The primary business of this year’s legislature is to pass the state’s biennial budget. Other legislative priorities include federal tax conformity, transportation and transit funding, and health care. We anticipate the legislature will take on other issues as well, including paid sick time and family leave, elder care, firearm regulation and marijuana legalization.
The Budget
The November 2018 Economic Forecast projected a $1.544 billion surplus for fiscal years 2020-21 including $419 million left on the bottom line from FY2018-19. This forecast also projected a $382 million surplus for fiscal years 2022-23. Statutory allocations based on the forecasted surplus also added another $491 million to the budget reserve, which now totals $2.075 billion.
House and Senate Republicans, believing that the projected budget surplus is sufficient to fund the state’s budget priorities, have ruled out raising any additional revenue as part of the FY2020-21 budget, including increasing the gas tax to fund transportation improvements. House and Senate DFLers suggest that inflation should be included in the spending projections. If inflation is included in the budget calculations, the FY2020-21 projected surplus would only be $382 million and in FY2022-23 there would be a projected deficit. Consequently, House and Senate DFLers have not ruled out raising additional revenue. Potential targets for additional revenue include repealing the sunset on the state’s provider tax, reinstating the inflator on the C/I tax and reinstating certain tobacco taxes.
Because this is the first year of the biennium, Governor-elect Walz is required to recommend a two-year state operating budget to the Legislature by February 19, 2019. Governor-elect Walz has made statements that suggest he will release his budget plans gradually before the February deadline, a contrast to the “surprise” budget releases made by many of his predecessors. Though Governor-elect Walz has not explicitly stated what he desires to use the surplus for, he has indicated he would like to make more general investments in education and infrastructure.
Federal Tax Conformity
Last session, the Omnibus Tax Bill (HF947), was intended to conform Minnesota’s tax code to changes in the federal tax code contained in the Tax Cuts and Jobs Act of 2017 (TCJA). However, Governor Dayton vetoed this legislation.
This year, legislators and Governor-elect Walz will try to find common ground on how to best conform the state’s tax code to the TCJA. DFL legislators, especially in the House, will focus their efforts on delivering tax relief to families in low- and middle-income tax brackets, likely by increasing taxes on Minnesota businesses and increasing the family tax credit. They may also advocate for the creation of new personal and dependent credits as well as reinstating taxes on tobacco, estates, and the inflator on commercial/industrial property. Republican legislators are expected to advocate for conformity provisions that reduce tax rates on Minnesota businesses from 9.8 percent to 9.1 percent and eliminate the Alternative Minimum Tax (AMT). We can also expect efforts by Republicans to reduce the first- and second-tier rates of individuals, couples and heads of household. Many of these provisions were contained in last year’s vetoed tax bill.
It is highly unlikely legislators and Governor Walz will agree on conformity before individual and corporate taxpayers begin submitting their 2018 returns to the IRS and Minnesota Department of Revenue (DOR). While Governor-elect Walz has indicated that he would like to avoid the drama that occurred with the 2018 Omnibus Tax bill, federal conformity will likely happen at or near the end of session, if it occurs this year.
Transportation and Transit Funding
During his campaign Governor-elect Walz indicated he would champion significant investments in transportation and transit infrastructure, including proposing a gas tax to increase funding for roads and bridges. His appointment of former Minnesota DFL House Speaker Margaret Anderson Kelliher as the Commissioner of Transportation reinforces the belief that transportation and transit will be a top priority this session. As Speaker of the House, Kelliher quarterbacked the last successful legislative effort to invest in transportation and transit that included an increase in the gas tax. These efforts included overriding the veto of former Governor Tim Pawlenty.
In the first days of session, House DFLers are expected to propose substantial increases in transportation and transit funding. This package is expected to include an increased gas tax, transportation bonding and, perhaps, a gross receipts tax. It is also expected to include significant general fund investment in transit funding, including addressing the projected $110 million shortfall in Metro Transit’s operating budget for buses.
Conversely, Republican Senate Majority Leader Paul Gazelka and Transportation Chair Scott Newman have come out in opposition to a gas tax or other new taxes for transportation and transit. They believe that significant revenue exists in the general fund, and the budget surplus to fund needed transportation and transit improvements. They have suggested that all revenue from the sales tax on auto parts and repairs be redirected from the general fund to cover these improvements. Last biennium a portion of these revenues were redirected for transportation purposes. 32 other states redirect money from general funds to help cover road and bridge costs.
Governor-elect Walz also appointed Maplewood Mayor Nora Slawik as Metropolitan Council Chair. This appointment may indicate an interest from the Walz administration in expanding public transit funding and infrastructure. Furthermore, a new slate of suburban DFL legislators in the House could mean a more emphatic approach to expanding and improving transit options, including light rail and bussing systems.
Other Issues
In addition to the budget, federal tax conformity, and transportation and transit matters, it is expected the Legislature will consider action on health care, firearm regulation, opioid taxes and marijuana legalization.
Health Care
In the 2018 election cycle, Republicans and Democrats shared a common campaign promise to lower health care costs, but differed on how best to do so. Governor-elect Walz and several DFL lawmakers proposed a MinnesotaCare buy-in option during last year’s election. House DFL leadership has indicated that legislation implementing this option will be one of the first bills they introduce. Republicans will push back on DFL efforts to open up MinnesotaCare, arguing that it will hurt individual doctors, hospital groups and rural clinics and hospitals.
Legislators will also need to decide whether to repeal the sunset on the 2 percent provider tax, which was originally designed to help fund health care programs like MinnesotaCare, but has been used to pay for a litany of other budget items. If not extended, the tax will sunset at the end of 2019. Also set to expire this year is the two-year moratorium on the sale of Minnesota’s nonprofit HMOs to other for-profit entities; another issue legislators will likely revisit this session.
Regulation of Firearms
Enhanced regulation of firearms was a central tenet of many suburban DFL House campaigns in 2018. The DFL House majority is expected to push for measures such as universal background checks and gun violence protection orders with legislation being introduced as early as the first week of session. Governor-elect Walz has also expressed support for legislation aimed at reducing gun violence. However, these proposals are expected to encounter difficulties in the Republican-controlled Senate.
Marijuana Legalization & Decriminalization
Governor-elect Walz has signaled his support to legal marijuana in Minnesota, citing tax revenue and improved racial equity as benefits. He has also voiced support for expunging marijuana-related crimes for non-violent offenders. House Speaker Melissa Hortman has indicated that the issue may be of interest in the upcoming session but that it is not a legislative priority. While Republicans have not entirely rejected the idea, they have cited negative consequences such as addiction and driving under the influence as important considerations that could lead to their opposition.
New Administration
Governor Walz has begun assembling his team to lead state government. The following agency commissioners have been named:
Important Links
A list of all Agency appointments can be found here.
A list of the House Committee Roster can be found here.
Important Dates
January 7, 2019 – Governor’s Inauguration
January 8, 2019 – Legislative Session Begins
February 19, 2019 – Governor’s Budget Recommendations Released
Last week of February – February Budget and Economic Forecast Released
April 13, 2019 – April 23, 2019 – Legislative Break
May 20, 2019 – Session Adjourns
