May 20 Deadline Looms
Legislators return to St. Paul today after their 10-day Easter/Passover break. Legislators left town on Friday, April 12 after meeting the third and final deadline for finance committees to complete their work before heading into the final four weeks of the 2019 legislative session. This deadline marks the beginning of final negotiations of major finance bills between Governor Tim Walz and the legislature.
The legislature has until midnight on May 20 to provide a budget to Governor Walz. With incredibly different dynamics between the DFL-controlled House and Republican-controlled Senate, long hours of debate over omnibus budget bills will highlight whether legislators can find compromise and deliver a budget to the governor’s desk on time.
It will be difficult for the legislature to come to agreement on a budget and tax package. The two sides are miles apart, with the size of the budget and tax increases being major obstacles to compromise. The DFL House and DFL Governor Walz have offered up similar budget proposals that highlight significant increases in both spending and taxes, while the Republican Senate is taking a stand against any tax increase and is relying on a $1 billion budget surplus to pay for any increases in spending.
The next steps for the legislature will be for each body to debate and process their respective budget and tax bills before taking them to conference committees over the course of the next two weeks. As that process unfolds, here is a scorecard of things to watch for in the final days of budget negotiations:
- Taxes: The DFL House and Governor Walz are proposing two significant tax proposals. The first is to increase Minnesota's gas tax by 20 cents a gallon. The second is to lift the sunset on the health care provider tax that funds the state's health care programs. Each of the DFL proposals call for a number of increases of various corporate taxes.
- Budgets: Deep divisions exist between both bodies when it comes to spending priorities. In many instances, budget proposals are hundreds of pages in length apart. In particular, the health and human services budget proposals share very few similarities.
- Policy Proposals: Many DFL policy priorities are tucked away in their omnibus budget bills. This is a point of major disagreement with the Republican Senate, who did not hear many of the DFL's major initiatives.
- Health and Human Services: The HHS budget may be the portion of the budget puzzle that can't be resolved before adjournment. Not only are spending priorities worlds apart, philosophical policy differences may be unresolvable.
- Confirmation of Walz Appointees: Up to this point, Senate Republican leadership has not scheduled any confirmation hearings for the cabinet appointees of Governor Walz's administration. This has led to speculation that the confirmation process may be thrown into the final budget negotiations as a bargaining chip.
- University of Minnesota Regents: Again, the slate of candidate recommendations made by an advisory panel are being held up over internal caucus politics. If left unresolved, the decision defaults to the governor, who gets to appoint his own slate of candidates for a two-year term.
The following is an overview of a number of policy areas under consideration by the legislature and links to some of the high level policy proposals in play that might be of interest to you:
In the course of budget negotiations at the Minnesota Legislature, transportation funding has become an area of heated debate. Due to the gas tax increase proposal, transportation omnibus bills have become a hot topic around the capitol, especially with the bipartisan difference in where the funding for the transportation budget will be appropriated from.
Governor Walz, in his budget proposal, announced a multifaceted approach to appropriate and allocate funding to invest in a long-term plan to repair and replace aging infrastructure which includes:
- Increasing the gas tax over two years by 20 cents per gallon and index it for inflation
- Increasing the rate of the vehicle registration tax/fee from 1.25 percent to 1.5 percent
- Increasing the legally separate sales tax on motor vehicles from 6.5 percent to 6.875 percent, same as the general sales tax rate
- Increasing the electric vehicle (EV) registration fee from $25 to $100 and using the proceeds plus $1.5 million from the general fund for grants for EV charging infrastructure
- Returning the previous highway user tax distribution fund dedicated portion of the sales tax on auto parts, the 9.2 percent and 6.875 percent taxes on short term vehicle rentals, and the first $32 million of the sales tax on leased vehicles to the general fund
- A 0.125 percent metro sale tax raising $99 million to fund transit operations
The House DFL majority followed suit with this method of funding with a plan that would increase the per-gallon tax by 5 cents a year over four years.
In addition to the 20 cent gas indexed fuel tax, the House transportation omnibus bill includes tab fee increases, Motor Vehicle Sales Tax increases, and does not keep the general fund transfer (funded by various sales taxes) created in the last biennium.
Across the street, the Minnesota Senate Republican majority responded to Governor Walz and the House majority’s plans with a proposal of their own, calling the proposed gas tax one of the most controversial topics of the session. President of the Senate Jeremy Miller (R-Winona) claims that the governor’s budget reverses previous bipartisan work and would divert around $230 million away from roads and bridges each year.
The House Omnibus Tax bill contains a number of business tax increases that would take effect in the next biennium. The House proposal is projected to increase tax revenues by an estimated $1.3 billion.
The Senate has yet to release its tax proposal, although we expect to be unveiled sometime this week. We expect the Senate tax proposal to be vastly different than the House proposal and will not contain any tax increases.
The House proposal is complicated and contains a number of business tax increase that attempt to address federal tax conformity resulting from the new federal tax law (Tax Jobs and Cuts Act) passed in 2017 increases. A few of the tax increases include the following:
- State business property taxes
- Data center sales tax changes
- Federal conformity of the corporate income tax
- Federal conformity of pass-through business income
- Applies a 12.85 percent tax rate on capital gains and dividend income over $500,000
- Applies taxes to deemed repatriated foreign income
- Freezes the estate tax exemption at $2.7 million
The House is expected to take up the tax bill at the end of this week. Expect the Senate to release its own tax proposal in the next few days and to take up the proposal on the Senate floor early next week. Once both bodies pass their respective tax bills, conference committees will be immediately appointed and begin deliberations.
Much like other areas of the state budget the House and Senate have taken drastically different approaches with their Health and Human Services proposals, both in terms of sheer size and pathways through the legislative process. The 1,100+ page House bill (SF2414) mirrors much of Governor Walz' budget request, including a repeal of the provider tax sunset and creation of a public health insurance option buy-in program. Also included are substantial changes to the regulatory structure to the assisted living and nursing home facilities. The smaller Senate omnibus proposals (SF92 & SF2452) include none of those, focusing more instead on dealing with fraud and waste in public assistance programs and other agency reforms.
The Senate does have their own proposals related to long-term care reforms, but those are traveling separately from the omnibus bill. The same can also be said of bills related to pharmaceutical transparency and price reductions, which again are included in the House omnibus but not the Senate. As we move toward the end of the legislative session, it will be a significant challenge for both bodies to reconcile all of these differences. The upcoming announcement of joint budget targets will be the next big step toward that reconciliation.
The House DFL majority has advanced a $1.5 billion capital investment plan proposal. Chair Mary Murphy (DFL-Hermantown) was joined by her DFL colleagues in supporting HF2529 as amended. The bill makes strategic investments in transportation, higher education institutions and local projects across the state. Representative Dean Urdahl (R-Grove City), GOP committee lead, expressed doubt in passing the bill at $1.5 billion but vowed to whip votes needed to pass a bill once an agreed-upon budget target is made with the Senate. The Senate GOP majority did not include capital investment in their budget targets. In fact, the Senate Capital Investment Committee has yet to meet this session. Chair Dave Senjem (R-Rochester) has stated that he will hold committee hearings during the even-year session, the traditional bonding year.
Though legislative deadlines have passed, the governor and legislative leaders had identified additional deadline objectives earlier in the session to ensure that the major finance bills move forward in a timely fashion to ensure passage before the May 20th adjournment. Those dates are:
- May 1: The last day for both bodies to pass all major finance bills and appoint conference committees
- May 6: The governor and leadership to provide fiscal targets to the chairs of conference committees on major finance bills
- May 13: Conference committee reports must be submitted to its body of origin