Minnesota leaders strike broad budget deal

Gov. Tim Walz and leaders of Minnesota's divided Legislature struck a broad agreement on a $52 billion, two-year budget Monday, using an influx of federal stimulus dollars to provide tax relief and pump hundreds of millions more into the state's classrooms.

Despite major political divides all session on taxes and spending between the DFL-led House and Republican-controlled Senate, leaders said they came together around a budget that focuses on helping the state rebound from the COVID-19 pandemic.

"This year has been a battle," Walz said. "We made the commitment together that this budget would be about recovering from COVID, it would be about investing in families, their children and education, it would be about providing relief for families in the form of tax cuts."

The agreement came just hours before the midnight deadline to adjourn the 2021 legislative session, meaning work will continue into a likely June special session to fine-tune the details. And much remains unsettled as legislators head into overtime work, including a debate over police reform measures, environmental emission standards for vehicles and the emergency powers Walz has wielded to respond to the pandemic.

Monday's adjournment date lined up with the delayed deadline to file taxes, and leaders said their deal includes full federal conformity to exempt Paycheck Protection Program (PPP) loans and unemployment insurance from state taxes. The Department of Revenue is looking into options so that taxpayers would not have to refile their taxes.

"We have about a billion dollars of tax relief," Senate Majority Leader Paul Gazelka, R-East Gull Lake, said of the agreement, including the PPP tax break and various other proposals. "That was very important to us."

GOP legislators were resolutely opposed to increasing taxes this session, given the state's projected $1.6 billion surplus and the billions in federal aid for COVID-19 relief.

House Democrats, meanwhile, had pressed for increased taxes on top earners and corporations, as well as higher gas and tobacco taxes. Democrats dropped those tax proposals to reach Monday's budget deal, including a plan to create a fifth-tier income tax bracket on couples making $1 million or more annually.

House Speaker Melissa Hortman, DFL-Brooklyn Park, said the state is in a position to give tax cuts and make a "historic" investment in education because of the federal dollars.

The budget deal spends $525 million more on early through high school education in the next two-year budget and $675 million in the budget that follows. It pumps $75 million into a summer learning plan Democrats prioritized to help students catch up after a year of distance and hybrid learning.

"We have the resources to take a substantial step forward to really make progress," Hortman said. "We have enough money to really invest in equity and closing gaps, and that's a particularly rewarding piece of this."

The $2.8 billion coming to the state from the federal government as part of the American Rescue Plan was key in providing enough flexible funding for both parties to pay for additional education spending and tax cuts. The deal gives the Legislature more say over how the majority of that funding is spent, a key demand of Republican lawmakers. But Walz will have primary decisionmaking authority over $500 million.

"Who from the legislative branch would ever agree to let the governor spend $500 million on whatever he wanted should turn in their election certificates and find a new job," said House Minority Leader Kurt Daudt, R-Crown. Daudt said there is a number of "severe problems" with the negotiated agreement, including legislators' inability to pass the PPP and unemployment insurance tax breaks before they adjourned.

Emergency powers Walz has used to respond to the pandemic will continue, which the governor has stressed are needed to continue critical work to respond to the pandemic, including quickly setting up more vaccination sites, expanding COVID testing capacity and getting $40 million a month through Supplemental Nutrition Assistance Program (SNAP).

"We're just managing basically the vaccination part now," Walz said, adding that he doesn't think that will be a "sticking point."

But House Republicans continue to call for an end to what they see as Walz's unilateral decisionmaking. Rep. Barb Haley, R-Red Wing, introduced a bill Saturday that the GOP lawmakers said would give Walz flexibility around vaccination contracts and state officials would declare a public health disaster so they could continue receiving SNAP benefits and other federal funds.

And House Democrats signaled they will continue to push for police accountability measures this year in the aftermath of George Floyd's killing in police custody. They've offered a dozen proposals that would impose new limits on traffic stops, increased civilian oversight of police and new regulations around no-knock warrants and body camera footage.

Gazelka said Monday that he remains "committed to not passing anything that is anti-police or makes the job of law enforcement more difficult." Yet state Rep. Carlos Mariani, the St. Paul Democrat and lead negotiator on the state's public safety spending bill, said Gazelka's stance doesn't mean that any House proposals don't still stand a chance of passing this year.

"I really do think everything is on the table," Mariani said. "There is no anti-police stuff in the bill, by the way. The way I characterize it is if you don't like bad cops, you should like this bill. This is an anti-bad cop bill."

Leaders noted that agreeing on the big numbers that provide a framework for the next budget is a key step. Working groups must now negotiate the details of different budget bills to align them with the target numbers that leaders set.

Committees have until June 4 to finish drafting budget bills, according to a timeline laid out Monday, with a special session likely called around June 14.

Special sessions to finish budget work have happened every budget year but three since 2001, including two years where disagreements stretched into partial government shutdowns. That will happen if lawmakers don't pass a budget before July 1.

While nothing is final until the budget is passed, leaders expressed confidence that this deal will not be derailed before a special session.

"In democracy, there's always a chance," Walz said. "This sets the tone, the goodwill, the compromise."

Staff writer Stephen Montemayor contributed to this report.