 23-25: $170 million)
- Additional CARES/ARP Federal Pandemic Relief Tax Conformity (FY 23-25: $100 million)
The agreement made a nominal reduction in the statewide C/I property tax levy of about $75 million (out of $2.25 billion) over state fiscal years 23-25.
In response to alarm over rising residential property values, the final tax package also increased the residential homestead market exclusion. This would have shifted a substantial amount of property tax burden around the state from residential homes to businesses and farmland.
We may never know the full details of the tax bill because, in a bit of brinksmanship, the House never convened the conference committee to finish the bill. In fact, on the session’s final day of activity, the House met in floor session for only 12 minutes out of the first ten hours of the day.
Ultimately, only a few budget items were completed over the final weekend:
- Broadband: ~$160 million in federal funds and $50 million in state funds for broadband expansion (FY 23-25)
- Mental Health: $100 million mental healthcare package (including important reforms to prevent release of people deemed incompetent to stand trial)
- Drought Relief: $8 million for drought relief expenses incurred by livestock and specialty crop producers impacted by the 2021 droughts (must be in USDA designated natural disaster area between 7/19/2021-1/1/2022 (application and other details to come)
An alcohol reform bill and human services policy bill were also completed. Despite lots of buzz and media attention, the Legislature did not reach an agreement on sports gambling.
What’s Next: Partisan recriminations began almost immediately, but the reality is the deal was probably built to fail.
Four billion in new spending was way too much for many Republicans, and not nearly enough for many Democrats. And vice versa on Taxes, where it was always going to be a struggle to fit each side’s priorities into a $4 billion cut.
The final Tax Bill was a disappointment to many, and the Legislature should start over with a package that focuses on long-term relief for small businesses.
Out of $4 billion in tax reductions and credits over three years, only about half went to permanent tax relief. Only about $175 million directly benefited small businesses as a whole (federal conformity + C/I property tax reduction).
The nominal individual rate cut would have provided about $100 per year in relief for individuals making over $100,000 per year, a paltry amount compared to the Senate’s original plan of about $1,000 per year in relief. The renter’s credit expansion – we’re one of only about a dozen states with such a credit – would have eaten up a larger and larger share of the budget over time.
But the session wasn’t just about the final week. Over the course of nearly four months, the Legislature and Governor Walz accomplished two major things for NFIB MN and small businesses around the state:
- UI Tax Relief: Facing a $2.7 billion deficit in the state’s unemployment insurance system, the Legislature (belatedly) agreed to wipe out the debt and a decade or more of UI payroll tax increases. Hundreds of NFIB Members responded to action alerts on supporting this relief, and we heard from many who were facing staggering increases in their UI bills.
- Reinsurance: For those who buy insurance on their own, rather than getting it through their employers, the reinsurance program is a vital lifeline that prevents double digit health insurance premium increases. Reinsurance has prevented the collapse of the private individual market over the past five years. This deal continues the stabilization program for three years.
Other successes are largely measured in defeating expensive and impractical mandates sought by Democrats in the Minnesota House. Thankfully, NFIB MN was able to work with the Senate to block every harmful mandate, fee increase, and tax that came from the House.
Special Session: Despite previously saying he wouldn’t call one to finish any work left undone, Governor Walz says he’s open to having a special session because “you don’t get to the one yard line and go home.”
Well, ask the 1999 Tennessee Titans or 2014 Seattle Seahawks about that.
House DFLers also want a special session.
Our view is it’s for the best if there is no special session. Leaving the deal unfinished means we’ll enter the 2023 session – a real budget year – with about a $12 billion surplus (pending the impact of inflation/potential recession).
Let voters decide how that money should be spent: on major tax reform that gets us out of the top ten in key tax rates, or growing a budget that has already seen a 54% increase in the last ten years.