Minnesota Gov. Tim Walz on Thursday called for spending cuts in a $65.9 billion two-year budget proposal that includes a modest reduction in the overall state sales tax but new taxes on services like legal and financial advice.

With a potential budget shortfall looming later this decade, Walz said it will be necessary to make cuts to disability home care spending and reimbursements for special education transportation. He also called for new measures against fraud.

Budget officials have warned the cost of reimbursements for home disability care has been growing. Walz is proposing about $350 million in cuts over the next two years, and $980 million in the following biennium.

“Minnesota is a state that cares deeply that every single individual should live the fullest quality of life they can,” Walz said at a briefing with reporters at the Revenue Department in St. Paul Thursday. “We’re cutting state spending. We’re cutting it responsibly. We’re making a difference in long-term fiscal stability without making Minnesotans sacrifice the quality that they’re already getting.”Projected deficit on horizon

If the state doesn’t take action to limit growth in long-term care waivers, they could end up being about an eighth of the state budget by 2028, and possibly half of the budget by the mid-2030s, Walz said.

Minnesota Management and Budget Commissioner Erin Campbell said the governor’s proposal would raise the amount of money left over at the end of the 2026-2027 cycle by about $570 million to $2.1 billion.

That would put the state on better financial footing in the next budget cycle when the state is expected to have a deficit, she said. The proposal would set the state up to have about $355 million left over in the 2028-2029 budget cycle when the state could have a revenue shortfall of several billion dollars.

In December, MMB officials said Minnesota would have a $616 million surplus for 2026-2027, but warned that a $5.1 billion deficit could come in the following two years if current revenue and spending trends held.

Walz’s recommendations come after Democratic-Farmer-Labor lawmakers’ 2023 two-year budget grew spending by nearly 40% to $70.7 billion — though some of that was one-time spending; so Walz’s cuts would not account for a more than $4 billion decrease.

GOP would resist any new tax

House and Senate Republicans balked at Walz’s recommendations and signaled they would resist any new taxes or fees.

“We need a budget that puts Minnesotans first, not government first,” said Senate Caucus leader Mark Johnson, R-East Grand Forks. “Republicans will stand firm against budgeting tricks that raise fees and taxes on regular Minnesotans.”

Said Rep. Lisa Demuth, R-Cold Spring: “Any tax increases are off the table.” Demuth was elected speaker by the House GOP this week.

Sales tax changes, cuts

Walz is calling for the overall statewide sales tax to be cut from 6.875% to 6.8%, meaning Minnesotans would pay $7.5 cents less on every $100 they spend. That amounts to a $95 million cut to overall sales taxes.

Those cuts come with increases in other areas.

The governor’s proposal ends sales tax exemptions for billable services like speaking with an attorney for legal advice or meeting with a financial adviser. The new fees on services like brokerage, accounting and legal services amount to around $185 million. There are exceptions for those seeking the new child tax credit or legal aid.

Walz said that move is fair to taxpayers because many other services already are taxed — such as yard work or funeral processions.

In advocating for sales tax cuts, Walz also said he was in part proposing them to decrease potential rising prices of goods due to tariffs proposed by President-elect Donald Trump. Another reason Walz and budget officials say there needs to be more tax on services is a post-pandemic trend toward more spending on services than goods.

State of play

For the first time since 2021, Republicans will have a say in the final state budget. Voters elected a House tied at 67-67 between the parties, so any measure that makes it through will need bipartisan support. The House currently is at 67-66, in favor of the GOP, but a special election is yet to be held in a heavily-DFL Roseville district.

The Senate is currently tied 33-33 though there’s a power sharing agreement there and it’s expected to return to a 34-seat DFL advantage after an upcoming special election in the heavily Democratic Minneapolis district of Sen. Kari Dziedzic, who died in late December.

Right now, House Republicans and Democrats are in a power struggle that’s headed to the state Supreme Court. DFLers boycotted the session after the parties failed to reach a power-sharing agreement, where Republicans used what likely will be a temporary majority to elect Demuth speaker on Tuesday.

The Legislature must pass a two-year budget this year. Walz’s recommendations are one of the first steps in the process. A clearer picture of the budget will come after the state’s February budget forecast. The session ends May 19. If the Legislature doesn’t pass a budget by the end of June the state risks a government shut down.

Past budgets

Here’s the past seven two-year budgets for the state:

2023 — $71 billion; 2021 — $52 billion; 2019 — $48 billion; 2017 — $46 billion; 2015 — $41.5 billion; 2013 — $38 billion; 2011 — $35.7 billion.