Walz proposes slimmed-down 2026-27 state budget, sales tax changes

This is an odd-numbered year, and so the Legislature is constitutionally required to craft a budget to fund the state government for the next two fiscal years.

Gov. Tim Walz took a major first step in that process Thursday by announcing his proposed 2026-27 biennium budget, which totals $65.9 billion in General Fund spending. This is a slimming down from the $70.7 billion General Fund appropriations for the current 2024-25 biennium.

If his budget is passed as proposed, Walz said it would leave a $2.1 billion surplus in fiscal years 2026-27, and a $355 million surplus in fiscal years 2028-29.

This is a year to be prudent, Walz said, because the Minnesota Management and Budget projects that costs for operating several new state programs created in 2023 will strain the state budget by 2030 and lead to budget deficits.

He said the “responsible cuts” in his proposed budget will head off those projected deficits.

Along with the budget proposal, Walz announced a first in Minnesota history: A cut in state sales tax, shaving .075% off the current state sales tax of 6.875%.

With the reduction, Walz said the state would still collect more sales taxes overall. That would be done by eliminating what he called existing sales tax “loopholes,” such as those that currently exempt legal, accounting, brokerage and trust services from taxation.

“If a tree falls in your yard and you hire someone to remove that tree, you pay sales tax on that,” Walz said. “If you call your stockbroker and make a deal you do not pay sales tax on that.”

“It brings fairness back into who is paying the sales tax,” Walz said.

Republicans called any sales tax expansion a non-starter.

“A budget that raises taxes on Minnesotans and cuts funding for long term care is not a budget that values the people of Minnesota. Democrats already used their one-party control to raise taxes on Minnesotans by more than $10 billion, and spent us into a looming deficit,” House Speaker Lisa Demuth (R-Cold Spring) said in a statement.

[MORE: View governor’s recommendations: pie charts; changes by agencies; summary of General Fund changes]

Other elements of the proposed budget that Walz said would save the state money:

• an “anti-fraud package” that incudes creating tougher penalties for those who defraud state agencies and giving agencies more enforcement authority;
• a cap on automatic year-over-year growth rates in Medicaid waivers; and
• a 5% reduction in special education transportation reimbursement costs.

What’s next

Both the House and Senate will craft their own budgets that will take into account the governor’s proposal but will likely vary from it based on their own priorities.

That process is scheduled to begin in earnest when Minnesota Management and Budget releases another economic forecast, due in late February. The November 2024 Budget and Economic Forecast projected a $616 million surplus for the next two fiscal years, but a $5.1 billion shortfall in the 2028-29 biennium.

Absent an agreed-upon budget by July 1, the start of the state’s fiscal year, all or parts of the state government would shut down.

— Session Daily writer Brian Basham contributed to this story.